Accepting payments online costs money, and the process, far from being perfect, has its own flaws. Imagine this scenario: a company selling its products online accepts hundreds of thousands of card payments every single year. Depending on the chosen provider, the business might be charged a fee between 1% and 3% of the amount being paid on every transaction, resulting in hundreds of thousands (if not millions) spent every year just to process customer payments. In addition, the required processes needed by card payments often take time to complete, drastically delaying the final settlement of funds.
This is when everything goes according to plan, but there is more; due to particular circumstances such as fraud or chargebacks, card payments might fail to process after a sold product has already been shipped, or a purchased service consumed, leaving the merchant with a loss to recover from.
The good news is that these frustrations for merchants are finally coming to an end thanks to the financial shift encouraged by the latest European legislations – effectively changing the way we pay online.
Open banking for digital merchants.
Came into force at the end of 2019 to drive competition and innovation in the financial market, the European Union’s second Payment Services Directive (also known as PSD2), embraced the concepts introduced the year before in the UK by open banking.
In essence, open banking has generated three game-changing opportunities for merchants. First, authorized businesses can now access their customers’ financial data by letting customers sign into their online bank accounts at checkout. Secondly, information about the funds available on any bank account can be requested in real time to assure that a payment will effectively be processed. Lastly, but most importantly, online payments can now be initiated directly from customers’ bank accounts without the need for any traditional intermediary such as card operators.
This new scenario enables merchants to offer better customer experiences through their own payment solution – powered by a flexible and agile process – to improve cash flow by taking card networks out of the equation and to avoid the processing fees, fraud and chargebacks traditionally associated with card payments.
Online payments: the four parties.
Every time somebody uses a debit card to pay online, a series of digital transactions is automatically set in motion. The two most obvious parties involved in the exchange are the merchant and the customer: the merchant offering a service or a product, and the customer, willing to acquire it, who initiates a transaction by entering his or her payment information.
The other two main parties playing a role in the payment process are the merchant’s and the customer’s bank, also referred to as the acquirer (or the acquiring bank) and the issuer (the issuing bank). The issuer provides credit and debit cards to the customer on behalf of the card brand networks, while the acquirer is the bank or the financial institution that processes credit or debit card payments on behalf of the merchant.
The other players.
Every business that accepts credit and debit cards needs some sort of payment processing services. Not all these connections are direct, and some involve additional third parties such as payment gateways (the digital equivalent of physical terminals in brick and mortar stores, transmitting payments between the issuing and the acquiring bank) and payment processors (exchanging transaction information between the merchant, the issuing bank, and the acquiring bank).
One of the most visible actors in the payment ecosystem is the card network, which acts as an intermediary defining fees, standards, and processing transactions. As it also provides services similar to gateways and processors, to keep things simple in the next example we will include all these functions under the “card network” umbrella.
End of part one.