Payments Explained

The lifecycle of an online payment, from purchase to settlement
August 20, 2020 | Expertise

For eMerchants, the world of digital payments can be a complex and shifting ecosystem, with new challenges cropping up daily such as approval rates, risk factors, new regulations... The following article is designed to act as a compass, guiding you in the right direction for your business. We will look at the entire payment cycle, what needs to happen for a transaction to be completed, and who plays a role in doing so. Payments terms will be explained along the way.

Who are the main players in the online payments industry?

When an acquisition is made online, it appears - to the customer at least - that it is instantaneous. The reality is somewhat different, behind each transaction there are multiple steps involving multiple players. The cool kids being: 

Buyer - Someone who purchases a good or service.

Merchant/Seller - An entity selling goods or services 

Acquirer - A bank or financial institution that enables businesses or rather merchants to accept and process financial transactions.

Payment Service Provider - shortened to PSP is a company that processes payments

Payment Networks/Card Schemes - networks that banks and financial institutions can use to issue cards such as Visa, MasterCard, AMEX, Diners, JCB, etc.

Issuer - An issuer or issuing bank is a financial institution that issues credit and debit cards to consumers (or companies) on behalf of card schemes.

If you want full control over your payments cycle, you will need:

Payment Management Platform: also known as a Payment Orchestration Platform and not to be confused with a Payment Gateway (which is only the technical aspect of accepting payments). A payment management platform routes payments to the most appropriate PSPs and protects against fraud, eliminates provider lock-in (when a PSP holds payment data making it difficult for you to switch provider,) facilitates reporting, and much more.

Card Payment Lifecycle

The complete payment cycle
All the different steps an online payment makes before it's completed

A Payment ‍Voyage

The payment cycle starts with a buyer; they see a nice-looking hat that would be perfect for their next sailing trip, it costs 350 Euros – an expensive hat, but it will command attention and respect on the boat. The buyer confirms the purchase, and now our voyage begins! To start, the transaction needs to be authorized (approved by the buyer’s bank), in order for this to happen we need to play a very quick game of pass the parcel; the merchant forwards a request to the acquirer, the acquirer forwards the request to the card scheme associated with the buyer’s credit card. The card scheme or card network– Visa, Maestro, American Express, take your pick...– forwards the request to the issuer, the issuer checks if the cardholder has sufficient funds to pay for the transaction. If yes, confirmation is sent back via all the different stages until it arrives back at the merchant. Now the sale is complete. But when do the funds reach the merchant’s account? To get the funds in the merchant’s account we need a settlement (the money received for the goods/services, after all fees are deducted). This can happen, daily, weekly, monthly, or at any agreed interval. The PSP used to process the payment will forward the funds to your account minus the processing fees (payment to cover costs of processing the payment) and the various “cuts'' that are deducted from the sum by the different players involved. 

At the moment card payments (payments made using a credit or debit card) have the largest slice of the online payments pie – around 33% of all online purchases are made using credit/debit cards. However, according to the report by The Paypers, this method is in decline. 

Payments processing with an alternative payment method (APM - a payment method that does not use a credit/debit card) how is it different?

Payment lifecycle with an APM

Again, we begin with our buyer, who has now found a nice pair of boat shoes that match the new hat perfectly. The buyer chooses to pay via SEPA Credit/Bank Transfer (a method of open banking) the buyer's bank then asks the buyer to authenticate the purchase (proof they are making the purchase, can be done via an app, code, text, etc:), once confirmed, the bank transfers the money into the merchant's bank. 

Other common APMs include eWallets, prepaid cards, cryptocurrency, and even cash payments.

What do you need to start accepting payments?

In order to get your hands on some money and to start accepting payments you, the Merchant, will need a MID (a Merchant ID is your identity number with your payment processor, which they use to route settlements to your account) given to you by your acquirer/PSP. The market is filled with PSPs, and each comes with their own list of pros and cons. The one(s) you decide are best for you will depend on your business. For example, acquirers tend to have better acceptance rates (the number of transactions that are approved and processed) in certain geographical locations than others. Basically, you are going to need to do some old-fashioned courtin’ but remember there is no need to be monogamous.

If you plan on operating in multiple locations it is beneficial to have a multi-PSP set-up (when you work with more than one payment service provider) as this will allow you to target customers with their preferred payment methods. In order to manage your multi-acquirer set up effectively, you can use a payment management platform. This will allow you to route the transaction (transaction routing is when you can send a transaction to a specific PSP based on a set of rules) to the most appropriate payment providers based on geolocations, risk factors (each payment has a risk factor; this is judged on geolocation, payment type, history, etc.) and more. 

Discover the all the features of IXOPAY’s payment management platform here.

Things to consider

Rules and Regulations: you will need to get familiar with terms such as tokenization (when payment details are held in a secure vault and replaced by a token), PCI-DSS (stands for the self-explanatory Payment Card Industry Data Security Standards,) and GDPR (Global Data Protection Rules, there to protect people's data from being used in questionable ways) quickly, thank goodness you can find all of these terms in our glossary. These regulations are there to protect both merchants and customers. They also have the added benefit of increasing acceptance rates and make for a seamless checkout experience (when users can purchase effortlessly and payments are authorized quickly). 

Fraud prevention: another crucial thing eMerchants need to consider; when money is involved, there is always a risk of fraud. In order to protect yourself and your customers, it is wise to invest in a fraud protection software or use a payment platform that has risk protection included. Or go all out and use a payment management platform with fraud protection and a third-party provider, for extra protection.

About IXOPAY

IXOPAY is a payments orchestration platform enabling independent, flexible and global payment processing. As a highly scalable and PCI-DSS certified “fintech enabler”, IXOPAY fulfills the needs of large merchants as well as those of “white label” clients: payment service providers (PSPs), acquirers and independent sales organizations (ISOs). The modern, easily extendable architecture offers smart transaction routing & cascading, state-of-the-art risk & fraud management, fully automated reconciliation and settlements processing, comprehensive reporting as well as plugin-based integration of acquirers, payment service providers and alternative payment methods (APMs).

IXOPAY is part of the IXOLIT Group, founded in Vienna, Austria in 2001. With local entities in Austria and the USA, IXOLIT supports national and international customers across various industry verticals. The owner-led and -financed company has grown from 2 to more than 65 employees and is focused on building innovative solutions for eCommerce.

Please find more information about IXOPAY here: https://www.ixopay.com

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