What is Payment Infrastructure?
The modern economy is becoming more complex. Payment infrastructure provides fast and reliable non-cash payments. Read about what payment systems are in e-commerce and which one to choose, how they work and what are the differences between them.
How the Payment Infrastructure Works
If we define a payment system (PS) in simple terms, it is a set of software, hardware, and communication technologies designed to perform financial transactions with non-cash money.
The payment infrastructure system as an ecosystem in general includes a number of participants:
- payment providers;
- the central coordinating body (usually the central bank of your country);
- processing centers;
- technical infrastructure providers, providing computing and communication bases for payments.
All participants of the system interact with each other by certain rules and agreements, based on a clearly defined legislative framework.
Thus, all the activities carried out in the SAR (Suspicious Activity Report), the rules used, and the functionality are within the legal framework.
For the customer, the process of buying in e-commerce begins with the interaction with the payment provider. It is due to the precise and coordinated work of payment providers, banks, processing systems, and other ecosystem participants that a user can make a payment literally in a few clicks and the time to complete a transaction is from a few seconds to a few days (in special cases). The share of fraudulent transactions, in comparison with the total amount of non-cash transactions, is very small — in 2020 this figure was about 0.005%.
As electronic payments are faster each year, and the level of their security is increasing, the share of cashless transactions is also increasing. Such trends will stimulate the stable growth of the share of cashless payments in the world in various business spheres.
In general, there is an entire ecosystem involved in electronic payments, which, as mentioned above, includes many participants. However, there is a special participant in this ecosystem who is responsible for coordinating all other links — the payment infrastructure system. The PS does not issue cards, does not issue credits, and does not determine acquiring rates. The main task of a PS is to provide effective and reliable financial services.
In general, the PS can be divided into the first and second generations, as well as national and international.
The largest international payment systems of the first generation are American Mastercard, Visa, American Express, Diners Club International, Chinese UnionPay, and Japanese JCB. All these payment systems began with activity in one country, but today they operate almost in all countries of the world.
International payment systems work with banks and payment providers in many countries, their cards can be linked to different accounts, transfer money from one country to another and operate in different currencies.
Money transfers here are made online and only between user accounts in this system. That is, both the buyer and the seller must have accounts in the corresponding electronic payment software. The money received by the seller goes to the electronic wallet, and then it can be used for purchases within the system, or it can be withdrawn to his current account.
Special attention should be paid to service ES for interbank settlements, to which ordinary consumers do not have direct access. For example, in 1973 there was created a payment system for international payments SWIFT — Society for Worldwide Interbank Financial Telecommunications. The system ensures the exchange of financial information around the clock with a high level of security.
Suppose a customer has selected an item in an online store and wants to buy it. He enters card data on the website or in the mobile app of the online store. This data is sent in encrypted form through the provider’s credit gateway to the acquiring bank (which enables the merchant to accept cashless payment). Then they go to the processing center of the payment infrastructure system as:
The PS asks the issuing bank (which issued the card) permission to write off the money. If there is enough money and the buyer’s account is not blocked, the issuer confirms the transaction to the acquirer. The latter credits the money written off to pay for the goods to the store’s current account. This is a very simplified explanation of the financial algorithm.
To make the online purchase procedure for the customer in e-commerce as comfortable as possible, merchants use financial gateways.
Why Modernize Your Payment Infrastructure?
So, without going into detail, the financial infrastructure has two main tasks (the rest follow from them). We will focus on them.
The first one, which was mentioned above, is investment risks. Managing them is one of the main tasks of financial infrastructure. The fact is that this factor is inherent and unavoidable in the conduct of any commercial activity. That’s why managing companies (participants of financial infrastructure) have the task of foreseeing and minimizing the threat of problems. Thus, the efficiency of this or that financial sector and particular enterprises increases.
As a matter of fact, risk management turned into a whole area of management long ago. Not only individual analysts and experts on the staff of an organization but also large firms with large teams to specialize in it.
The second main task of financial market infrastructure is to reduce so-called transaction costs. These are costs that inevitably arise during the conclusion of transactions, contracts, and the signing of agreements. It would seem that there is nothing complicated here, why make it the main task and spend resources on the infrastructure? In fact, it’s not that simple.
Transaction costs include a lot of expenses. For example, the search, preparation, and processing of necessary information and materials. It also includes the cost of negotiations, which may or may not be very short. The costs will also require monitoring compliance with the terms of the contract. By the way, this process is considered one of the most expensive, because lawyers are involved. Costs are high, and those involved in the financial infrastructure need to reduce them. Otherwise, the already difficult process of making deals will become even more difficult and costly.