31. Payment Players

In previous chapters, I covered working of online payments in various industries. I need to cover few more industries such as eCommerce, Travel, Hyperlocal etc. But for now, I am taking break from industries and will revisit fundamentals of payment instruments and payment players.

Let’s start with fundamental meaning of ‘payment’… At one end there is a merchant, who wishes to collect money from its customers and on the other end there are customers who wants to pay. And in simple terms ‘online payment’ is all about moving money from customer(s) to merchant… And this has to be done efficiently and economically… there are companies who are in the business of this money movement and they make money to perform these activities. To make payment, customer needs ‘Payment Instrument’ and to receive (process) those instruments, merchant would need ‘Payment Processors’

Payment Instruments:

Instruments that are available with customer to make payment. These instruments are issued by various banking and non-banking entities. Some of the instruments:

• Cards: Credit, Debit and Prepaid
• Wallets
• Net-banking account
• UPI
• Alternate credit products
• Cash (Yes, still an important payment instrument)
• Cheque & DD (still exist but I am not going to talk about these)

These Payment instruments are linked to a source… and that source can be funds in your bank account, pre-loaded funds or credit line.

Simple working of these Payment Instruments:

1. Bank Account based: Customer’s spend is limited to balance in the bank account.

2. Prepaid based: Customer has to load the amount to the instrument and then can spend within the available balance.

3. Credit Line based: Customer will have credit line and can spend within that credit limit. And customer is obliged to pay back the credit amount that he/she has availed.

Working of Bank account based and prepaid based payment instruments sounds same… right? Yes, As both types of instruments use available balance from source. Then what is the difference? Answer: Balance in bank account earns interest but balance in a prepaid instrument won’t.

Payment Service Providers.

To make the payment, customer should have at least one of the Payment Instruments and merchant should have means to accept or process those instruments. That acceptance mechanism is provided by Payment Service Providers.

In payment world, we use word ‘integration’… basically set of APIs that are established among ‘merchant — Payment Service provider — Payment Instrument Issuer’ to facilitate the fund movement related activities such as transaction, settlement and refund. There are various types of Payment Service Providers depending on their integration with merchant

Payment Instrument Issuer = Payment Service Provider

A payment instrument provider ONLY can process that instrument. Merchant has to do direct integration with these entities.

Example: Wallets, Net-banking, alternate credit products (pay later product), Amex cards

Detailed example: PayTM wallet can be processed only by PayTM not by Mobikwik

Processing Entities:

These entities process certain type of payment instruments. These are intermediaries who connect merchant with issuing entities.

Example: Acquiring Banks (that use card processors) process certain types of credit & debit cards, or Acquirer PSP can process UPI transactions.

Detailed example: To process Visa and MasterCard credit & debit card, merchant would need to integrate with HDFC acquiring bank

Payment Aggregators:

There are few disadvantages in above two methods. If merchant wants to increase payment coverage (support as many as payment instruments possible) then (a) merchant has to do multiple integrations that translates in to deployment of resources & effort (time) (b) merchant ends up receiving multiple settlement files that increases reconciliation efforts

To address these issues, Payment Aggregators were born. They have arrangement with multiple payment processing entities (acquiring banks, net-banking, wallets and credit products) on its platform and thus offer bundled solution that increases payment coverage, reduce development effort and single settlement to the merchant.

Note: I have covered working of aggregators in detail in previous chapters

Payment Containers:

These are sort of ‘lite-payment aggregators’… they also partner with acquiring bank, aggregators, acquiring PSP, wallets on single platform. But the main difference between aggregator and Payment Container is user has to create account in that Payment Container and login to that account every time before accessing or making payment.

Example: PayPal, AmazonPay, PhonePe

Note: Then there are other Payment players such as TSPs and market places (will cover them later)

Merchant can have integration with any of the above Payment Service Provider or combination of Service Providers to process payment instruments… Example: A wallet can be integrated directly or through an aggregator or cards can be processed by direct integration with acquiring bank or by aggregator who uses the acquiring bank.

This all sounds bit confusing and complicated but actually it is not. I would say payment eco-system is more like Russian nesting dolls (one inside another) with single aim of moving money from point A to point B.

In next few chapters, we will talk about various Payment Instruments and Payment Service Providers…