The payments industry is one of the most complex industries in the financial world. There are multiple players in this industry who work in tandem to make a payment transactions work. The payments were initially handled by banks in return of the presentment of a check, draft or a withdrawal note. In the initial days, a payment was only possible to the bearer of a check, draft or a withdrawal note if specified accordingly, or else, the payment was transferred to the account, specified on the check. Therefore, for a large part payments were handled in cash, until the first credit card was introduced. Thereafter, multiple banks introduced their own credit cards. Similar to the revolution brought about by the introduction of credit cards in the banking industry, the FinTechs are reshaping the payment industry by bringing in innovative customer journeys.
A brief understanding of the entire payment ecosystem and different entities involved is essential to understand the impact caused by FinTechs from a business and technology perspective. The moment an individual swipes his/her credit card at a point of sale (POS), the payment process begins and different entities of the ecosystem start interacting with each other. Let us begin by taking a hypothetical case of an individual purchasing coffee from a coffee shop and explore all the enti-ties involved therein by the transaction.
Let us take the case of Susan, a hypothetical customer, swiping her card at a hypothetical coffee shop called StarCoffee. In the payment ecosystem, the coffee shop is called a “merchant” and Susan is described as a “card holder.” StarCoffee would have a bank account, and the bank holding this account would be called an “acquirer” bank. Susan would also have a relationship with a specific bank who would have issued a credit card to Susan. This bank is called as “issuer” bank and in most cases the issuer bank will issue cards associated with differ-ent card schemes like Mastercard and Visa. The card scheme is an intermediary who is responsible for connecting all the entities in the ecosystem. The moment Susan swipes her card at the coffee shop, an authorization request is sent from the point-of-sale system to the merchant’s acquirer bank. The point-of-sale sys-tem is typically a credit card swipe machine, a Europay, Mastercard and Visa (EMV) credit card or a tap card machine. The acquirer bank then forwards the request to the “card scheme.” The card scheme works with the issuing bank to understand if the customer is eligible for the desired credit and if the customer has a relevant balance in his/her bank account. If all goes through well, Susan is allowed to conduct the purchase and she walks out of the store with her cof-fee. The merchant provides a bill to her and keeps a copy of it, as a proof of the transaction.
the transaction is completed at the POS, there are multiple transactions
carried out at a later time to close settlements for the transactions
initiated. The acquirer bank then creates batches of settlements and sends the
details of these transactions to the respective card schemes. The card schemes
then process this
information and create batches of settlement requests to be sent to the respective issuing bank. Upon getting the payment request, the issuing bank pays the card scheme and which in turn pays the acquiring bank. In some cases, the card pro-cessing companies like American Express and Discover play a dual role of issuing a bank and card scheme as well.
This is a very simplified version of the complexities and variations involved in processing the transactions across multiple banks, merchants and credit card- issuing companies globally. Since the process is complex and usually the commission charged is correlated to the number of entities involved, the FinTechs have started disrupting this market by letting payments happen differently. As mentioned above, investments in a payment FinTech has been the highest followed by FinTechs in the wealth management space. P2P payments, wallets