Introduction to the Payments Industry

Evolution of Payments

Payments have nearly always existed in human civilization. As civilization evolved, so have payments, evolving from bartering to tokens to cash pooling to now countless forms of digital payments.

Dating back to ancient civilizations, payments took place in the form of bartering, where individuals made direct exchanges of goods and services, without any form of currency.

As societies developed, the need for a standard form of payment grew quickly. This need was fulfilled by the introduction of commodity money, initially represented by shells, beads, or precious metals, which held inherent value.

With this, transactions could be simplified and allowed for longer distance trading. This grew to metal coins, then eventually paper money and bank notes, which held no intrinsic value.

Instead, they were backed by governments as a form of currency, enabling an even more convenient and efficient way to conduct transactions.

From there, electronic payments completely reshaped the industry. With the advent of credit cards in the mid-20th century, people could pay for goods and services, without cash, and repay it later.

This enabled even further convenience, paving the way for a cashless society. With the recent adoption of computers and mobile phones, the 21st century has brought forth the era of digital payments.

This era now includes online banking, electronic fund transfers, digital wallets, and cryptocurrencies. These systems enable online shopping, contactless payment, peer-to-peer transfers, mobile payment apps, and more.

Through this most recent growth, it is clear to see that payments will continue to evolve, no doubt becoming more convenient and reliable by the day.

Cash Payments

While bartering can be a useful technique amongst friends and family, it is not an acceptable form of payment in a large scale economy.

Because of this, cash and other mediums of currency quickly developed, with the earliest trace of paper money dating back to 700 BC in China.

From there, cash became the most prevalent form of payment for well over 2000 years.

Throughout this time period, cash offered a highly convenient solution to allow sales and payments, serving as a staple in human history.

Cash provided a simple, tangible, and widely accepted form of currency that could enable small sales, or spread to large scale exchanges.

It offers immediate settlement and maintains privacy, making it a very convenient and efficient form of payment.

However, cash has a wide variety of drawbacks. While privacy of sales can often be a convenience, it can also pose numerous risks.

If any record of a transaction exists, it is often insufficiently detailed, posing issues in tracking expenses and tracing income. Cash also has security and risk factors associated with it, as it is susceptible to theft, loss, or counterfeit.

Carrying large amounts of cash can also impose personal safety risks, making it less than ideal to carry on your person. On top of that, storing cash or making exact change can be a large inconvenience.

While not an ideal solution, cash will always be prevalent in society. However, due to convenience and increasing popularity of digital payments, the usage of cash continues to lessen.

Cheques and Credit Cards

The first significant advancement past cash was the introduction of checks. The advent of checks marked the transition from cash to paper-based payments.

The use of checks dates back to medieval times, where handwritten documents authorizing a transfer of funds existed. However, checks have evolved to become much more standardized since then.

In more modern times, checks serve as an alternative to cash, where individuals can settle debts without physical currency.

Instead, the check issues instructions to their bank, enabling the direct transfer of funds from one account to another. This helped ensure safe transactions while also providing record-keeping through checkbooks and bank statements.

However, checks can bounce, making them a difficult currency to accept for everyday transactions.

In lieu of this, credit cards were introduced, allowing consumers to make purchases immediately, with the ability to pay it back at a later date.

This offered benefits to both consumers and businesses. For consumers, credit cards eliminated the need to carry large amounts of cash and allowed for deferred payments.

For businesses, they could safely accommodate a customer, without the customer having to have the ability to pay at that time. Credit cards are also processed electronically, so there’s no need to deal with physical currency and a clear record of the purchase exists.

Credit card technology continues to advance also, from magnetic strips to chips and tap to pay. They have also become increasingly secure and widespread, as they continue to shape the payments industry.

Electronic Payments

With the rise of the internet, a new era of electronic payments came to life. With the advent of online payments and emergence of payment gateways, the way financial transactions were conducted was revolutionized.

Online banking enabled customers to accPayments University - Intro to Paymentsess their bank accounts and perform financial activities online through numerous platforms.

Through online banking, individuals gained the ability to check account balances, review transaction histories, transfer funds, pay bills, and more from anywhere in the world.

This came with a variety of benefits, with faster transactions, automatic bill payments, and electronic statements.

Along with online banking, payment gateways enabled a large expansion in electronic payments.

Acting as intermediaries between merchants and customers, payment gateways facilitate secure online transactions. With gateways, customers can make electronic purchases and merchants can receive these payments securely and efficiently.

By offering encryption of data, verification of customer information, and authorization of transactions, gateways have fostered the growth of e-commerce and online payments.

With this expansion of electronic payments, both individuals and businesses received significant benefits. Now, customers could make secure purchases from anywhere, expanding their access to goods, while increasing their convenience.

Businesses expanded their markets and sales opportunities, while also reducing reliance on physical payment. All the while, these payments continue to become more efficient and secure, driving economic growth.

While online banking and payment gateways enabled a new way to process payments, innovative solutions continue to emerge. These advancements continue to change the industry, as well as drive towards a cashless society.

Mobile Payments

The new reliance on mobile phones has given rise to another new wave of electronic payments. This era gave rise to mobile wallets and contactless payments, where individuals could store payment information securely on their mobile devices.

Now, individuals could make purchases by simply tapping their mobile phone in stores. Individuals can go beyond these retail settings, also making online purchases through mobile apps or making peer to peer transactions allowing for seamless transactions in many digital environments.

Contact payment played a major role in these payments, by enabling transactions to be completed through holding your mobile device near a point-of-sale (POS) terminal with Near Field Communication (NFC) technology.

It included features like tokenization and dynamic authentication to provide a swift, secure, and convenient payment experience.

Today, mobile payments are becoming increasingly prevalent and allow for increasing security, mitigating card fraud risks. By eliminating a physical card and having facial or fingerprint recognition, payments are able to become more and more secure.

Cryptocurrencies and Blockchain

Most recently, cryptocurrencies and blockchain technology have emerged in the payments industry. Cryptocurrencies are digital or virtual currencies that use cryptography for a secure, decentralized transaction.

They operate independent of central banks, instead relying on blockchain technology to verify transactions. They have several advantages, like decentralization, transparency, or possible lower transaction costs.

Many cryptocurrencies, like bitcoin, have recently gained popularity and are becoming increasingly recognized, but many people remain skeptical.

While cryptocurrencies may reshape the payment industry like credit cards and gateways have, challenges like scalability and user adoption make it unclear of how.

Key Players in the Payments Industry

Card Networks

Credit card networks play a vital role in facilitating transactions. These networks act as intermediaries between banks and consumers, offering infrastructure and standards necessary for the flow of payments.

Some of the most popular networks are Visa, Mastercard, American Express, and Discover.

Founded in 1958, Visa is a leading company in the payments industry. They have become well known for dealing with credit, debit, and prepaid cards.

Visa offers numerous payment solutions for individuals, businesses, and governments.

Visa’s network enables secure transactions, allowing financial institutions and merchants the ability to process payments in numerous currencies and locations.

It also has a very wide acceptance, giving customers the ability to make purchases domestically and internationally.

Established in 1966, Mastercard is another huge company within the payments industry. Like Visa, Mastercard offers a large range of payment solutions, like credit cards, debit cards, and prepaid cards.

Mastercard also connects consumers and merchants to provide secure, efficient payment services across borders and currencies.

Founded in 1850 and joining the credit card scene in 1958, American Express (Amex) is another household name.

However, Amex differs slightly from Mastercard and Visa in that it operates on a closed-loop payment network. This means that instead of working with a bank to issue cards, Amex issues its own cards and provides its merchant services.

Discover operates as a mix of the two, offering its own cards and partnering with other networks.

Regardless of the network, each company has played a major role in electronic payments.

Using their networks, individuals have been enabled to make secure, efficient transactions, changing the payment industry forever.

Banks and Financial Institutions

Banks also play a major role in the payments industry. Two types of banks, issuing and acquiring banks, are vital to the payment process.

These banks serve two different functions, but come together to allow payments to occur.

An issuing bank is the bank that issues a credit or debit card to a customer. Sitting on the opposite end of a merchant, it is their responsibility to authorize a transaction.

This entails ensuring that the customer making a purchase has enough credit or funds for a purchase, as well as verifying the account details.

Then, in order to settle the purchase, the issuing bank must transfer the funds to the acquiring bank.

This second type of bank, the acquiring bank, is the bank that holds the merchant’s account. It is the acquiring bank’s responsibility to accept a deposit coming from a merchant’s transaction.

This is where the money is stored after a payment is completed.

In general, the banks serve to hold and transfer money. Both banks work together to transfer the money from the customer’s account to the merchant’s account.

Payment Processors

Another key player in a transaction is the payment processor. The payment processor acts as a mediator between the merchant and financial institutions. They serve to authorize credit card transactions and facilitate transfer of funds. Processors may be part of an acquiring bank, like Bank of America, but they can also be independent, like Fiserv or TSYS.

Payment Gateways

Payment gateways, like Pace, are software applications that allow merchants to accept payments and allow payment data to be transmitted.

The payment gateway serves to accept payment information, then encrypt it and safely transfer that data between a merchant and the banks involved in the transaction.

The main feature of a gateway is to provide security for a customer. Once the gateway receives their information, they can ensure it safely reaches the payment processor to enable a transaction to occur.

Other gateways offer additional benefits that can be favorable for certain merchants.

Pace Software offers a variety of these lucrative services, such as …

Merchants and Businesses

Businesses, or merchants, play a huge role in the payments ecosystem. Without merchants, there would be no products, and therefore no payments.

Merchants offer a good or service, and then pair with other companies in the payments industry to enable transactions to occur. Merchants make decisions based on their needs on what banks, processors, and gateways best fit their needs. Then, when a consumer decides they would like to purchase their product, either in person or online, they can make a sale while the payment is processed behind the scenes.

Consumers

As aforementioned, customers are an essential part of the payment process. Similar to merchants, without consumers, there are no transactions.

When a consumer decides they like a product, they decide to purchase it. This is the start of the transaction.

The consumer can then use their credit card to interact with the merchant’s terminal (via swiping, tapping, mobile, virtual, etc) to transmit their account information through the gateways, processors, and banks, and be approved for purchase, all within milliseconds.

Then, after a day or two, the payment can settle, and funds can be transferred from the consumer to the merchant.

While it is obvious to see how the merchant and consumer interact to make a purchase possible, it is less obvious to see how the rest of the industry interacts. While a merchant and consumer can still make a transaction occur without any outside help, hopefully you can see how much more convenient these companies make the industry. For just a couple pennies, these companies work together to allow online payments, deferred payments, transaction reports, all while increasing the efficiency and security of transactions. Therefore, it is clear to see these companies are essential to our society today.

An Overview of Payment Systems

Card-Based Systems

Card payments can be broken into two separate processes. The first process is the authorization. In this process, the consumer first uses their card to purchase a good or service from a consumer.

To do this, a consumer can interact with the POS terminal, which captures their card information. From there, the information can pass through the gateway and processor, ending up at the merchant’s acquiring bank.

Then, the acquiring bank captures the transaction, forwarding the information to the customer’s credit card network. From there, the network sends the transaction to the cardholder’s issuing bank to request an approval.

If the funds or credit exist, the payment is approved. Then, the issuing bank sends the response to the credit card network, who transmits it to the payment processor, who sends it to the acquiring bank.

The acquiring bank sends this approval back to the terminal, showing the transaction took place, and finishing the authorization stage.

The second stage of the payment is the settlement process. This typically happens at the end of each day, when the merchant closes out all of their sales for the day.

When this happens, the information on all of their sales is sent to the gateway, processor, and then acquiring bank. Aagin, the acquiring bank sends the information to the credit card network, who sends it to the consumers’ issuing banks.

From there, the issuing banks transfer the required funds to the acquiring bank, which deposits the transaction amount into the merchants account. Lastly, the issuing bank bills the cardholder the transaction amount.

Through all of these steps, many security measures like encryption, tokenization, and fraud detection are used to protect the consumer.

With this security in place, consumers and merchants can make seamless transactions in milliseconds.

Bank Transfers

Bank transfers is a method of electronic payment, where funds move from one bank account to another.

It is a secure way to transfer money both domestically and internationally. There are many different types of bank transfers.

The first bank transfer mechanism is wire transfers. Wire transfers are the direct, realtime transfer of funds from one bank account to another.

They are typically used in time-sensitive transactions, as funds can be immediately transferred, even across countries. They typically incur many fees and require specific details about the recipient and their account.

The next method is Automated Clearinghouse (ACH) transfers. ACH transfers are electronic transactions of bank accounts within the same country. In ACH transfers, transfers are not instant, but instead typically processed in batches.

These transfers are typically used for less time-sensitive transactions, like direct deposits, bill payments, and person-person transfers.

ACH can be used in these scenarios, as they do not require immediate settlement, so fees can be avoided.

While many other bank transfer methods exist, like Electronic Fund Transfers, International Bank Transfers, Payment Initiation Services, and others, they all serve a similar process.

They serve to provide a secure, reliable method of transferring funds from one bank account to another. Different bank transfers can be chosen for different reasons, but either way, the transfers help to simplify payments across the globe.

Digital Wallets

Recently, digital wallets have gained popularity for their convenience and security. They provide a contactless way to make payments via mobile devices.

Many of the growing wallets include PayPal, Apple Pay, Google Pay, and more.

One of the most widely recognized and used digital wallets is PayPal.

It allows users to securely send and receive payments online. PayPal allows users to link their bank accounts, credit cards, or debit cards to their account, enabling them to make purchases or transfer funds.

It also adds an additional level of security, by acting as an intermediary between buyers and sellers.

Another growingly popular digital wallet is Apple Pay. Apple Pay can be used on any Apple device, and is used to store credit, debit, or prepaid cards.

From there, through the use of near field communication (NFC) technology, consumers can make contactless payments through POS terminals.

It also allows for online and in app purchases. On top of its convenience, it adds an extra layer of, as it can only be accessed through Touch or Face ID.

Many other examples of digital wallets exist, but they all work to provide users with security and convenience. Instead of carrying a physical card with them, consumers can bring just their phone to make effortless payments, with additional security, causing their large growth in popularity.

Contactless Payments

Contactless Payments allow individuals to make transactions by simply tapping a smartphone, watch, or contactless card on a compatible terminal.

The leading enabling technology is Near Field Communication (NFC), but other technologies are also on the rise. Newer technologies, like QR codes and bluetooth, are becoming increasingly popular as well.

The most popular, NFC, is short-range wireless communication that allows for contactless transactions.

It enables an exchange of data between two close proximity devices. It operates on radio frequency identification to allow safe communication between a terminal and a device.

It is seen in mobile wallets like Apple Pay, Google Pay, and Samsung Pay. It allows for quick, convenient, and secure transactions without need for physical contact.

NFC, and other contactless payments, offer both speed and convenience. On top of that, they also incorporate numerous security features, like tokenization and biometric authentication, causing its recent boost in popularity.

Cryptocurrency Payments

Some of the newest technology in payments is cryptocurrencies. Cryptocurrency payments differ from traditional payment systems. Here, cryptocurrencies operate on a decentralized, secure, transparent network, allowing for direct peer-to-peer transactions.

These payments are made possible through blockchain technology.

Cryptocurrency payments work through a decentralized ledger, called a blockchain. This blockchain consists of a series of blocks, which each contain a batch of transactions.

Then, multiple copies of the ledgers are distributed among nodes to prevent a single entity from controlling the entire network. With this, you can create a digital wallet, with public and private keys to access, receive, and store funds.

From there, you can initiate a cryptocurrency transaction, by sending a transaction record. This includes an address, an amount, and other information.

When the transaction is sent, it is broadcasted to the network, and the nodes receive the transaction and choose to validate it. If it is validated, it is grouped into blocks and added to the blockchain, which is called mining.

Then, the blockchain’s consensus mechanism can ensure agreement on the state on the ledger among the network. Then, once the transaction is complete, the recipients and senders wallets can be adjusted accordingly.

This type of payment can offer several advantages, like lower costs, reduced reliance on intermediaries, and faster transactions. However, it still has downsides, like volatility and scalability. Because of this and how new it is, it is difficult to predict how cryptocurrencies will be used in the future.