What startups need to know about the payments ecosystem
What’s involved in making a payment? We explain the ‘four party model’ and why it's important for startups to understand it...
Payments are simple, right?
It used to be we simply handed over cash for goods or services, and now it’s even simpler—we can simply tap a card to pay. Well, no it's not quite that simple. One thing any startup dealing with payments will quickly learn is that simplicity for the consumer actually hides a complicated payments ecosystem which can be tricky to get your head around.
Everyone involved in a single payment
When a payment is made the route that it takes from the customer to the payee is described using the ‘four party model’. The immediately confusing thing about this terminology is that, sometimes, two of these parties are the same entity, and there are actually six parties involved:
Payer/cardholder Let’s start with the obvious. This is the person or business buying the goods or service.
Merchant Whoever is supplying the goods or service and wants to get paid.
Acquirer, or acquiring PSP (Payment Service Provider), or merchant acquirer The acquirer processes the payment on behalf of the merchant, and deposits the funds in the merchant’s account, minus fees.
Issuer or issuing payment PSP Often a bank, but not always, the issuer provides the payment card to the customer. And it’s increasingly common for these cards to be virtual rather than plastic.
Payment scheme The scheme provides the rails for funds to get from one account to another, linking the acquirer and the issuer, and providing payment authorisation. ‘Open loop’ payment schemes such as Visa, UnionPay and Mastercard allow many PSPs to issue cards using their schemes, and ‘“closed loop’ payment schemes, such as American Express, do not—the issuer and acquirer are the same.
Gateway This is the device or online payment portal where the cardholder taps their card or enters their details. The gateway passes these details to the acquirer, making sure it’s secure and meets strict regulations.
Data flows between all of these parties to make sure that the payment is authorised or declined, and at the end of the day everyone receives the funds they are due, whether that’s the payment for their goods or services, or fees for the use of their systems.
Why should I care?
The ecosystem of payments is increasingly complex and ever-changing. One thing driving this is new technology and customer demands—mobile payments, payments using wearables, or new types of payments using connected cars, or stores that allow you to leave without checking out and take payment automatically. These all have to work on established payment mechanisms.
But it’s not just on the consumer side where there are innovations and new ways of doing things. We’re all used to banks issuing debit and credit cards, but should issuing be limited to financial providers? Could big tech companies issue cards? Could small tech companies? Virtual cards make this possible, but an understanding of how payments work is vital to even consider this.
What about digital wallets? Could your customers benefit from having what is essentially their own bank accounts, complete with bank account number and basic banking services? Could this be the differentiator that makes a business stand out against its competitors?
Increasingly, payments and payments technology will be differentiators for many businesses, integrated and embedded in innovative ways that give customers just that little bit of extra convenience—increasing loyalty and decreasing churn. The businesses that understand the payments ecosystem will be the ones that can make the best use of this technology.