WHY PAYMENT NETWORKS ARE ABSOLUTELY ESSENTIAL
This article tackles the not-so-fantastical world of e-payments, and how some of the moving parts of the system works. Banks all over the world hold money for both individuals and corporations. Someone with a bank account can easily use their debit card to withdraw money, check balances, and prove their identities when speaking to a bank teller. But then, what about when transactions need to be made between banks, say, with a debit or credit card? It wouldn’t make much sense for other banks to be able to give and receive money from other banks without there being some in-between step, which is exactly what a payment processor does.
What’s a Payment Processor?
In any transaction, there’s an issuing bank and the acquiring bank. The customer issuer is focused on their client not having money taken from their account under suspicious circumstances, while the merchant acquirer is focused on their client actually receiving the payment they’re entitled to. These are two separate entities, each with competing agendas.
A payment processor works as an intermediary between these two entities to ensure payments are properly authorized and received. The payment processor maintains a payment network that communicates with both entities in the transaction to ensure the transaction occurs exactly how it’s supposed to.
Responsibilities of a Payment Processor
There are more and more payment processors now that the Internet is breaking down monopolies all around the world, but a payment processor occupies an exceptional place in the financial landscape. A payment processor has to be absolutely trustworthy, and not to mention rapid and straightforward in how they complete their tasks.
The issuing bank trusts payment processors to properly take money only from accounts that have been authorized and validated (via PIN or other methods) and to take exactly the right amount of money, and not a penny more.
The acquiring bank trusts payment processors to receive the funds from the issuing bank and deposit it in their customer’s account for their own use. A merchant acquirer has much more to worry about than what can be explained here, but we think the article Understanding the Merchant Acquirer | Powercash21 does a more than satisfactory job.
The last job of a payment processor is to keep all of this information about the customer, merchant, and their respective banks as secure as possible, so nobody can compromise the financials of either party.
Suffice to say, it’s a pretty big job to undertake that requires a lot of good will from both banks to go smoothly. That’s why for the longest time, only major players like Visa and Interac could play in the game of payment processing, as they had access to infrastructure that could reliably process payments near-instantly, as well as securely.
Payment networks are a significant addition to the landscape of electronic payments, and they are compensated extremely generously for their efforts. Most payment processors charge something in the realm of 2.5% to process a transaction. This is why if you’ve ever been in a restaurant that charged less if you paid in cash than had you paid with credit, now, you know just what they’re compensating for.