A developer’s perspective on the essential elements of the XTRM global payments platform that enables payments to anyone, anywhere with a focus on...
Global Payment Options: A Primer on Payment Service Providers
Overview of the payments landscape and the expanding roles for payment service providers and the growing global payment options for their clients and users.
In nearly any endeavor we all want options. And it’s no different when it comes to making and receiving payments. But what do we mean when it comes to potential payment options? The list of global payment options is exploding.
Likely nowhere in the global payment ecosystem has there been as much growth and change as in the realm of online service companies known collectively as Payment Service Providers (PSP) offering all types of payments-as-a-service. And while most of the ink seems to be spent on inbound payment processing rather than payment disbursement, the global payment ecosystem includes both payables and receivables. The ability to connect both inbound and outbound payment workflows is now possible using global payments platforms tapping the potential of digital wallet architectures.
Thus, the very definitions of a payment service provider (aka Third-Party Payment Provider, TPPP) need to move beyond any narrowly defined stricture of payment processor relating solely to card processing.
Presently, credit, debit and prepaid cards are the most used payment choices for point-of-sale and e-commerce payments for consumers and a growing percentage of B2B transactions are processed on their rails. As more direct digital payment means and methods expand through innovation, their adoption is certain to grow. Transitioning B2B payments from traditional, paper-based invoice-to-payments may prove easier and more cost-efficient through emerging direct, peer-to-peer or account-to-account methods than through the card network rails. As a payment solution developer or payment aggregator, however, it’s certain that no one-size-fits-all use case will prevail. Thus keeping as many global payment options open as possible isn’t simply a nice to have; rather it’s proving to be imperative to meet your customers’ demands.
Primary Payment Relationships: One to Many and Many to One
Perhaps the most powerful motivation for the digital payment transformation driving adoption of PSPs and global payments platforms is their ability to support myriad business models that incorporate relationships across the business ecosystem.
Payment use cases - B2B, B2C and B2B2C - can all be captured via a single interface which, in turn, powers new business models that incorporate end-to-end payment flows from fund source to final payee. Managing both customer and supplier payment workflows can be streamlined and disintermediated for improved visibility, better efficiency and greater control.
Primary digital payment models range from Many-to-One payments, inbound payment processing from multiple sources typified by e-commerce solutions, to One-to-Many mass payment disbursements to partners, suppliers, customers and contractors receiving payments in their local currency in their choice of formats.
While some PSPs provide services for both payment processing and payment disbursement, many only provide services related to processing inbound payments. These PSPs seek to differentiate themselves from payment gateways which are, in fact, a subset of the more generic term, by surrounding that functionality with related services like risk mitigation, fraud detection and regulatory compliance.
On the disbursement side of payments, many PSPs operate only domestically while other PSPs may offer cross-border payments via a global payment platform where funds can be deposited and stored for instant account-to-account transactions, facilitating immediate payment, and supporting them with built-in currency exchange services to streamline cross-border payments. These platforms automate AML, regulatory compliance, security, privacy and offer reporting capabilities for income tax documentation.
Using a global payments platform enables users to send/receive funds electronically without the need to open yet another bank account – users simply connect their existing bank account, and the platform treats it as an endpoint. The global payments platform enables payment receipt and disbursement via digital wallets that can bypass both traditional banks and the card processing networks for instant account-to-account transactions. By treating both incoming funds from card processing and outgoing funds for EFT deposits as endpoints, the platform makes payment possibilities more flexible and aggregator payments more feasible for non-bank businesses.
A PSP can incorporate on-platform services such as 1099K and tax reporting to reduce or remove administrative burdens created by making payments to non-employees or currency exchange (FX) at lower rates than traditional financial institutions. Taken together, the ability to send, receive, exchange, and manage payments on a single global platform means that global payment options are truly global, both in geographic reach and in programmatic breadth.
Global payment options span multiple formats in more than 190 fiat currencies covering over 200 countries around the world and now are expanding to include cryptocurrencies and non-cash alternatives such as digital gift cards and reward points as well as the payment rails used to convey payments from traditional EFT methods including ACH, International ACH and wire transfer to debit and credit card processing and account-to-account digital wallet transactions.
For payment facilitators and payment aggregators, and the payers and payees they serve, understanding the benefits as well as the limitations for each of these payment-related variables is essential to designing and deploying digital payment and payout workflows as the market evolves.
Key Entities in Global Payments Ecosystem
Payment Service Providers (PSP) or Third-Party Payment Providers
Payment service providers bring all financial parties together to deliver a simple payment experience for both payers and payees. For merchants and their customers by processing payments quickly and efficiently from multiple sources; for payment disbursements they facilitate payments to companies and individuals for B2B, B2C and B2B2C use cases via multiple methods. Invisible to most but essential to all, payment service providers make digital payments possible faster, at lower cost, with greater transparency and choice for payment recipients.
Payment processors are a type of PSP that handle transactions so that customers can buy products using the payment card networks. The payment processing company communicates and relays information from the buyer's credit or debit card to both the seller’s bank (Merchant) and the buyer’s bank (Issuer). As such, most payment processors are exclusively found on the inbound side of a payment and only involved with disbursements as they relate to returns, refunds and adjustment transactions specifically related to an incoming payment.
The payment gateway connects the payment processor and merchant account to the credit or debit card companies such as Visa or American Express. In essence, it’s connecting a buyer’s financial account to a seller’s merchant account. Without a payment gateway, you would be missing a major part of completing a financial transaction. You would have all the parts needed to move your money or receive money, but without a payment gateway, you cannot receive your customer’s payment.
Card Brand Networks
Card brand networks are the most visible actors in the payments ecosystem. Card brand networks act as the intermediary between payment service providers and an issuing bank. There are two primary types of card networks: credit card associations that include Visa, Mastercard, Discover and American Express; and PIN-less debit card networks such as NYCE, Interlink and Cirrus.
Also referred to as acquiring banks, merchant banks process credit and debit payments on behalf of a merchant. A merchant contracts with the acquiring bank in the form of a merchant account. The acquiring bank exchanges funds with the issuing banks and ensures the merchant receives payment for payment card activity—minus interchange and other fees.
The issuing bank issues credit or debit cards for business and consumer accounts. Credit cards are credit accounts with spending limits. Debit cards are generally connected to an account holder’s deposit account and thus are subject to available funds when transactions are presented for payment. This also provides the potential for instant digital deposits via the card networks.
Digital Wallets or e-Wallets
All digital wallets have two components: a software application and a database. The software part is responsible for security, encryption, and the actual transaction. This software application is the main component which provides the user interface as well as safe and secure transactional capabilities. The other component, a database, stores user input information. The user information may include PII such as address and taxpayer ID as well as linked bank accounts. One type of digital wallet, a server-side digital wallet, includes added functionalities, including the ability to store and exchange funds.
Digital wallets are accessible, via the web or embedded within apps to be reached by any mobile device, anywhere making it simpler to manage payment distribution as part of an end-to-end payables solution or service.
In combination with a payments platform, platform-based digital wallets provide a next-gen payment technology overlay with multi-currency capabilities to solve multiple international payment headaches by connecting accounts to banks globally using open API access. Regulated in the same way as a bank, the payments platform manages Anti-Money Laundering (AML) and Know Your Customer (KYC) requirements.
Foreign Currency Exchange
Foreign currency exchange companies simplify cross-border payments to and from users of a global payments platform by enabling currency conversion. For example, it permits a business in the United States to pay European Union suppliers and partners in Euros, even though its core business is conducted in United States dollars. Embedding currency conversion capabilities into a global payments platform enables both payers and payees to maintain and exchange funds in multiple currency-specific digital wallets within their account
Payment Aggregators process payments to and from many payees on behalf of payers. Similar in many respects to PayFacs, however, they do not use separate sub-merchant IDs in the card network. Rather, they process all transactions under their merchant ID. Payment Aggregation also differs from the PayFac model in that it is focused upon payment disbursement as well as inbound payment workflows.
Payment Facilitators (PayFac)
A Payment Facilitator or PayFac is a service provider for merchants. A sub-merchant platform involves a PayFac that has been pre-approved for one master merchant account with an acquirer, that is then able to sign-up merchants underneath their master account as sub-merchants, thus expediting the process and creating the opportunity to monetize payments.
Banks – Domestic & International
A bank is a financial institution that creates deposit accounts from which a customer can deposit and withdraw money.
The global payment ecosystem includes banks that serve multiple roles:
- as either Merchant account banks or Issuer banks (or both) with respect to their roles in the credit and debit card processing.
- more importantly for payment disbursements, demand deposit accounts (aka checking accounts) are the primary source and
- most frequently used endpoint for payments received and, when connected to debit cards can enable instant payment.
For global payments platforms, banks serve two vital functions. First, as an important endpoint for many of the payment rails connected via the payments platform, banks play a key role in assuring access to funds through credit and deposit accounts in addition to ensuring AML and compliance issues are met. Second, for platform-based digital wallets, funds stored on the platform are fully backed by funds on deposit in banks across the globe, assuring that all funds in all currencies are completely safe and available for immediate use for instant digital transactions at any time.
Key Variables in Global Payments
Looking beyond the various players in the global payments ecosystem there are many variables to be addressed in designing payment systems or embedding payments functionality into a software or service solution, including:
- Payment Type: Inbound Payment or Outbound Payout
- Payment Format: Virtual or physical
- Payment Reach: Global or domestic
- Payment Funding: Debit or credit
- Payment Means: Fiat Currency, Cryptocurrency, Non-cash alternatives
- Payment Mechanism: Online, in-store (POS), peer-to-peer, invoice
- Payment Method: Payer selected or payee choice
- Payment Rails: EFT (ACH, SEPA, Wire Transfer), Wallet-to-wallet, Digital Debit, PayPal, Digital Gift Card
Let’s review each of these payment variables in a bit more detail.
PAYMENT TYPE: INBOUND and OUTBOUND
Payment options abound beginning with payment types as they would appear on any financial statement as credits or debits. For a payment service provider or global payments platform these payment types include incoming payment processes (aka Accounts Receivable) enabling buyers to pay via their preferred funding, process, and form for any transaction, as well as outgoing digital payment options (aka Accounts Payable) that have expanded to provide a wide range of payout formats to disburse to customers, contractors, partners, and suppliers.
These options can now be provided to both payer and payee independently so that any payment workflow can now offer choice at every stage in the workflow from payer to payee. An organization's payout process can be designed to pre-select the payment method or by making payments using digital wallet-to-wallet transactions they can provide the recipient with the ability to choose their preferred payment method. An incoming payment can trigger a series of outbound payments to partners, suppliers, etc.
A global payments platform aggregates both inbound and outbound payment workflows so that payments technology can be embedded in software and services to improve either incoming or outgoing payments. This is a level of payment facilitation and payment aggregation that creates unprecedented opportunities for software developers. Digital payments operate both independently and interdependently with traditional financial organizations including banks and card processing networks.
PAYMENT FORMAT: VIRTUAL or PHYSICAL
Prior to the explosion of digital payment technologies, payment complexities were simple: Cash or check? Debit or credit? Never mind the limitations of these methods, nor the expense involved in processing payments using them.
Electronic Fund Transfers (EFT) digitally-enabled cash and check transactions to the point where physical checks or cash currency are now more the exception than the rule. And e-commerce has tapped into the credit and debit card networks to grab an ever-larger share of B2C and B2B transactions as CNP (Card Not Present) transactions become the new norm. Clearly, the benefits of digital payments far outweigh their analog equivalents.
But digital payments must live in the real world and just as e-commerce tapped the legacy card networks to ensure the ubiquity of (relatively) frictionless payments, PSPs will continue to grow not just by replacing legacy approaches but more so by accommodating physical payments use cases. The legacy of cash being tendered via bank checks is long even though their use has been cut in half since 2004. The AFP Electronic Payments Survey Report also reported that, 97% percent of financial professionals that they still use checks to pay business suppliers. Thus, bank checks cannot be dismissed simply because there’s now a better way. For much the same reason, while virtual prepaid debit cards are faster (instant) and less expensive than traditional plastic prepaid cards, the platforms must accommodate these use cases as well.
PAYMENT REACH: GLOBAL or DOMESTIC
Most payments to partners and suppliers are made domestically, meaning that both the payer and the payee are doing business in the same county and using the same currency. But the fastest-growing segment in the payments marketplace are transnational, cross-border transactions requiring either the payer or the payee to convert currency from or to their preferred currency.
Traditionally, making such international payments has been complex and expensive, requiring multiple banks and intermediaries. But digital wallet architectures have solved this problem by creating multiple currency wallets for both Payers and Payees alike. Now, either party can exchange and send or receive and exchange funds on the global payments platform, bypassing traditional banks and expensive intermediaries.
Both Payer and Payee accounts are provisioned with as many of the 40 currency-specific digital wallets as needed to conduct transactions. Additionally, the global payments platform enables on-platform currency conversion via low-cost FX to more than 130 currencies serving over 190 countries.
A Payer anywhere can fund their digital wallet with funds in their local currency and send payments to partner, supplier, contractor or customer Payees anywhere.
PAYMENT FUNDING: DEBIT or CREDIT
A payment service provider, such as a payment gateway or payment network is fundamentally focused on inbound payments (plus or minus returns and credits). Their primary consideration is which card networks are included in their service - credit cards, debit cards, etc. Funding options apply to incoming payment processes so that buyers can pay via their preferred method.
From the perspective of a global payments platform, or any payments-platform-as-a-service, this is only half the story. A payments platform facilitates both inbound payments and outbound payments in a variety of formats and the cash or credit applies to the payouts as well. Effectively the platform serves as a digital alternative by using a collection of banks to ensure that funds in digital wallets on the platform are immediately available to be exchanged into local currency, transferred to an external endpoint or sent to another account holder on the platform via real-time account-to-account transactions.
PAYMENT MEANS: FIAT, CRYPTO or NON-CASH
With all the buzz about cryptocurrency, it’s hard to remember that it still represents a minuscule spot on the payments horizon. Fiat currencies still rule the day and drive the regulatory and compliance considerations that payment service providers or Third-Party Payment Providers (TPPP) or their users must address
But payees want choices and the ability to access cryptocurrency as one of their payment options is a potentially desirable feature. Co-mingling fiat and cryptocurrencies is problematic and regulatory considerations preclude transfers between TPPPs and cryptocurrency networks due to AML compliance. However, storing links to cryptocurrency in digital wallets is technically feasible and offering cryptocurrency as another potential endpoint for payees’ external transfers appears to be an optimal solution – rather than offering on-platform exchanges.
An often-overlooked payment medium is the use of digital gift cards in lieu of cash (EFT). Often found in employee and consumer referral programs, this payment mechanism is most appropriate when direct cash is not viable for either cultural or regulatory considerations. Meanwhile, when given the choice of EFT, universally accepted prepaid debit or digital gift cards a small, but often strategically valuable, subset of payees opt for them.
PAYMENT MECHANISM: ONLINE, POS, P2P and INVOICE
Both online and in-store (point-of-sale) payment experiences have largely shifted to card-based (credit, debit or prepaid) user card-present (CP) and card-not-present (CNP) experiences that flow through signature-based or PIN-based systems that have become ubiquitous.
Digital payment platform solutions incorporate card processing technologies but also offer peer-to-peer (PTP) or account-to-account (A2A) mechanisms to facilitate payments directly - at much lower cost - bypassing the card processing networks and banks.
PAYMENT METHOD: PAYER DIRECTED OR RECIPIENT CHOICE
Payments made using a payments platform offer the end recipient greater choice in how they would like to receive payment. However, aggregators and their payer clients may have compelling reasons why it’s not a good idea to offer the end-user with all these payment options for a given use case. Developers can choose to direct all payments via a preselected flow in order to bypass steps associated with giving users the choice of payment options.
PAYMENT RAILS: EFT (ACH, WIRE), CARD NETWORKS, ET AL
ACH transfers are electronic, bank-to-bank money transfers processed through the Automated Clearing House (ACH) Network. According to Nacha, the association responsible for these transfers, the ACH network is a batch processing system that banks and other financial institutions use to aggregate these transactions for processing.
International ACH (non-US)
ACH-style, low-value automated clearing house functionality. The process and networks vary by region and country (e.g., SEPA in the EU; IFSC in India, etc.). A payments platform enables the recipient to self-serve the bank linking information so the network used for electronically moving money between bank accounts across borders is simplified.
A long-standing, relatively expensive but very reliable means to move money via immediate exchange with acknowledgment of the transfer. Sometimes referred to as credit transfer or by the specific networks used to process the payment, SWIFT or FedWire.
A mobile wallet is a virtual wallet that stores payment card information on a mobile device. Mobile wallets are a convenient way for a user to make in-store payments and can be used at merchants listed with the mobile wallet service provider. Given that mobile payments often operate on the rails of the card processing network, and that digital wallets can be used in conjunction with mobile payment systems, it is little wonder that many conflate the terms mobile wallet and digital wallet. Mobile wallets, however, lack critical payment functionality found in digital wallets.
Digital Wallets /e-Wallet
A digital wallet (or e-wallet) is a server-based payment technology typically accessed via embedded APIs to securely store payment information (and funds) in multiple currencies in a single prepaid account. It enables its users to transact online and offline in their currency of choice through a computer or a smartphone and can be used for wallet-to-wallet and external transfer of funds to multiple end-points such as virtual debit cards, digital gift cards or directly to a linked bank account for use in both online or in-person financial transactions.
A prepaid digital wallet securely stores users' funds. A digital wallet can also be used to non-cash elements such as incentive or loyalty program points and digital coupon
Account-to-account transactions processed in real-time are the fastest and most cost-efficient means to move funds between organizations and individuals. They are often referred to interchangeably as wallet-to-wallet transactions, although the latter term may also refer to intra-account transfers between different currency-specific wallets.
Refers to the deposit of funds electronically into a bank account via ACH rather than through a physical, paper check. Because the funds are transferred electronically, recipients' accounts are credited automatically. Generally, ACH transactions take 1-2 days to process.
Debit Card Deposit
When sending a transfer to your recipient as a bank deposit, you have the option to use their debit card number instead of their bank account number. Using the credit card rails, the funds are instantly deposited.
A paper check is a written, dated, and signed instrument that directs a bank to pay a specific sum of money to the bearer. Generally, checks may be cashed or deposited. Checks have fallen out of favor over the years as digital payment methods have become the norm. However, in limited use cases, a payee may need to be paid using an actual check and it may prove important to ensure this option is open when selecting a payment platform.
Credit, Debit and Prepaid Cards
Credit, debit and prepaid cards all leverage the card processing networks to assure nearly universal acceptance at point-of-sale. However, each has unique characteristics:
Credit cards tap a line of credit the user has established with the Issuer; in effect, the user is borrowing money. Usage is limited to the amount of available credit based on the credit limit established for the user’s credit card account.
Debit cards tap into a user’s deposit account (checking) at the user’s bank. Usage is limited to the amount of available funds in the user’s checking account (and other sources subject to any override provisions on the account, if present).
Prepaid cards are not tied to a user’s deposit or credit account. Instead, it is pre-funded directly, Usage is limited based on the availability of funds remaining on the prepaid card.
Each may have a card network logo such as Visa, MasterCard, American Express, or Discover on them and transactions go through common payment gateways so the point-of-sale experience is similar.
However, for payment disbursements, the prepaid card (aka prepaid debit card) is the preferred payment method. It does not require the payer to know any of the payee’s credit or bank account information.
Open Loop vs. Closed Loop Prepaid Debit
An open loop card is a general-purpose prepaid or debit card that can be used anywhere that brand of card is accepted. It usually bears the logo of the card brand or network (which processes the actual transactions), such as Visa, MasterCard, American Express, or Discover. Closed loop cards are limited to a specific issuer such as a retailer and most commonly used for prepaid gift cards.
Virtual and Physical Prepaid Cards
Debit cards are widely used for purchases and payments. However, many businesses that accept cards are charged a fee from the merchant that provides the machine and payments infrastructure as well as their financial institution. This fee is often a percentage of the transaction amount or a flat fee for each payment.
Digital Gift Card
A gift card is a prepaid debit card that contains a specific amount of money available for use for a variety of purchases, primarily in closed loop use cases. Digital gift cards, also known as e-gift cards, and virtual gift cards, all refer to gift codes that are delivered using technology such as email, SMS text, social media and smartphone apps.
Payment innovation will continue unabated. This primer is sure to need a refresh in the not too distant future.
At XTRM, our mission is to provide the technology to make payments easy, efficient, integrated, global and transparent. As with many technologies whose aim is to simplify the complex, sometimes in order to make things simple, you need to understand the complexities well enough to appreciate them and their finer nuances and then untangle them so as not to replicate them. For our partners and customers, we look to do that so that you don’t have to become a payments expert. But for all, it helps to understand the landscape.
Simplify your B2B and B2C payment workflow with XTRM's multi-currency digital wallet platform or APIs. Out platform and APIs are used by leading companies to send, receive, exchange and embed global payments. Connect with a payment specialist today.