In the beginning there was gold followed by cash. Then came the check. And then came technology where we are now.
The best analogy to understand the action in retail payments is that of a kitchen table where the transaction occurs. The table has 4 legs and the table top.
The four legs together with the table top in our kitchen table example are the basic requirements of creating a transaction.
Customer:
The first leg is a card holder who wants to purchase goods or services for which the payment card is used. Many flavors of cards exist- credit card, debit card, prepaid card and virtual cards. With the rise of smart phones a new breed of payment vehicles called digital wallets has emerged. Here you load funds from your bank account. Open Banking allows you to choose from the smart phone which bank you want to use to load funds.
The action is in offering the customer multiple choices in making payments--cards, wallets, QR codes, Buy now pay later(BNPL), Request to pay(RTP), EMT or email money transfer, account to account to split a restaurant bill to name a few.
Merchant:
This second leg is the entity that sells you the goods or services. This can take place in a physical store or online in a website or app. The payment is accepted in a Point of sale terminal or in a secure area of their website called Payment Gateway where you enter the card details. In facilitating a payment, they accept any of the payment vehicles the customer chooses to pay. Once received, they send the transaction over to the third leg called processor.
The action is in enabling Merchants accept the various payment vehicles. This is driven by the need to offer convenience and personalization to the customer which ultimately drives revenue.
Processor:
The third leg goes by various names --acquirer, payment processor, PSP, merchant aggregator. Sometimes a bank can offer the processing. With the rise in transaction types the action for the processors is making sure the transaction goes through and also to route the transaction at the least cost for themselves and the Merchant.
Issuer:
The fourth and final leg of our kitchen table analogy is a bank or fintech who has issued the card or payment vehicle to the customer. These entities are responsible for funding the transaction by taking money from the customer bank account and sending it on to the Merchant's bank account.
The action here is that the Issuer has to provide these new payment vehicles to the customer . The success lies in how well they market the vehicle leading to more acceptance in the market.
Networks:
Finally the table top or the network that connects all the parties . They are the trusted brands we know so well like Visa, Mastercard, Amex. New payment networks based on current technologies are disrupting the legacy Networks business models. This is where the action lies.
These new networks are domestic networks in nature ,usually driven by the government and are provided to increase the availability of new payment vehicles . The goal of these governments is to enable transition from cash and financial inclusion. Absent legacy costs, these networks offer speed , convenience and lower costs to all the legs of the kitchen table top in the payment ecosystem. Examples of these networks are Interac in Canada, UPI in India, M-pesa in Kenya, SEPA in EU.
The legacy networks are not resting . They are also building these new networks in addition to their legacy infrastructure.
Some of the technology building blocks that enable this action in the retail payments area include ISO20022 payment messaging, tokenization, digital identity. They all take advantage of rich data now available about customer behavior to reduce operational risk elements like failing transactions in straight through processing, fraud mitigation, cloud infrastructure to cut costs and digital trends to attract new customers.
All in all a great time to be in this space.
