Martin Cole
Key Takeaways:
1. The classical payment model consists of three steps: Authorization, Clearing, and Settlement.
2. Payment Service Providers (PSPs) act as intermediaries between merchants and acquirers, managing connections and routing payments.
3. Issuing banks issue cards to cardholders and authorize transactions, while acquiring banks settle funds to the merchant and take on the risk associated with fraud or non-delivery.
4. Payment processors facilitate transactions by communicating with banks and card schemes.
5. Merchant acquirers provide value-added services to help merchants run their businesses efficiently, in addition to accepting and processing card payments.
6. Pricing models for card processing can be blended or Interchange Plus, with Interchange+ being more transparent and allowing for more granularity in processing fees.
The Authorization Step
In the payment process, the first step is authorization. This is where the customer’s bank is contacted to approve the transaction based on fraud rules and available funds. The issuing bank plays a crucial role in this step, as it is responsible for issuing cards to cardholders and authorizing transactions. The bank checks if the customer has sufficient funds and if the transaction aligns with the fraud rules set by the bank. If the transaction is approved, the process moves on to the next step.
The Clearing Step
Once the transaction is authorized, the payment information needs to be exchanged between the customer’s bank and the merchant’s bank. This is where the clearing step comes into play. Payment processors, such as PSPs, facilitate this exchange by communicating with the banks and card schemes involved. They ensure that the necessary information is securely transmitted and that the transaction details are accurately recorded. This step is crucial for the successful completion of the payment process.
The Settlement Step
After the clearing step, the settlement step takes place. In this step, the customer’s bank pays the merchant’s bank for the transaction, and the funds are settled to the merchant beneficiary. Acquiring banks play a significant role in this step, as they are responsible for settling the funds to the merchant and taking on the risk associated with fraud or non-delivery. The settlement process ensures that the merchant receives the funds for the transaction and can continue running their business smoothly.
Payment Service Providers (PSPs)
Payment Service Providers, or PSPs, act as intermediaries between merchants and acquirers. They manage connections and routing payments, making the payment process seamless for both parties. PSPs handle the technical aspects of payment processing, ensuring that the necessary information is securely transmitted and that the transaction is completed successfully. They also provide additional services, such as fraud prevention tools and reporting capabilities, to help merchants manage their businesses effectively.
Merchant Acquirers
Merchant acquirers are financial institutions that provide services to merchants to accept and process card payments. In addition to the core payment processing services, they offer value-added services to help merchants run their businesses efficiently. These services may include point-of-sale solutions, reporting and analytics tools, and customer support. Merchant acquirers play a crucial role in enabling merchants to accept card payments and manage their financial transactions effectively.
Pricing Models for Card Processing
When it comes to pricing models for card processing, there are two common options: blended and Interchange Plus. Blended pricing combines all the fees associated with card processing into a single rate, making it simpler for merchants to understand and budget for. However, it may lack transparency, as merchants don’t have visibility into the individual components of the processing fees.
On the other hand, Interchange Plus pricing provides more transparency and allows for more granularity in processing fees. With this model, merchants are charged the actual interchange fees set by the card networks, plus a separate fee for the acquirer’s services. While Interchange Plus pricing may require more effort to understand and calculate, it can potentially result in lower costs for merchants, especially if they have a high volume of transactions.
Conclusion
The classical payment model involves multiple players and steps to ensure secure and efficient transactions between customers and merchants. Payment Service Providers act as intermediaries, managing connections and routing payments, while issuing banks authorize transactions and acquiring banks settle funds to the merchant. Merchant acquirers provide value-added services to help merchants run their businesses efficiently, in addition to accepting and processing card payments. Understanding the payment process and the roles of different players can help merchants make informed decisions and optimize their payment operations.
