The digital revolution has fundamentally transformed the landscape of financial transactions, making cashless payments a daily norm. Whether it's a simple retail purchase, a utility bill payment, or a large-scale business transaction, the underlying payment infrastructure makes it all possible. Here are the infrastructure's components.
At the heart of any digital transaction is a payment gateway. It is a technology that captures and transfers payment data from the customer to the acquirer and then transfers the payment acceptance or denial back to the customer.
In essence, it's the digital equivalent of a point-of-sale terminal in a retail store.
A merchant account is a type of bank account that allows businesses to accept payments in multiple ways, primarily debit or credit cards. This account serves as an agreement between the retailer, the bank that provides the merchant account, and the payment processor for the settlement of card transactions.
The payment processor is often a third party that's appointed by a merchant to handle transactions from multiple channels such as credit and debit cards.
The processor communicates the transaction details between the merchant, the issuer (i.e., the customer's bank), and the acquirer (i.e., the merchant's bank), ensuring secure and swift transaction processing.
Payment networks, also known as card networks, are financial services that manage the transaction process between merchants and consumers. They set the interchange fees, authorize transactions, and ensure that the payment reaches the merchant from the customer's account.
Issuing and Acquiring Banks
The issuing bank, or issuer, is the financial institution that provides the customer with their payment card. When a transaction takes place, the issuer checks the customer's account to ensure sufficient funds or credit is available.
If approved, the issuer sends the funds to the acquiring bank—the bank that processes card payments on behalf of the merchant.
It's crucial to note that these banks perform distinct roles in the payment infrastructure. The issuing bank carries the risk of the cardholder's default, i.e., if the cardholder fails to pay their credit card bills. This bank is also responsible for cardholder verification to prevent fraudulent transactions.
On the other side, the acquiring bank, also known as a merchant bank, serves as an intermediary between the merchant and the card networks. It authorizes or declines transactions, processes them, and seeks reimbursement from the issuing banks. The acquiring bank also takes on the risk of the merchant defaulting.
Security is a critical element of any payment infrastructure. Processors, banks, and governments all institute security measures, including ones developed in-house and ones that are created by payment infrastructure security specialists.
For more info about payment infrastructure, contact a local company like Cellulant Group.