Whether you’re in person or online, using a card account to pay for goods and services is deceptively simple. You input your account details into the yoga studio’s form and usually within seconds, your pass is paid for. The only thing standing between you and unlimited tree poses is your level of motivation.
But for something so quick and easy, a single payment transaction is a drop in a massive ocean. Globally, cashless payment transactions numbered about 1 trillion in 2020 and could almost double in the next five years, supported by banks, card networks, payment processors, and – if you’re a software provider enabling payments for your customers in some way – your own company.
So, who are the entities involved in a payment transaction and what, exactly, do they do?
Acquiring Banks. Acquiring banks are also referred to simply as acquirers, and they are regulated financial institutions.
Acquiring banks are banks that have established themselves as members of the card networks, enabling merchants to access the networks and systems for card-based transactions through their memberships. An acquiring bank executes merchant agreements with its merchant customers and is liable for all of their actions – or inactions. They’re responsible for their own and their merchants’ compliance with network rules and government regulations, as well as that of any third parties that are involved.
Processors. Processors are the entities that handle the movement and verification of transaction data between the merchant and the other parties (acquirer, card networks, issuing bank) involved in the execution and settlement of transactions. They provide the technical capabilities and connectivity to the card networks for transaction authorization, clearing and settlement.
Processors are also sometimes referred to as acquirers, but they may not be the same thing as an acquiring bank. Processors and acquiring banks provide two different functions, and both are needed for every transaction.
The terminology can get confusing because one company sometimes offers multiple services. For example, a processor may provide access to deposit accounts through its relationship with acquiring banks. At the same time, some large acquiring banks offer payment processing services. Either one of these multipurpose entities may at times be referred to (perhaps incorrectly) as an acquirer.
Gateways. Payment gateways are the entry point into the payments system. A gateway sits between the merchant and the processor, and its function is to collect, package, and encrypt transaction data, including the card account details, for routing through the rest of its journey. It then translates the response back to the cardholder at the point of interaction.
Payment gateways originated with the advent of ecommerce. For businesses that were building ecommerce web sites, connecting their interface to a payment processor was originally a time-consuming and difficult task that could take a year or even longer. This barrier led innovators to create technology that could integrate with and certify to each processor only once, while offering a simpler and more modern interface to which the merchant could then connect.
Processors and acquiring banks may offer payment gateways as part of their suite of acquiring services. Other companies also sometimes offer gateways as standalone services.
Card Networks. The card networks (American Express, Discover, Mastercard, Visa) are a critical piece of the payments puzzle, providing the infrastructure needed to clear and settle transactions between issuing and acquiring banks.
The card networks manage the interchange system – a system of fees that acquirer banks pay to issuing banks – and set interchange rates. They establish and enforce the rules and regulations that businesses operating within the payments ecosystem are all required to follow. Their mandate is to protect the consumer, ensure security and reliability in the systems used for payment transactions, and engender trust in those systems.
The networks also work to drive card usage by developing new products and services and promoting brand awareness and acceptance.
Issuing Banks. Issuing banks are the banks that hold consumers’ debit or credit card accounts and issue their cards. When a transaction is initiated at a merchant, its information travels through the rest of the system to end up at the issuing bank, which is responsible for authorizing the transaction based on verification of the account and available funds.
Like acquiring banks, issuing banks are members of the card networks, and they are responsible for adhering to network rules and regulations as well as ensuring the compliance of their own customers, the cardholders.
Software companies / payment facilitators. Software companies have increasingly begun to bundle payment processing solutions for their clients alongside their stack of other software and business solutions. They may choose to do this to improve the customer experience, increase speed of onboarding, and add value to their customers, as well as to increase their own valuations.
Many seek to do so by becoming payment facilitators. These companies connect to the broader payments ecosystem through relationships with merchant acquirers who allow an extension of their merchant acquiring capabilities to approved payment facilitators. They provide a single point of contact and a streamlined application and onboarding process for their merchant customers.
This eliminates the need for those customers – which are often small businesses with fewer resources – to go through the lengthy and cumbersome process of identifying, applying to and integrating with the needed payments partners themselves.
Payment facilitators haven’t always been a part of the payments process. But today, they play an important role, lowering the barriers to payment acceptance for even the smallest businesses.
All of these companies contribute in unique ways to an infrastructure that safely and securely connects consumers to the merchants they want to do business with, billions of times every day.