When we make an electronic or digital payment to a merchant, we only witness the money getting debited from our accounts and the goods or services being provided to us by the said merchant. 

Apart from this, we have absolutely no idea of who is involved in making this payment transaction happen seamlessly. However, that’s about to change in this chapter of Smart Money. Let’s get going. 

Who are the different players in the payments ecosystem?  

Contrary to popular opinion, there isn’t just one entity linking the consumer and the merchant in the payment ecosystem. In fact, there are at least four key players that play their own part in digital payment systems - the issuing entity, the payment brand networks, the payment processing entity, and the acquiring entity. Let’s take a quick look at these four players. 

• Issuing entity 

The issuing entity, also known as the issuing bank, is the consumer-side bank. The issuing bank is the financial institution with whom the consumer holds credit cards, debit cards, or bank accounts, which are then used by the individual to initiate a payment.

Here’s an example that can help you understand issuing entities better. Let’s assume that you’re a consumer making a payment to a merchant through a bank account or a credit card held with HDFC Bank. Here, the issuing bank is HDFC Bank. 

• Payment brand networks 

Payment brand networks are essentially card companies like Visa and MasterCard. They come into play only when you initiate digital payments through credit or debit cards. These companies basically act as a network to a payment system that connects the issuing entity, the payment processing entity, and the acquiring entity.  

Here’s an example that can help you understand just how a payment brand network works. Let’s say that you have a Visa credit card issued by HDFC Bank. Now, when you make a credit card payment, the payment gateway sends a request to the payment brand network (Visa), who in turn sends a request to the issuing bank (HDFC Bank). 

The issuing bank (HDFC Bank) sends an approval of the transaction to the payment brand network (Visa), who in turn forwards it to the payment gateway. Upon receiving the approval, the payment gateway completes the payment transaction and sends the amount that you paid to the merchant’s bank.  

• Payment processing entity

Payment processing entities are also known as a payment gateway or as a payment service provider. These entities are basically enlisted by the merchant to provide their customers with a platform to make payments electronically or digitally. 

Since payment processing entities are into providing merchant services, they offer multiple payment methods such as netbanking, card payments, UPI, and wallet payments. This is done to make it easier for consumers to initiate payments in a method that they’re more comfortable with. 

Let’s take a look at an example of how payment gateways work. Assume that you wish to purchase a product from a merchant through their online website. Now, if you were to do it without a payment gateway, you would have to add the merchant’s bank account as a beneficiary on your internet banking portal and then make the payment. 

There are multiple disadvantages to this means of payment. Firstly, you would be forced to use only one method of payment - internet banking. And secondly, it will be hard for the merchant to identify the product for which you had made the payment for. 

Here’s where payment gateways come into the picture. By integrating the gateway into their website, the merchant can not only open up multiple payment avenues for their consumers, but also easily identify the product for which the payment was made and by whom. 

• Acquiring entity 

Just like how the issuing entity is the consumer-side bank, the acquiring entity is the merchant-side bank. The acquiring bank is the financial institution with whom the merchant holds their bank account. 

The payments made by the merchant’s customers go through the issuing bank, the payment brand networks, and the payment processing entity, before finally being deposited into the acquiring bank, which basically denotes the merchant’s bank account. 

Wrapping up

With this, you must now be aware of the key players in the payments industry and the transaction flow from the customer to the merchant. In the next chapter of this module, we’ll compare digital payments with cash and other modes to see how they fare. 

A quick recap

• There are at least four key players that play their own part in digital payment systems - the issuing entity, the payment brand networks, the payment processing entity, and the acquiring entity. 
• The issuing entity, also known as the issuing bank, is the consumer-side bank. 
• The issuing bank is the financial institution with whom the consumer holds credit cards, debit cards, or bank accounts, which are then used by the individual to initiate a payment.
• Payment brand networks are essentially card companies like Visa and MasterCard. 
• These companies basically act as a network to a payment system that connects the issuing entity, the payment processing entity, and the acquiring entity.  
• Payment processing entities are also known as a payment gateway or as a payment service provider. 
• Payment processing entities are enlisted by the merchant to provide their customers with a platform to make payments electronically or digitally. 
• Just like how the issuing entity is the consumer-side bank, the acquiring entity is the merchant-side bank. 
• The acquiring bank is the financial institution with whom the merchant holds their bank account.