digital payment

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1. Basic of Ditigal Payments

Before understanding digital payments, let us first understand what a payment is.
Digital payment is the trade of value from one party to another for goods or services, or to fulfill a legal obligation. Payment can take a variety of forms. Previously, the Barter system was used which is still prevalent in some parts of the country. Barter is the exchange of one good or service for another is a form of payment. Nowadays, the most common means of payment involve the use of money, cheque, or debit, credit, or bank transfers. Payments may also take complicated forms, such as stock issues or the transfer of anything of value or benefit to the parties. The payer is the party making a payment while the payee is the party receiving the payment. In trade, payments are frequently preceded by an invoice or bill.

There are two types of digital payment methods; exchanging and provisioning. Exchanging involves the use of money, comprising banknotes and coins. Provisioning involves the transfer of money from one account to another and involves a third party. Credit cards, debit cards, cheques, money transfers, and recurring cash or ACH (Automated Clearing House) disbursements are all electronic payment methods. Electronic payment technologies include magnetic stripe cards, smart cards, contactless cards, and mobile payments.

Cash and Cheque payments were a common mode of payment until a few years back but the introduction of digital payments revolutionized the concept of the digital payment industry making it hassle-free. Digital/Electronic payments include Net banking, credit card, Debit card payments, money transfers, recurring Standing Instruction, or ACH. We will understand in depth of each digital payment mode one by one in later sections.

There are two different types of banks one is an issuer bank and the other is a processor bank. Few banks work both as issuer and processor bank. Issuer bank issues cards such as Rupay/credit/debit while the processor bank processes the transactions. American Express and Discover work as both issuer bank and processor bank.
A means of authorizing credit cards or other forms of electronic payments is defined as the payment gateway. Payment gateways help to protect sensitive information like credit card numbers and other account information by encrypting the data they transmit to merchants and payment processors. When a credit account holder makes a purchase with their card, the information such as the account number is scrambled by an algorithm. The entire concept is to encrypt the details of the cardholder and applying maximum security.

Because credit cards require the use of an electronic transfer of information, they can be exposed to multiple threats. Card issuers use a variety of methods to encrypt credit cards. The magnetic stripe on the back of a card is typically encrypted, and can only be read by a card scanner. Relying solely on the magnetic strip is a less secure method than requiring the use of a PIN-and-chip. A smart card with an electronic chip adds can be harder for thieves and hackers to steal information from compared with other forms of encryption and security put in place to protect cred account information.

For transactions that do not require a card to be scanned, such as an online transaction, websites require both the credit card number on the front of the card and a CVV number located on the back of the card to be used. Using a CVV prevents an individual from being able to use only a stolen credit card number to conduct a transaction.
Digital payment processing involves two phases. The first one is  authorization, when the card is verified (it is checked whether the necessary sum of money is available on the account) and the money is blocked (reserved for subsequent settlement). The second one, usually taking place at the end of the business day, is capture (or settlement), when the reserved amount is withdrawn from the cardholder’s account and transferred to the merchant account (the funds are settled). Therefore, to complete transaction processing, the settlement has to be performed.

Payment Settlement mechanisms

In general, there are two settlement mechanisms commonly referred to as terminal capture and host capture. In the case of the host capture, most of the work required to settle transactions is actually done by the host system (payment gateway). When host capture is used, the digital payment gateway (the host) keeps track of all the authorizations and takes care of settlement on its own. The settlement is generally done:

  • once a day at a fixed time
  • multiple times a day within fixed settlement windows
  • on demand when end-of-the-day settlement message is received.

Generally, no or minimum information is required from a merchant to use host capture. Terminal capture is usually done by sending a settlement message\settlement file with the full information about the transactions that need to be settled. Terminal capture puts all the responsibility for the settlement logic upon the submitter (merchant). While terminal capture does provide more control over the settlement process, it is easier to deal with host capture whenever it is possible, because it is easier to implement and support.

From a global perspective, all types of settlement can be viewed as belonging to one or two groups: merchant-initiated or time-initiated. Terminal capture and on-demand host capture are merchant-initiated. Settlement performed daily at a fixed time, or several times a day within fixed settlement windows, we are talking about time-initiated host capture.

When choosing the settlement approach, every business needs to consider, what the best option is: merchant-initiated versus time-initiated and host capture versus terminal capture. With the increase of online commerce and wider adoption of electronic forms of payments, Various tools have been introduced into credit card processing software by different companies, in order to reduce the possibility of fraud.

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