Payment processor

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A payment processor is a system that enables financial transactions, commonly employed by a merchant, to handle transactions with customers from various channels such as credit cards and debit cards or bank accounts. They are usually broken down into two types: front-end and back-end.

Contents

Front-end processors have connections to various card associations and supply authorization and settlement services to the merchant banks' merchants. Back-end processors accept settlements from front-end processors and, via the Federal Reserve Bank for example, move the money from the issuing bank to the merchant bank.

In an operation that will usually take a few seconds, the payment processor will both check the details received by forwarding them to the respective card's issuing bank or card association for verification, and also carry out a series of anti-fraud measures against the transaction.

Additional parameters, including the card's country of issue and its previous payment history, are also used to gauge the probability of the transaction being approved.

Once the payment processor has received confirmation that the credit card details have been verified, the information is relayed back via the payment gateway to the merchant, who will then complete the payment transaction. If verification is denied by the card association, the payment processor will relay the information to the merchant, who will then decline the transaction.

Evolution of payment technology

After centuries of using metal coins, [1] paper currency made its first appearance in China [2] during the Tang dynasty (around the 10th century AD) and was later introduced to the West in the 17th century. [3] Also in the 17th century, people began to use checks [4] as a payment method, which grew in popularity from the 1800s to the early 1900s. To help streamline and centralize the multiple types of currency, the U.S. Congress passed the Federal Reserve Act in 1913. [5]

The first payment card [6] was created in 1950 by Ralph Schneider and Frank McNamara to allow members to use charge cards at their Diners’ Club, and consumers were required to pay their bill in full each month. In 1959, American Express [7] created the first credit card that allowed users to carry a balance from month to month.

The ATM [8] emerged in the 1960s and 1970s as part of the growing movement toward “self-service” technology. ATMs provided the first technology-enabled banking option that allowed consumers to conveniently deposit and withdraw cash, without being restricted to a particular bank location or business hours.

In 1972, the first Automated Clearinghouse [9] (ACH) association was formed in California in response to bank industry concerns that widespread check usage would outpace the technology needed to process them. ACH became the primary method of electronic funds transfer [10] (EFT) for agencies, businesses, and individuals to pay or collect money online, and is still commonly used today.

Over the following decades, the evolution of payment technology accelerated. The first digital currency is attributed to an algorithm developed by David Chaum in 1983. Although modern folklore suggests the possibility of early internet purchases – specifically, online marijuana sales between MIT and Stanford students in 1971 and 1972, a 1974 pizza order by Donald Sherman, [11] and a 1984 grocery purchase by Jane Snowball – the first legitimately recognized online purchase [12] was most likely a CD sold by Dan Kohn in 1994 using a website he developed called NetMarket.

The first online payment processing company [13] was founded in 1998, first under the name Confinity, which was later changed to X.com, changing again to its current name, PayPal, in 2001. The market continued to expand over the following two decades, branching out into a full payment processing ecosystem that includes card companies, digital wallets and apps, cryptocurrencies, payments software platforms and gateways, eCommerce partnerships, and peer-to-peer payments. Other technologies that are vital to the payment ecosystem are data security systems and processes, automated functionality, and customer engagement tools.

The future of the payment processing industry is being driven by an increase in vertical-specific processors, [14] the accelerated adoption of contactless payment methods [15] (in response to COVID-19-related limitations on contact and in-person interactions), and the trend toward customer choice and autonomy, [16] particularly in western cultures.

Modern implementations

Due to the many regulatory requirements levied on businesses, the modern payment processor is usually partnered with merchants through a concept known as software-as-a-service (SaaS). SaaS payment processors offer a single, regulatory-compliant electronic portal that enables a merchant to scan checks (often called remote deposit capture or RDC), process single and recurring credit card payments (without the merchant storing the card data at the merchant site), process single and recurring ACH and cash transactions, process remittances and Web payments. These cloud-based features occur regardless of origination through the payment processor's integrated receivables management platform. This results in cost reductions, accelerated time-to-market, and improved transaction processing quality.

Transaction processing quality

Electronic payments are highly susceptible to fraud and abuse. [17] Liability for misuse of credit card data can expose the merchant to significant financial loss if they were to attempt to manage such risks on their own. One way to lower this cost and liability exposure is to segment the transaction of the sale from the payment of the amount due. Many merchants offer subscription services, which require payment from a customer every month. SaaS payment processors relieve the responsibility of the management of recurring payments from the merchant and maintain safe and secure the payment information, passing back to the merchant a payment "token" or unique placeholder for the card data.[ citation needed ] Through Tokenization, merchants are able to use this token to process charges, perform refunds, or void transactions without ever storing the payment card data, which can help to make the merchant system PCI-compliant. Tokenization can be either local (on the merchant's system) or remote (on the service provider's system); the latter provides a higher level of security against a breach. Another method of protecting payment card data is Point to Point Encryption, which encrypts cardholder data so that clear text payment information is not accessible within the merchant's system in the event of a data breach. [18] Some payment processors also specialize in high-risk processing for industries that are subject to frequent chargebacks, such as adult video distribution.

Network architecture

The typical network architecture for modern online payment systems is a chain of service providers, each providing unique value to the payment transaction, and each adding cost to the transaction: merchant, point-of-sale (PoS) software as a service (SaaS), aggregator, credit card network, and bank. The merchant can be a brick-and-mortar outlet or an online outlet. The PoS SaaS provider is usually a smaller company that provides customer support to the merchant and is the receiver of the merchant's transactions. The PoS provider represents the aggregator to merchants.[ citation needed ] The PoS provider transaction volumes are small compared to the aggregator transaction volumes, so a direct connection to the major credit card networks is not warranted, because of the low traffic. Additionally, the merchant does not handle enough traffic to warrant a direct connection to the aggregator. In this way, scope and responsibilities are divided among the various business partners to easily manage the technical issues that arise.

See also

Related Research Articles

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A debit card, also known as a check card or bank card, is a payment card that can be used in place of cash to make purchases. The card usually consists of the bank's name, a card number, the cardholder's name, and an expiration date, on either the front or the back. Many new cards now have a chip on them, which allows people to use their card by touch (contactless), or by inserting the card and keying in a PIN as with swiping the magnetic stripe. Debit cards are similar to a credit card, but the money for the purchase must be in the cardholder's bank account at the time of the purchase and is immediately transferred directly from that account to the merchant's account to pay for the purchase.

<span class="mw-page-title-main">EFTPOS</span> Type of electronic payment system

Electronic funds transfer at point of sale is an electronic payment system involving electronic funds transfers based on the use of payment cards, such as debit cards or credit cards, at payment terminals located at points of sale. EFTPOS technology was developed during the 1980s.

<span class="mw-page-title-main">EMV</span> Smart payment card standard

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<span class="mw-page-title-main">Wire transfer</span> Electronic funds transfer

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An e-commerce payment system facilitates the acceptance of electronic payment for offline transfer, also known as a subcomponent of electronic data interchange (EDI), e-commerce payment systems have become increasingly popular due to the widespread use of the internet-based shopping and banking.

A payment system is any system used to settle financial transactions through the transfer of monetary value. This includes the institutions, payment instruments such as payment cards, people, rules, procedures, standards, and technologies that make its exchange possible. A payment system is an operational network which links bank accounts and provides for monetary exchange using bank deposits. Some payment systems also include credit mechanisms, which are essentially a different aspect of payment.

<span class="mw-page-title-main">Dynamic currency conversion</span> Foreign exchange process

Dynamic currency conversion (DCC) or cardholder preferred currency (CPC) is a process whereby the amount of a credit card transaction is converted at the point of sale, ATM or internet to the currency of the card's country of issue. DCC is generally provided by third party operators in association with the merchant, and not by a card issuer. Card issuers permit DCC operators to offer DCC in accordance with the card issuers' processing rules. However, using DCC, the customer is usually charged an amount in excess of the transaction amount converted at the normal exchange rate, though this may not be obviously disclosed to the customer at the time. The merchant, the merchant's bank or ATM operator usually impose a markup on the transaction, in addition to the exchange rate that would normally apply, sometimes by as much as 18%.

A chargeback is a return of money to a payer of a transaction, especially a credit card transaction. Most commonly the payer is a consumer. The chargeback reverses a money transfer from the consumer's bank account, line of credit, or credit card. The chargeback is ordered by the bank that issued the consumer's payment card. In the distribution industry, a chargeback occurs when the supplier sells a product at a higher price to the distributor than the price they have set with the end user. The distributor submits a chargeback to the supplier so they can recover the money lost in the transaction.

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First Data Corporation is a financial services company headquartered in Atlanta, Georgia, United States. The company's STAR Network provides nationwide domestic debit acceptance at more than 2 million retail POS, ATM, and at online outlets for nearly a third of all U.S. debit cards.

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<span class="mw-page-title-main">Credit card fraud</span> Financial crime

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<span class="mw-page-title-main">Giropay</span> Internet payment System based in Germany

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<span class="mw-page-title-main">ACI Worldwide</span> American payment systems company

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<span class="mw-page-title-main">Infibeam</span> Indian financial technology company

Infibeam Avenues Limited is an Indian payment infrastructure and software as a service (SaaS) fintech company that provides digital payment services, eCommerce platforms, digital lending, data cloud storage and omnichannel enterprise software to businesses across industries in India and globally.

Worldpay, Inc. is an American payment processing company and technology provider. In February 2024, it was separated from Fidelity National Information Services (FIS) to become an independent company once again. It is majority owned by private equity firm GTCR. It is headquartered in the greater Cincinnati, Ohio area. Worldpay, Inc., is the largest U.S. merchant acquirer ranked by general-purpose transaction volume.

References

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  2. ↑ "The Song Dynasty in China | Asia for Educators". afe.easia.columbia.edu. Retrieved 2020-09-25.
  3. ↑ "The History of American Currency | U.S. Currency Education Program". www.uscurrency.gov. Retrieved 2020-09-25.
  4. ↑ Quinn, Stephen; Roberds, William (November 4, 2008). "Economic Review" (PDF). Federal Reserve Bank of Atlanta. Retrieved September 25, 2020.
  5. ↑ "FDIC: Historical Timeline". www.fdic.gov. Retrieved 2020-09-25.
  6. ↑ "The History of Credit Cards". www.experian.com. 2018-03-15. Retrieved 2020-09-25.
  7. ↑ "American Express - Our History". about.americanexpress.com. Retrieved 2020-09-25.
  8. ↑ McRobbie, Linda Rodriguez. "The ATM is Dead. Long Live the ATM!". Smithsonian Magazine. Retrieved 2020-09-25.
  9. ↑ Bradford, Terri (December 2007). "The Evolution of the ACH" (PDF). Federal Reserve Bank of Kansas City. Retrieved September 25, 2020.
  10. ↑ "Automated Clearing House". www.fiscal.treasury.gov. Retrieved 2020-09-25.
  11. ↑ Eveleth, Rose. "In 1974, Someone Ordered a Pizza With a Computer for the First Time". Smithsonian Magazine. Retrieved 2020-09-25.
  12. ↑ Fessenden, Marissa. "What Was the First Thing Sold on the Internet?". Smithsonian Magazine. Retrieved 2020-09-25.
  13. ↑ PYMNTS (2015-07-02). "The History Of PayPal: Important Company Dates". PYMNTS.com. Retrieved 2020-09-25.
  14. ↑ Kashyap, Vinay (January 21, 2020). "2020 Will Be a Transformational Year in Payments Technology". Payments Journal. Retrieved 2020-09-25.
  15. ↑ Fowler, Bree. "The Many Ways to Make Contactless Payments". Consumer Reports. Retrieved 2020-09-25.
  16. ↑ Wertenbroch, Klaus; Schrift, Rom Y.; Alba, Joseph W.; Barasch, Alixandra; Bhattacharjee, Amit; Giesler, Markus; Knobe, Joshua; Lehmann, Donald R.; Matz, Sandra; Nave, Gideon; Parker, Jeffrey R. (2020-06-08). "Autonomy in consumer choice". Marketing Letters. 31 (4): 429–439. doi:10.1007/s11002-020-09521-z. ISSN   0923-0645. PMC   7278769 . PMID   32836798.
  17. ↑ "Banks Blind To Many Cyberattacks, Research Says". PYMNTS. February 2017. Retrieved 11 December 2017.
  18. ↑ "P2PE: Point to Point Encryption for PCI Compliant Payments". Bluefin Payment Systems. Retrieved 2016-03-30.
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