Payment in brick-and-mortar world vs. online world

Payments space is changing leaps and bounds with advances in Fintech and world is gradually moving towards cashless economy, mainly driven by consumer expectations. Below is a simple schematic to illustrate how payment works in traditional stores vs. payment on a website.

Payment in  Traditional brick & mortar stores (Card-Present)

In traditional brick & mortar stores, a customer would carry their merchandise to the cash register, open up their wallets, and swipe their debit or credit cards at POS terminal or cash register. Card-present is basically user swiping physical card at merchant’s POS.

Card payment at POS
Card payment at merchants’ POS

Sequence of transactions flow is illustrated above. Issuing bank issues the card to user Joe and takes responsibility for user’s credit worthiness for payment. Acquiring bank takes responsibility for merchant to accept payments. At the end of the day, funds are settled i.e. issuing bank pays the acquiring bank. All the entities – issuing bank, card networks and acquiring bank charge fees like transaction fee, interchange fee, etc. The entire payment process takes less than 2-3 seconds! It is because infrastructure is robust, global, proven and trusted over decades.

Card-present is the cheapest. The average credit card processing cost for a retail business where cards are swiped is roughly 1.95% – 2%. The average cost for card-not-present businesses, such as online shops, is roughly 2.30% – 2.50%.

Payment online (Card-Not-Present)

Card-not-present is anything user buys online.

Payment online is similar in terms of how transactions are processed behind the scenes, instead of POS terminal, there is “Payment gateway”. Think of payment gateway as credit card terminal for your website – but virtual. When a customer enters their payment details at check out, the gateway routes it through card infrastructure (similar to above) for authorization then returns to your online store in order to complete the transaction.

Card payment using online payment gateway
Card payment with online payment gateway

Payment gateway landscape is crowded with many vendors with multiple service offerings.

Vendors like Paypal belong to what is known as “offsite payment gateway” i.e. move customers away from your site to vendors’ site in order to complete the check out process, and then bring the customer back to confirmation page of site. E.g. Paypal Standard. Other segment. Second category called “onsite payment gateway” allow customers to complete transactions on the site e.g. Stripe, Authorize.net

Where is Digital Disruption happening in this space?

When you look at this space, a lot is changing more on the front-end.

  • Digital disruption in the form of mobile payments from end-user’s perspective;
  • Payment Gateway taking place of POS or combined POS+Acquiring banks in some cases, etc.

But, the back-end legacy infrastructure is still several decades old — this area (steps 2-8) is same.

Iam waiting to see who can disrupt this trillion dollar legacy card infrastructure! This would then potentially have huge implications on banks and card network. What do you think?

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