Payment series 1: Intro to payments — how payment works
In this article, we will look at the most common B2C payment in the US, credit and debit card.
Acquirer & issuer
Issuer is the bank that issued the credit / debit card. The issuer pays for the transaction. Because it may take the issuer 1 to 2 month to receive the fund from the consumer, the issuer takes the biggest portion of the fee in the transaction known as the interchange fee. Usually at 1.5 to 2%.
Acquirer typically refers to the merchant’s bank account. This is where the money goes into at the end of the transaction. I want to point out here some people will also refer to acquirer as the processor. This is because sometimes processor and acquiring bank are offered as a bundle.
Processor & gateway
Processor will process the payment. It has 2 major function:
- When the customer makes a purchase, the processor will direct the authorization based on the credit card network (visa, master, AE…etc).
- Then at the end of day, processor will initiate and process the settlement of funds. With some online provider, I have some cases that this part is done by the payment gateway.
Payment gateway mostly applies to online transaction. Because there are sensitive information being sent during online checkout (account #), the purpose of payment gateway is to make sure certain messages are encrypted and ensure secure communication from client to the payment network. Basically, the payment network does not allow anyone to connect, so the connection is through payment gateway. Gateway functions typically include: submit, authorize, capture, and settle. As mentioned, most of the merchants already have processor, so the settlement may be done by the processor.
ISO & MSP
ISO stands for independent service orangization. MSP stands for member service provider. ISO is for Visa and MSP for Master. These serve as the frontline for Visa and Master because it’s very hard or impossible for Visa and Master to deal directly with every business. ISO and MSP serves as sales, support, and may also create custom solution for customers. Another important feature of ISO & MSP is that they ensure merchants are compliant with regulation.
PSP
PSP stands for payment service provider. It’s an intermediary that aggregates accounts into one merchant account. In other words there is only one merchant ID in the payment network (processor, acquirer, issuer). The purpose is the lower fees. It was originally designed for SME that process less than $5000 a month, as higher processing value would drive down the fee. It has gained much popularity and gained customers beyond SME. Paypal & Square are some of leading players.
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