The ecommerce market in India is growing at a dynamic pace. Estimated to reach $188 billion by 2025, the sector received $15 billion in investments from private equity and venture capital firms in 2021. At this rate, the Indian ecommerce industry will surpass the US to become the second largest online commerce market by 2034. Xpressbees, Amazon, Flipkart, and Cars 24 are some of the leading ecommerce firms that are making big waves with their investment and expansion plans.
Rising smartphone penetration, evolving customer expectations, and convenient digital payments play a major role in the ecommerce boom. Online transactions in the Indian ecommerce ecosystem are estimated to grow by 96% to touch USD 120 billion by 2025. The growth of digital payment options such as credit cards, debit cards, prepaid cards, UPI, and BNPL added impetus to online shopping transactions.
In this article, let’s decode the anatomy of payment card transactions in an ecommerce setup.
Payment processing is how businesses complete credit and debit card payments. It includes authorization, funding, and settling of a transaction. For a consumer, an online card transaction is a pretty straightforward process that happens within a few seconds. All they need to do is enter the card details, and authorize the transaction with an OTP.
And voila! The transaction is successful.
Key Players in Ecommerce Payments
While the entire transaction may only take seconds, it involves a complex network with multiple steps and players behind the scenes. Here are the players involved in carrying out a transaction.
· Cardholder (customer with the payment card)
· Merchant (ecommerce website)
· Payment Gateway
· Payment Processor
· Card Network
· Issuing Bank
· Acquiring Bank
Now, we are sure you know who a cardholder and a merchant is. So, let’s take a deep look at other players and their role in card transactions.
Payment Gateway
A payment gateway (PG) is a service that authorizes transactions between online businesses and their customers in a secure and convenient way. In simple terms, it acts as a secure tunnel between the merchant’s payment portal and the payment processor.
Role of Payment Gateway
A payment gateway is a central cog in the transaction processing ecosystem for both online and in-store purchases. In a transaction process, PG is the front-end mechanism that collects, authenticates cardholder information, and transfers the details to the merchant’s bank in real-time. Then, the transaction is processed in the merchant’s bank. All payment gateways are PCI-DSS compliant and SSL-certified.
For example, imagine you go to an online store, pile up your cart, and click on check-out for billing. When you enter your payment method and details on the website, a payment gateway helps you transfer money to the merchant.
Payment Processor
A payment processor is a vendor service that acts as a conciliator between the financial institutions and the merchant involved. It facilitates authorization of the transactions and relays the data to clear and settle the transactions for the merchant. Some payment processing services include card acceptance, PCI compliance assistance, security solutions, and customer support.
Role of a Payment Processor
In a transaction, the payment processor acts as a tunnel between the merchant and the customer banks. It takes the information from the payment gateway and connects with the issuer through the card network to authenticate and approve the transaction. The role of the payment processor is summarized below:
· Seek authorization for a transaction
· Connect with the cardholder’s issuing bank
· Transfer funds into a merchant account
Card Network
A card network is a card infrastructure provider that facilitates payment card transactions between the issuer and the merchant. Conventionally, the network validates, processes, and sets the terms for the card transactions. The major card networks in India are MasterCard, Visa, RuPay, Discover, and American Express.
Role of a Card Network
The card network acts as a communicator between the merchant’s acquiring bank and the customer’s issuing bank. It is responsible for transmitting the transaction information to the correct issuing bank, verifying the issuer’s authentication results, and delivering responses to acquirers.
Issuing Bank
An issuing bank is a financial institution or a bank that issues and distributes (credit/debit) cards to customers. It operates as an essential intermediary between the cardholders and the card networks. Despite the common misconception, card networks do not directly issue cards to customers because of the fundamental risks involved in issuing credit to customers. Only issuing banks do.
For instance, if a credit card holder does not pay off his or her debts, the issuing bank will write them off. In addition, the issuer will become responsible for recouping the costs. It is important to note that specific card networks like Discover and American Express serve as their own issuing banks.
An issuing bank is typically a commercial consumer bank, commonly known as the issuers. It provides the framework to facilitate reliable and regulated transactions and the rules and standards for payments performed on its system.
Role of an Issuing Bank
A card issuing bank is one of the key players in the card transaction and payment processes. Each time a cardholder makes a purchase/payment using a card, the transaction moves through multiple financial institutions and systems before the amount is credited to the merchant’s bank account. The issuing bank assents the transaction based on the customer’s available credit or funds in the account. Upon receiving the authentication request, the issuer’s Access Control Server (ACS) reviews the information, verifies the cardholder using their form of authentication, and responds to the merchant. It also subjects the transaction to its defined set of fraud and risk regulations.
In the case of a credit card issuance, an issuing bank generally manages everything on the customer front, such as payment portals, rewards programs, payments, collections, etc. It plays a crucial role in evaluating and determining the credibility of a chargeback. For example, when a cardholder notices a counterfeit or invalid charge made to their credit or debit card, they immediately contact their issuer to file a dispute, kick-starting the chargeback process. The issuer validates the complaint and communicates the chargeback to the acquirer. The acquirer then notifies the merchant to either accept or challenge the chargeback.
The issuer is responsible for authenticating the cardholders’ financial information and account data to determine their creditworthiness. Based on the assessment, it extends the line of credit to the cardholders and offers financial support for transactions/payments made with its cards. In addition, the issuing bank also renders essential services such as card activation, setting the purchase limit, suspensions, and card renewals.
Acquiring Bank
An acquiring bank is a financial institution or a bank that offers merchant accounts to businesses. These accounts enable merchants to accept direct debit/credit card payments. An acquiring bank, otherwise known as an acquirer or a merchant’s bank, is a licensed member of a card brand and is responsible for creating and maintaining the merchant’s account. It also manages the communications between card networks and businesses.
Usually, the acquirer acts as a payment processor or an Independent Sales Organization (ISO) and processes credit/debit payments on behalf of a merchant. It provides merchants with unique IDs to manage card payments. In turn, the merchants pay a significant fee to the acquirer for their services in the transaction process.
Transaction processes are prone to various financial frauds, that include breach of sensitive customer information. As a significant player in the payment process, an acquiring bank ensures transaction security and strictly complies with the Payment Card Industry Data Security Standard (PCI DSS). In the event of a fraud or data breach, the acquiring bank stands liable for the compromised transaction(s).
Role of an Acquiring Bank
As the merchant’s bank, acquirers are responsible for routing the payment card transactions to the appropriate issuing banks. Once the issuing bank disperses the amount from the cardholder’s account, the acquirer accepts the payment and credits the money to the merchant’s account. Furthermore, the acquiring bank exchanges fund with various issuers each time a consumer makes a purchase, returns for a refund, or raises a chargeback. It then issues a net balance (gross sales deducting the fees and reversals) to the merchant for transactions during the given period.
When a cardholder uses a card in a purchase, the acquiring bank will either accept or decline the transaction based on the card holder’s account information available on the issuing bank and card network’s database. This process entails two steps.
Step 1: Authorization — Request the issuer to validate the card details. If sufficient funds are available in the account, the transaction will be completed.
Step 2: Authentication — Verify cardholders’ identity based on the card details entered during the purchase. The authentication process is typically carried out using 3D Secure (3DS).
Payment Processing Workflow
All the parties delved upon above are integral players in the card transaction ecosystem. Transactions would not be viable without any one of them.
Curious to know how payment card transaction flow works?
Let’s take the example of a credit card payment for instance.
Here you go!
- The customer initiates a purchase. The purchase can be made in person, online, or over the phone.
- The merchant evaluates the credit card details entered during the purchase and routes the information to the payment gateway.
- The payment gateway routes information to the payment processor.
- The payment processor communicates the authorization request to the appropriate card network.
- The credit card network routes the request to the cardholder’s issuer.
- The issuer validates the received information and approves/declines the transaction.
- The card network sends the issuer’s response to the acquiring bank.
- The acquiring bank redirects the authorization response to the merchant.
- Based on the response, the merchant accepts or declines the transaction. It deposits all the authorized transactions with the acquiring bank.
- The acquirer credits the merchant’s account and submits the transactions to the credit card network for payment.
- The credit card network pays the acquirer and charges the issuing bank.
- The issuer posts the transaction to the cardholder’s account.
- The cardholder receives the monthly statement and makes payment.
Payment processing is an indispensable part of any business, both online and offline. In the stride toward a digital economy, ecommerce payment processing is a modish necessity.
Intrigued? To know more about payment processing, write to us at business@m2pfintech.com.
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