Basics of Digital Payments

Out of the many industries in the 21st century, digital payments had brought about significant ease in doing business. If you are setting up a digital business, understanding payments are critical to managing your P&L and cash flows.

Digital payments consist of three players — merchant (you), customer (buyer), and payment gateway and processor.

Payment Gateway and Processor is the key player in all digital payments. It provides the technology required for encryption, authorization, and processing of the transaction.

As a merchant, you would provide a payment link (which in turn is created by the payment gateway), to your customer.

The customer would enter debit card details (or such) and confirm the transaction using authorization methods such as an OTP.

The gateway captures and encrypts this information and sends it to the customer’s bank (issuing bank) for validation. Once the bank verifies the details, the transaction details are sent to the merchant’s bank for processing.

This last step of processing ensures that the transaction amount is credited to the merchant’s bank, and the transaction amount is settled into the merchant’s account with the bank.

Who makes the money from this? Each party, including the issuing bank, merchant bank, and the payment gateway makes money out of this technology and process. Payment gateway charges the merchant a certain fee on each transaction (for example, fixed-rate pricing), and is in turn charged by various banks for giving them access to the bank’s API and support.

Simple enough?