Payment Industry Ecosystem | India
The evolution of digital payment systems in India, also known as Bharat, has been remarkable since its inception. There has been significant progress in enabling seamless payments both within and across banks. Initially, a few players dominated the market, and customers had to bear transaction charges. However, the landscape has drastically changed. Presently, most payments are conducted free of charge and in real-time.
In this technical blog post, I will delve into the various key players involved in different payment systems. Digital payments began with the use of Credit/Debit cards and later transitioned to Internet banking, eventually incorporating wallets and UPI (Unified Payments Interface).
Upon examining the underlying payment processing systems, it becomes evident that the fundamentals have remained consistent throughout this journey. While there have been refinements and optimisations, the core principles have largely remained the same.
Internet Banking
Internet banking facilitates the transfer of funds from one account to another, with two possible scenarios: the recipient’s account may be within the same bank or in a different bank.
Transferring funds within the same bank is straighNorward as it allows the bank to process payments independently, reducing risks. However, inter-bank transfers require assistance from a reliable third party to bridge the gap between banks.
The Reserve Bank of India (RBI) serves as this essential bridge, enabling banks to process payments through methods such as
- Real Time Gross Settlement (RTGS),
- National Electronic Fund Transfer (NEFT),
- Immediate Payment Service (IMPS)
A crucial requirement for such transfers is that banks must be registered and authorised by the RBI. Each bank branch is assigned a unique Indian Financial System Code (IFSC) based on this registration.
Here begins the payment journey. When transferring funds from one bank to another, it is mandatory to provide the recipient’s account number and the receiver bank’s IFSC code. These two pieces of information enable the RBI to accurately direct the funds to the correct bank and account number.
Because this process involves verification from the RBI, linking a new recipient to a sender’s account usually takes some time. Consequently, real-time payments to arbitrary recipients are not feasible due to this verification delay. This is a primary reason why Credit Cards gained popularity.
Credit Card Payment
In the realm of credit card payments, there are additional entities that collectively form the essential network for fund transfers. To understand this, let’s examine the overarching process, which essentially involves a two-step payment procedure.
Payment Authorisation
I have depicted the high level process flow in below diagram. Following are the key points to note:
· Merchant or Seller who wanted to accept payment through credit card need to work with some kind of Merchant Service Providers (MSP) or Independent Sales Organisations (ISO). These providers will help merchant with hardware and infrastructure required for the same.
· POS terminal provider, Acquiring bank are the Acquirers. Sometime a provider can just act as a single service provider, partnering with various MSP/ISO.
· Acquiring bank can also provide its own POS terminals or can partner with other hardware providers too.
· Card Network Providers only allow transaction between approved list of banks. In our case, those are Card Issuer Bank and Acquiring Bank.
· Payment Authorisation happens instantly in real time and provide payment promise to Merchant from Card Issuer Bank side.
· Actual payment settlement done later in batches.
Payment Settlement
Payment settlement is not done instantly during card swipe to avoid associated risks due to the involvement of multiple parties and possible frauds. It’s generally done based on pre-agreed terms which could be generally T+1, T+2 or more, where T is day on which card swipe is done.
As there are multiple players involved to provide safe and secure amount transfer to Merchant’s bank account, there is always a fees associated with it. This fees generally need to bear by the Merchant, based on the pre agreements.
Following is the high level diagram depicting the settlement on T+1.
Due to the evolution of internet and e-commerce industry, customer can now pay online using Credit Card. But due to the absence of physical POS, Payment Gateways came into picture.
Payment Gateway
Payment Gateway provides a layer of abstraction with needed data security in payment process. They are kind of virtual POS terminal, which verifies the credit card details and forward the transaction. As part of security, they need to be PCI DSS certified (i.e. Payment Card Industry Data Security Standard)
Let’s look at the same process w.r.t Payment Gateway.
Here, the payment flow is same and all parties behind Payment Gateway are still same. Again, payment settlement is done later, and rather hitting Capture on POS, this time using Payment Gateway online services this can be achieved. Payment Gateways also let user to Tokenise and save their card details securely for future payments.
Generally, as mentioned earlier, in payment industry, companies used to provide multiple services. And it’s possible that Acquiring bank can provide its own Payment Gateway too.
Digital Wallet Payments
Due to the financial prerequisites associated with credit card ownership, not everyone could afford one, posing a challenge for widespread usage. To address this, digital wallets emerged as an alternative, eliminating the need for stringent income criteria and making them accessible even to small-scale merchants.
Digital wallets essentially convert physical currency into electronic money, storing it in wallets managed by wallet service providers. This digital money can then be transferred to another person’s wallet, deposited into a bank account, or used to pay for various services such as electricity, water, gas bills, insurance premiums, and more.
However, due to less rigorous identity verification of users, there are relatively lower transaction limits on wallet transactions. The registration process for merchants to utilize digital wallets is also simpler compared to the elaborate procedures required for credit card payments.
Payment Aggregator
The digital wallet service provider allocates E-Money equivalent to the real money it receives. All the physical currency is retained by the service provider, usually aggregated from diverse sources. This is why digital wallet providers are also referred to as Payment Aggregators. Moreover, the payouts to shops/utilities are not conducted in real-time; instead, the service provider employs the accumulated funds for different investments concurrently. This approach forms an alternative business model to generate revenue, allowing for a reduction in the fees levied on merchants.
Payment Service Provider (or PSP)
Due to the evolvement of various payment technologies like Net Banking, Credit Card, Digital Wallet payment, there was a need to provide an umbrella service providers.
Payment service providers club all the technologies under single application and allow user to choose any of those for payment.
Payment Orchestration Platform (or POP)
Around the world we have many PSPs which are working in a particular region or a country on the basis of their locally available payment methods, rules and regulations. In case a business is spanning across the globe, then integrating your application with a single PSP won’t work and will require added complexity to manage multiples.
To ease out the same, Payment Orchestration Platform (or POP), provide an umbrella platform which let you integrate with multiple PSP as per the region, without worrying about the internal complexities e.g. Spreedly
UPI (Unified Payment Interface)
The introduction of UPI by RBI in 2016 marked a significant turning point in the payment industry. Leveraging the foundation of IMPS payment technology provided by RBI, UPI revolutionized payments by utilizing widely accessible mobile phones. What made it exceptionally popular was its elimination of the need for account numbers and complicated IFSC codes during transactions. Similar to IMPS, UPI offered real-time payments, enhancing the overall payment experience.
Additionally, UPI presented a unique advantage: it allowed small merchants to adopt the system without incurring any fees. Furthermore, the real-time payment feature addressed the challenges associated with money settlement, making the process seamless and efficient.
As we know in Internet banking process account number + bank IFSC code is required of both parties (i.e. payer and payee) for inter-bank money transfer. So the platform (or PSP) that provide UPI feature, actually first ask user to register UPI payment through a bank, mentioning these two mandatory details. This registration is done by PSPs via UPI server and user’s bank. Once provided, platform assign a virtual UPI address corresponding to it. Also it uses the user’s mobile number too as an alternative to VPA e.g. we can consider this as a map (or key-value pair) to retrieve account details using VPA/Mobile Number.
So, whenever user receives any money on a virtual address OR his mobile number, its corresponding bank details will be identified by the PSP platform and will transfer the money using UPI server (which is actually built over IMPS)
Note, for UPI to work end to end, both parties should be registered on UPI server, via any of the authorised PSPs.
Following diagram can give an high level overview about UPI.
Conclusion
In this article, my aim was to explore the roles of different players in the payment industry’s intricate process. It’s worth noting that a single service provider might offer multiple services within the chain, yet the overall process remains consistent. When integrating payments with various vendors, having a clear understanding of the services offered by the service provider is crucial. This knowledge can assist in gauging the complexity involved in handling a specific payment method.
At last I am mentioning below a list of some service providers in different areas. Please be aware that this list is not fixed or comprehensive and may change over time. Also, this list is not just for a particular country or region.
