The Payments Ecosystem: Not Nearly as Boring as You Think!

Posted by Modo on Apr 22, 2019 9:00:00 AM


payments ecosystem

We know—you read the words, “payments ecosystem,” and your heart sinks just a tiny bit. Perhaps you’re expecting a very dry explanation of how payment gateways, shopping carts, credit card networks, and all the other gears fit together to form the mighty payment machine. And while all that stuff is important, we firmly believe it does not need to be dull.

Say it with us, “Payments are FUN!”

Why? Because payments matter—a lot. Oil all those parts and you’ll create a perfectly smooth, streamlined payments stack. Your customers will love you even more, you’ll reduce decline rates, boost revenue, remove friction, decrease operational costs, and get one step closer to becoming a full fledged payments geek.

Ready? Let’s get into it.

Payments 101—What We Mean by the Payments Ecosystem

Alright, time to bring it back to basics. What exactly are we talking about when it comes to the card payments ecosystem? Essentially, it’s the collection of the acquiring and issuing banks, card networks, payment gateways, organizations, technologies, processors, cardholders, and merchants that gets money from a customer’s credit or debit card to you.

Why does that matter, exactly? Because the easier you make it to get paid, the more cash you’ll get in your bank account. If there’s one thing customers hate, it’s friction. The smallest issues make customers click off your website (and onto a competitor’s) before you even know they’ve arrived.

But where does that friction come from? In many cases, it’s a failure of these systems to communicate with each other—which is the real reason to understand how payments fit together. Because when you get those integrations and communications right, your customer enjoys a seamless experience from beginning to end. Payments are like electricity or a car engine in that way—you only really pay attention when it stops working and you’re not sure where all the smoke is coming from. And that, unfortunately, is not the time to start thinking about payments.

Let’s Get Our Hands Dirty and Pull the Card Payments Ecosystem Apart

Time to dive into online card payments with the Modonauts.

Step 1 — A Customer Gets a Credit or Debit Card from an Issuing Bank

First things first—your customer is going to need a credit or debit card to pay you online (there are also a huge number of alternate payment methods and digital wallets they can pay with, but we’ll save that topic for another day). The customer’s bank, known as an issuing bank, has a contract with the various card networks (think Visa, Mastercard, AMEX, etc) and issues a card to the customer—the card works with one of those networks.

Step 2 — The Merchant (That’s You) Gets a Merchant Account with an Acquiring Bank

It takes two (banks) to tango. On the customer side, you’ve got the issuing bank. On your side, you’ve got the acquiring bank. The acquiring bank is where you hold a merchant account—the place where you’ll gather all of your money and where your bank performs cash management and FX to keep the money flowing. Your acquiring bank also works with the card networks to accept customer payments.

Step 3 — A Customer Makes the Extremely Wise Decision to Purchase from You

Your beautiful branding, awesome products, quality, and value make you stand out. An online shopper decides you’re the perfect merchant (with the perfect pair of shoes) and decides to make a purchase through your eCommerce website.

Step 4 — The Customer Enters Their Payment Details and Processing Begins

Your newly acquired customer has submitted their payment details and are ready to get their payment confirmation. So we're done, right? Wrong. We've barely scratched the surface.  

Once your customer has committed, the payment process kicks off in earnest—there’s plenty of behind-the-scenes activity before the checkout completes.  If you run an eCommerce store, you’ve got an integration where customers can enter their card details. These come in various flavors:

  • A payment gateway like Stripe, PayPal, or any dozens of others.
  • A payment processor, which might just be an extension of the acquiring bank where you have a merchant account.
  • A “Point of Sale” (POS) terminal where you or a customer can enter card details—businesses like Square and NCR are big players here.
  • A shopping cart integration that works with payment processors.
  • Various other ways of processing payments.

Everyone’s setup is slightly different, but the main purpose is to get information from the cardholder to the card networks and to the banks.

Step 5 — Authorization Time, Come On!

Be honest, you’d already forgotten about issuing and acquiring banks, right? Well, now they’re back in the mix. The banks work with the payment gateway and the card network to authorize the card payment.

With all the fraudsters out there, it’s important that every transaction is checked for fraud, available funds, and various other bits and pieces. This is where some very smart technologies come out to play.

AI, machine learning, algorithms, and other advanced tech are deployed to analyze the card and transaction, and accept or reject the payment—all in under three seconds.

Here’s how that breaks down:

  1. Once they have the card details, the payment processor, POS system, or payment gateway sends the details to the acquiring bank.
  2. Your acquiring bank or a payment processor sends the credit card details to the right network (Visa, Mastercard, etc.)
  3. The card network does some authorization and validation to check the card is legit and is being used correctly.
  4. After the card network has cleared the payment, they send a request to the issuing bank (the bank that issued the card in the first place).
  5. The issuing bank then runs their own security and validation checks and also makes sure the customer has the funds to pay for the transaction.
  6. Assuming everything is good, the transaction is authorized and the customer has paid with their card.
  7. You can provide them with beautiful products or the finest services that money can buy.

This entire process is invisible to the customer, and once it completes, they’ve finished their checkout.

Step 6 — Money Gets Swapped for Goods or Services, and Everyone is Happy

This is where we get into clearing and settlement. The transaction goes on the customer’s account and the credit card network forwards details to the issuing and acquiring banks. The issuing bank transfers the payment amount (less fees, naturally) to your merchant account and you get the money.

See, that wasn’t too painful, was it?

If Only Payments  Were Always That Simple

If this seems like there’s a lot of room in the process for errors to occur, you’d be right.  Sometimes, merchants get shorted the appropriate amount of funds. Sometimes, good customers with good funds are declined by issuers. Sometimes, your processor goes down, and without a backup, you're  stuck in a tight spot. Removing this friction means it’s easier to collect payments and makes for much happier customers.

Refunds, errors, and chargebacks are also an issue for many merchants. Integrating with payment processors that reduce false declines and identify fraud is a powerful tool for reducing those expenses.

What About Mobile Wallets, Then?

We know the future is not all card based. Mobile wallets and other alternate payment methods like loyalty points will become more widely used (yes, even in the United States). Mobile wallets fit into the payments ecosystem similarly to cards, except the business providing the mobile wallet also gets involved.

If you’re using Apple Pay, Google Pay, or some other smartphone wallet, the service providing that wallet works with the payment processor, but it can be a different experience for the customer.

With mobile wallets, customers will need to enter things like a username, password, and may need to go through an additional security gateways. It’s vital that the payment stack you use can handle those requirements, flawlessly.

We know we got into the weeds a little on the payments ecosystem, but we hope we’ve given you a good overview of how everything works.  Hey, we’re glad you’re still here.

Stick around, we’ve got plenty more to share.


Topics: Payments Ecosystem