The payments ecosystem is dynamic and brings together many types of stakeholders. Mapping stakeholders and their respective roles allows us to understand how the European payments ecosystem works. Payment innovation still has endless potential to develop.
Inescapable interaction with fintech comes to most people every day when they make a payment. This market sector sees most strongly the effects of consumer adoption as a driver of financial innovation. Wearables, for instance, have not entirely taken of yet, but wait until the celebrities decide they’re the next best thing and wearables will be everywhere.
The Stakeholders: Acquirers and processors, card networks, issuers, gateways and ISOs and MSPs.
Acquirers and processors
The acquirer is the company which has a contract with the merchant. Acquirers are generally banks which work in partnership with one or more payment processors. Acquirers issue merchant accounts and delegate merchant services to ISOs (see below). All merchant interactions – POS rental, settlements, disputes – are conducted through the merchant acquirer.
The processor is the back office, the acquirer’s service provider. These terms are used together because the same legal entity; i.e., Barclays or Adyen, does the work of both the acquirer and the processor. This means they deal with the merchant in a front end sales capacity a well as construct the back end of the website which allows the merchant to check the status of payments.
Card networks control a serious part of payments technology. Limiting what is accepted – VISA, Amex or Maestro – impacts on user experience and how customers can access their finances. ‘Power is shifting to companies that control the customer experience,’ suggests Business Insider, because customer adoption is integral to any financial innovation.
In addition to referring to types of cards such as Mastercard, card networks also include integrated payment providers such as Discover. Payment providers like Discover provide multiple card networks as payment options at the checkout. Thus, card networks and banks interact in the ecosystem when customers use e-wallets or online banking transfers for payment. This interaction is key in the payments sector.
Issuers include large banks and legacy providers that are embracing innovation in payments. They issue credit or debit cards to customers. According to individual company policy, these cards determine which card network the user is reliant upon. Citi last year moved customers from VISA to Mastercard upon reissue of cards.
Some examples include the UK’s Barclays and HSBC and America’s Chase, Citi and American Express. JP Morgan Chase is noteworthy for its active development of a mobile wallet with Starbucks for their mobile order and pay system.
Some gateways are also considered payment service providers (PSPs). This is because companies like Braintree or Klarna are used by online merchants as an outsourcing of the checkout process. By outsourcing checkout to a gateway or PSP, the merchant can provide more payment options to a customer, more seamlessly. Payment service providers are an integral part of the ecosystem, offering e-retailers and other end users a plethora of choice for their customers. Flexibility of payment is key to customer satisfaction in our digital world.
In Europe, payment service providers (PSPs) use the SEPA Direct Debit Core Scheme to give customers a ‘no-questions-asked’ refund for up to eight weeks. The SDD has seen the strongest adoption in Germany, the Netherlands, Spain, and Austria. PSPs can implement the SDD Scheme to become more attractive to merchants. Additional information about this is here.
Notable payment gateways include PayPal, Klarna, Adyen, Stripe and Braintree. Stripe uses API technology to enable instant payments. The Californian-based company recently acquired Index, a POS payments software developer to expand from online into in-store payments.
ISOs bring stakeholders together.
An ISO is an Independent Sales Organisation. They are not part of an association such as VISA or Mastercard. Instead, banks delegate merchant service to ISOs. ISOs then resell these merchant accounts to a payment processor to to a gateway which connects the merchant to a payment processor.
Confusingly, the industry sometimes calls ISOs MSPs; a Member Service Provider. ISOs or MSPs are sponsors by a bank and it is the bank who officially handles the money in the payment transaction.
This infographic of major stakeholders in the payments ecosystem was created by BI Intelligence and can be found here.
With so many options possible to the customer at checkout, the ecosystem works best when there is collaboration between players. Customer adoption requires smooth user experience. To achieve this, programs and payment solutions must be capable of working together. Integration is key.
By Grace Appleford, Research Analyst.