- Špela Mihelin
ABCs of payments value chain
Author: Špela Mihelin & Petra Krilić
Source: Lemur Legal
In the last few years the payment industry has changed dramatically. Up to now the sector has been dominated by more domestic and established players in the industry. However, since the world is becoming a cashless society and online purchasing is a part of our everyday lives, a lot of new start-up payments or fintech companies have entered into the industry. These new digital and improved providers, are mainly offering an easier and quicker way of transferring money from a buyer to the merchant or in a peer to peer network. While the increasing number of payment services offer us more diversity and choices, we are losing track of what their role in a payment value chain (or PVC) actually is.
What is a payment value chain?
A digital payment is a seamless system involving one or more participants, where transactions are affected without the need for cash. In the past few years, users became more demanding and tech savvy (technically adequate), so fintech companies started collaborating with various sectors of the economy to meet their needs. These collaborating companies each take up a separate or even multiple roles, when carrying out seamless transactions. Their service provides an added value in the chain of interactions needed in the process of sending a payment from party A to party B.
1. ISSUING AND ACQUIRING BANK
Issuing bank provides consumers with their credit cards, while acquiring bank, solicits, underwrites and owns the merchant account. When a consumer makes a purchase with his credit card, the issuing bank receives the information about the transaction. The issuer either approves the transaction and reserves the funds or declines it. At the end of each business day the merchant’s acquiring bank, deposits money into the merchant’s account for all approved transactions. The acquiring bank later settles with the issuing bank, as the acquirer receives money from the issuing bank. The issuing bank will be reimbursed, when the consumer pays his credit card bill.
2. PAYMENT SERVICES PROVIDER (a PSP)
A PSP is a third party that enables and helps merchants in accepting electronic payments by a variety of payment methods. They can offer acceptance of credit cards, bank transfers, real-time bank transfers and direct debit. Ultimately, they bring together everything needed to allow merchants to accept credit cards and still make it seem as a seamless and stress-free process for the merchant.
Typically, a PSP can connect to multiple acquiring banks as well as payment and card networks. By enlisting the services of a PSP which manages bank accounts and relationships with the external network, the merchant becomes more independent from financial institutions to manage transactions. A PSP is a broader term for the following services:
Payment gateway is a tool that transmits payments between the customer’s and merchant’s bank. It is primarily used for online transactions, thus transactions where a card isn’t present. Additionally, the gateway may provide Virtual Terminal or other functionality and may take multiple forms (such as a Web application, API, SDK or IFrame integration). Examples of companies that overtake a role of a payment gateway is Adyen, Braintree, Amazon Pay etc. All of them however, take on other roles from a payment chain as well.
A payment processor is a service that communicates transaction information between the merchant, issuing bank and the acquiring bank. When a consumer presents a physical payment card in a traditional retail purchase, the payment processor is all the merchant needs to complete the transaction.
POINT OF SALE (POS)
When buying something in a physical branch of a merchant, the payment processor usually provides a POS interface for the merchant. It is commonly referred to as a credit card processing terminal. Modern IPOS solutions nowadays usually use tablet technology, such as iPad or Android systems. Essentially, POS solutions may process transactions using fully integrated payment interfaces or through side-by side terminal solution.
3. CREDIT CARD ASSOCIATIONS
Visa, Mastercard and Maestro are by far the most known card networks. These companies don’t issue credit cards or set the interest rates that cardholders pay, they make sure that when a customer uses their card, the merchants get paid. Both Visa and Mastercard are publicly traded companies, of which the main goal is to make credit card processing as efficient, fair and safe as possible. At the same time, they are earning profits for their shareholders, by influencing consumers to use their cards as much as possible.
Ewallet or also known as digital or online wallet is a software application allowing users to store e-money, complete transactions, receive payments and check balances. The user has to link the ewallet with his/her bank account in order to be able to make payments. Typically, ewallet consists of two components, namely software and information. The software component stores personal information and provides security and encryption of the stored information; while the information component presents the database of details provided by the user (e.g. name, address, credit card details, etc.). According to Juniper Leaderboard 2018, top three ewallets globally are PayPal, Alipay and WeChatPay, while in Europe Google Pay, Apple Pay and Samsung Pay seem to get the most attention from users.
5. PAYMENT AGGREGATORS
Payment Aggregators or Merchant Aggregators are basically service providers who make it possible for merchants to start accepting credit card payments and online money transfers without the need of having an individual merchant account with a bank or any other financial service provider. These services have become the most popular forms of payment behind credit cards.
Compared to Payment Gateway there are several benefits that integration of Payment Aggregator offers to merchants, namely simple integration, faster approvals, easy access to cross border markets and large customer segments, fast payment and simple fee structure. The recent downside to this method is that it is becoming more and more expensive and that it does not necessarily offer protection against fraudulent chargebacks.
Overall, Payment Aggregators are one of the most popular, convenient and secure alternative payment providers, both with merchants and consumers, who especially love the fact that they can store their credit card details with one payment provider instead of sharing their information with every merchant where they make the purchase. Consequently, the emergence of new providers and general adoption of Payment Aggregators around the globe is growing at a steep pace.
Popularity of Payment Aggregators demands different approaches to conquer the desired market(s) and position themselves as market leaders - differences are visible in many aspects, all from costs and offered services to target groups.
PayPal as an example
PayPal is one of the establishments that took up several different roles in the PVC. As it acquired many fintech companies in the past few years, PayPal isn’t only a platform that facilitates payments between parties through online funds transfers anymore. The above mentioned Braintree, is one of PayPal's holdings, that takes up a role of a payment gateway and a processor in the PVC. With Braintree’s well-known customers, such as Airbnb and Uber, Braintree has helped PayPal become a global one-stop shop for merchant account services and payment processing. While Braintree mainly focuses on transactions from buyers to merchants, Venmo (another one of PayPal’s companies) is offering a payment solution in a peer-to-peer payment space. The Venmo payments app has especially become popular among customers who use the service to split up a tab in a restaurant.
After PayPal established its position in the internet payments, it started expanding its business to increase an in-store presence as well. PayPal made the first step with the acquisition of Paydiant, as it entered into the mobile payment markets. Paydiant enables merchants to integrate complete mobile wallet capabilities into their own mobile apps. This allows in-person mobile payments at merchant’s physical location. Another important Paypal’s holding regarding in-store presence is iZettle, which initially offered a mobile credit card payment service and later developed a software support and financing solutions. These services allow iZettle to be incorporated as a modern IPOS solution at merchant’s physical brench. All these acquisitions and internal developments allowed PayPal to offer different types of services that go beyond their core payment services.
PayPal Scheme, courtesy of Aljaž Petek
It is safe to say that PayPal for sure is one of the most popular payments services as it can represent many crucial roles in the PVC. If both sides utilize the right combination of its services, PayPal can take up all rolls needed in the PVC. As it is evident from the above scheme, PayPal may well take up all the roles in the PVC, meaning that it may also act as a PSP, Payment Gateway, Acquirer, Aggregator, Issuer and E-wallet, depending on what kind of combination of its services the users in question utilize.
The payment industry is becoming a complex industry with numerous companies offering a variety of payment services. While it is still too early to assess the impact of digital and improved providers, encouraged to develop additional services, on the broader industry, it is safe to say that the traditional banks will need to reconsider their current payment infrastructure as payments are becoming all about technology and a commodity, which may have great influence on banks’ customer acquisition and retention.