Where does the Payment ecosystem start?
The payments ecosystem always starts with people who want to buy things from other people ( for example — merchants)
How does the business normally happens?
- Brick and mortar — like “McDonald’s 34,492 restaurants: where are they?”
- Online shopping websites— like travel , food, entertainment, shopping
- e-Commerce — like — amazon, eBay, Alibaba, Flipkart — See- https://www.marketing91.com/amazon-competitors/
- m- commerce — like — online banking, bill payment — See — https://www.investopedia.com/terms/m/mobile-commerce.asp
- Social Commerce — Like — Facebook, watsapp
So basically we have two ways to do business Online and offline. Online based business are becoming more and more popular.
Source — https://www.statista.com/statistics/534123/e-commerce-share-of-retail-sales-worldwide/
What are the different options Merchants/businesses have to accept payment?
- Cash, Check
- Credit cards — Pay Later
- Debit cards — Pay Now
- Prepaid cards or gift cards — Pay before
- Mobile wallets — Apple pay, Android pay, Samsung pay, Paytm, Alipay, Wechat pay
Preferred payment methods of online shoppers worldwide as of March 2017
What categories of payments are there?
- Cash, Check
- Card Present
- Card Not Present
What are different types of card not present(CNP) and CP transaction payments?
- Remote payment — for example in case of e-Commerce and m-Commerce
- Proximity payment (also called Contactless payment)— QR code payment ( Paytm Alipay), NFC based payment( Apple pay, Samsung pay, Android pay)
- In-app Payment (IAP)— In-app purchases are purchases made from within a mobile application.
Apple’s Getting Started with Apple Pay reference document distinguishes between IAP and Apple Pay in the following manner:
It is important to understand the difference between Apple Pay and In-App Purchase. Use Apple Pay to sell physical goods such as groceries, clothing, and appliances. Also use Apple Pay for services such as club memberships, hotel reservations, and tickets for events. On the other hand, use In-App Purchase to sell virtual goods such as premium content for your app, and subscriptions for digital content. [emphasis added]
Refer — https://www.macworld.com/article/3050390/ios/could-apple-pay-clean-up-the-in-app-purchase-mess.html
What are pull based and push based payments?
Push based payment
With the push method, consumers ‘‘push’’ their funds to an online account at a payment provider. The payment provider then transmits these funds to the merchant through a secure channel. The benefit of this method is twofold in that the merchant never receives the consumer’s bank account or credit card information, and the consumer doesn’t have to provide it.
Pull based payment
The pull method is utilized by the majority of ACH payment providers. In essence, the payment provider stores the consumer’s bank account information online; then, when the consumer makes a purchase, the funds are ‘‘pulled’’ from their bank account and transmitted to the merchant.
Source —ESSENTIALS of Online Payment Security and Fraud Prevention -David Montague
What are the Payments System Models — open loop and closed loop?
Open Loop Systems
An open loop payments system relies on intermediaries , usually banks, to connect end parties (consumers or merchants, for example).
The advantage of the open loop structure is that it allows a payments system to scale quite rapidly. As intermediaries join the payments system, all of their end party customers are immediately accessible to other intermediaries participating in the payments system.
Other Terms in Open Loop Payments Systems
On-us transactions occur when the bank intermediary is the same on both sides of a transaction. Depending on the payments system, the transaction may stay within the bank (e.g., never be submitted to a clearing house or “hub” for switching), in which case the bank settles the transaction through an internal book transfer. In other systems, an on-us transaction is passed through the system and returns to the bank, just like a regular “off-us” transaction. The growing concentration of U.S. banks is increasing the percentage of “on-us” transactions.
Closed Loop Systems
A closed loop payments system operates without intermediaries. The end parties have a direct relationship with the payments system. The original American Express and Discover systems, and the proprietary card systems (for example, a Macy’s credit card accepted only at Macy’s) are examples of closed loop systems.
Payments services providers, such as PayPal or Western Union, operate closed loop systems. But it is important to note that these providers themselves are users of the open loop systems, often on an aggregated basis. They use the open loop systems to fund transactions from senders and/or to deliver payment to the receiving party
Source — Glenbrook Partners
What are different players involved in a payment transaction?
Issuer/Issuing banks — Historically people ( buyer/seller) would use cash, but now more and more people are moving to pay with cards — be it credit, debit, or prepaid cards. These cards are typically issued by an Issuer or Issuing Bank.
Merchants — These cards are useless unless Merchants are willing to accept them.
Acquirers — In order to accept cards, Merchants need a terminal. Terminals are provided by Acquirers or Gateways. Behind an Acquirer is always a Merchant Bank that receives funds.
Network — The transmission protocol or “rails” is managed by Networks such as Visa.
ISO/MSPs —
According to https://nationalprocessing.com/blog/understanding-registered-isomsps/
ISO is the abbreviation for Independent Sales Organization and is a term that describes an individual or organization that is not a bank (credit card industry association member). However, they do have an established card relationship with the different member banks. An MSP or Member Service Provider is not a credit card association member but is registered by a credit card corporation (MasterCard, VISA, etc.) and can provide program services to other members. Just remember that ISO’s and MSP’s are not banks.
Merchant Bank —
A merchant account is a type of bank account that allows businesses to accept payments in multiple ways, typically debit or credit cards. A merchant account is established under an agreement between an acceptor and a merchant acquiring bank for the settlement of payment card transactions.
Payment Gateway —
A payment gateway is an e-commerce service that authorizes payments for e-businesses and online retailers. It is the equivalent of a physical POS (point-of-sale) terminal located in most retail outlets.
Conclusion
This post is an attempt to help the beginners understand the basic system behind payment ecosystem. However, there are much more to learn and explore. For example, how does the companies Visa, MasterCard, Paypal make money. What are new technologies in Mobile space and innovations. I will try to write another post to explain this part.
Keep learning!
