Why Everyone’s Battling to Help With Your Payment?

Payments.

Not a day goes by when we don’t make or receive payments - so much so that our transactions continue to get processed even while we sleep. According to Statista, the total transaction value in digital payments is projected to be US$ 9.46tn for 2023, and grow at an annual growth rate (CAGR 2023-2027) of 11.80% resulting in a projected total amount of US$14.78tn by 2027.?

So what’s the big deal, one might ask?

After all, a payment is only a means to an end; a way to get what you desire. And while it’s understandable that sellers should want to make it easy for you to pay, what’s less clear to many is why everyone else is battling to help with the payment? For example, why payment processors want to process your payment. Or why banks want to create payment APIs? Or even why firms such as Apple or Google care to provide you with a digital wallets?

In my article, I’ll try to explain this through three key sections.

1.??? Participants: Who are the participants in the payment value chain?

2.??? Flow: How your funds get from point A to point B?

3.??? Fee: Who gains what in the process?

1. Participants: Who are the participants in the payment value chain?

Whether you’re in a physical store, or browsing from the comfort of your couch, the moment you tap your digital wallet, punch your 16-digit card details, or hit ‘buy now,’ several parties get into motion to help make the transaction happen. Key parties involved could include you, your bank, your card network, your digital wallet, a payment gateway, a payment processor, the seller, and the seller’s bank. Not all parties may be involved in each transaction, but broadly speaking, these are the key ones.

Participant 1: You

The first participant is you, in this case, the buyer. As buyer, your priority is to get what you want, as easily and quickly as possible. In fact, if possible, you don’t even want to have to pay, and let the payment just happen in the background, as you walk in and out of stores and restaurants, going about your life. Although we speak of frictionless payments, let’s face it, the very act of making a payment is friction. For example, if you want to watch something on Amazon Prime, even clicking ‘buy,’ is one extra step between you and your favourite show. They say no one wants a mortgage. What they really want is a home. Anyway, you, as the buyer, are a key participant and where this chain begins.

They say no one wants a mortgage. What they really want is a home.

Participant 2: Your Bank

The second participant is your bank. If you're the buyer, your bank is called the issuing bank.

Participant 3: Your Card Network

The third participant could be your card network. If you make a card payment, your bank still needs to confirm to the card network that there’s nothing suspicious about the card use, and that it’s okay to go ahead. ?

Participant 4: Your Digital Wallet

The fourth participant may be your digital wallet, depending on whether you use one. Some popular wallets include Apple Pay and Google Pay. I heard in an interview that by 2026, 65 % of all transactions will be made using digital wallets, so I take it that many of us use one, or several digital wallets. ?

Participant 5: Merchant Account Service/Payment Processor

The fifth participant is the payment processor, who acts on behalf of the seller. The payment processor does all the heavy lifting to capture your payment request and work via all participants to get the payment safely across from your account to the seller’s account. Processors include firms such as PayPal, Stripe, SumUp, Square who receive payments in store or on e-com portals and shopping trolleys handle things from there.

Participant 6: Payment Gateway

This is an additional technology that takes your payment instruction from the seller’s device or portal to the processor, in a secure way, without compromising payment details in transit.

Participant 7: The Seller’s bank

The seller’s bank is the one where the seller has their business account, the final destination for the funds. This is also called the acquiring bank.

Participant 8: The Seller

The eighth and final participant is the seller themselves. Sellers are often referred to as merchants.

To be able to receive online payments, sellers needs to partner with processors who can help them offer multiple payment options to their customers, and then help them with the payment.

2. Flow: How your funds get from point A to point B??

Now, for the flow. Once again, this will vary depending upon whether you use a card, a digital wallet and so on, but the below gives you a broad idea.

When you wish to make a purchase, the request travels though the payment gateway through to the processor. The processor contacts your bank (via the card/wallet) to check if you have the money to pay for the item. They also check other things such as that the card isn't stolen, and if all is good to go, your bank issues an authorisation code so you can get what you need. Though the actual settlement of funds can take more time, most times, sellers can begin to access the money right away.

3. Fee: Who gains what in the process??

As you can see, this is a complex process, and I’m not even speaking of payment issues, such as failed payments, returned goods, and fraud just yet. Naturally, everyone in the value chain needs to get paid for their services - which brings us on to the fees. Although this is a very detailed topic, here’s a simple breakdown to help you understand what makes the payment ecosystem attractive.

Participant 1: You:

You get to keep the item you wanted. And the more seamless and safe the payment experience, the better it is for you.

Participant 2: Your Bank

The issuing bank charges an interchange fee. This fee can vary depending on factors such as how much risk the transaction carries, whether the card was present or not, and so on.

Participant 3: Your Card Network

If you pay by card, then the card network keeps a share called dues and assessment. This is usually per transaction and basis points.

Participant 4: Your Digital Wallet

Your digital wallet charges your bank for processing the transaction. I assume this either causes a squeeze on bank margins, or gets passed on within interchange fees. For example, a wallet provider may charge the bank 15 cents of every ￡100 sale.

Participant 5: Merchant Account Service/Payment Processor

Payment processors handle all the above costs, and then pass these on to the seller as part of the payment processing fee. They have various pricing models such as monthly costs, plus a percentage of each transaction, fixed fees, tiered pricing, and so on. For example, a payment processor may take a fixed fee per transaction, plus 2.75% of each payment.

Participant 6: Payment Gateway

Similar to the above, the costs of the payment gateway too will get absorbed in the cost of payment processing.

Participant 7: The Seller’s bank

Once all the above charges are paid, the remainder amount will make its way to the seller’s bank, also called the acquiring bank. Not surprisingly, they too will take their share to manage the seller’s account, receive the payment, and keep it safe.

Participant 8: The Seller

Finally, the seller gets to keep what’s left after all the above deductions.

As you can see, with all the deductions in the process, the merchant may get to keep a lot less than the price paid by the consumer. I suppose, part of running a viable business would be to bake that cost into the original pricing. For example, If I am a seller and I know that when selling a cup of coffee for ￡4, I’ll only really get to keep ￡3.50 after all payment processing charges are met, I might have to increase the price of the coffee so that I get ￡4 after processing. So at some level, all the above costs are borne by none other than the customer.

So there you have it – a typical payment value chain. As I mentioned, this is a very simplistic and high level view, and there are several nuances, and variations depending on factors such as global Vs local payments, payments using open banking, etc. I’m very conscious we haven’t even touched on your payment data, and why that's very valuable in its own right, but I’ll leave that for another day!

Conclusion?

In summary, digital payments usually take place in seconds and offer a lot of benefits to both buyers and sellers. They help sellers to offer choice to their customers, and help the buyers shop in quick, easy, and relatively secure ways. However, there’s a lot more to a payment value chain than consumers realise, and for every party that touches a payment, there’s a slight profit to be made, the cost of which is eventually borne by the end consumer.

About Me:

I’m a senior leader in the financial services industry with over 25 years of corporate experience and have held substantial leadership roles in prestigious firms such as HSBC, Barclays, and BSkyB. I’m also an accredited coach, a published author, a global speaker, an Udemy instructor, and a marathon finisher. Click here to get in touch.