The electronic card payments industry is an intricate web of interconnected players, each performing crucial roles to ensure smooth and secure transactions. While the process might seem seamless from a consumer's perspective, the backend involves multiple entities working together. In this article, we will explore the different actors in the industry, focusing particularly on the acquirer processor and its distinction from the acquirer, and why a robust acquiring processor is essential for modern payment systems.
What is an Acquirer Processor – and How Does It Differ from an Acquirer?
With the convenience of modern payment methods such as contactless cards and one-click online payments, it's easy to overlook the complex mechanisms operating behind the scenes. The money seems to transfer almost magically from one bank to another. However, the reality involves a sophisticated network of entities ensuring that each transaction is processed smoothly and securely.
The Acquirer: Definition and Role
An acquirer, also known as the acquiring bank, is responsible for providing merchants with accounts where customer payments are deposited. Every merchant, whether they operate online, in-store, or both, needs an acquirer to accept payments. Traditionally, banks have fulfilled this role, but with the advent of e-money licenses, many non-bank entities also act as acquirers. The acquiring bank charges a fee from the merchant, called Merchant Discount Rate (MDR), that varies from 1% to 4%, depending on the country and the merchant's industry. The MDR is discounted from the amount to be paid to the merchants as a result of their sales.
The Acquirer Processor: Definition and Role
An acquirer processor acts as the technical intermediary between the merchant, the card network, and the acquirer. It handles the payment processing from the merchant through the acquirer to the card network or alternative payment methods (APMs), ensuring the transaction is authorized and settled by the card issuer. In the traditional four-party model of card transactions, the acquirer processor manages the merchant and acquirer side of the transaction, contrasting with the issuer processor who handles the customer and issuing bank side.
The Distinction Between Acquirer and Acquirer Processor
Although the acquirer and the processor can be the same entity, they often operate separately. This division has become more common due to the evolving nature of payments. From point-of-sale (POS) devices to online payment gateways and mobile POS (mPOS), the complexity of acquiring has increased significantly. Providers capable of offering acquirer processing across a fragmented payment ecosystem, especially those without legacy system constraints, are thriving.
The primary difference lies in their responsibilities:
The acquirer directly interacts with the merchant, taking on financial liability, setting fee structures, and essentially acting as the face of the operation.
The acquirer processor is the technical backbone, authorizing transactions, linking the merchant, card scheme, or APM and acquirer, evaluating transaction validity, minimizing fraud and chargebacks, and maintaining the system of record for payments.
The Importance of a Solid Acquiring Processor
In a rapidly changing and expanding payments landscape, acquirers with outdated technology will struggle to keep up with new demands. As the ecosystem becomes more fragmented and complex, acquirer processors that can handle real-time, cross-border transactions efficiently stand to gain. The ability to process various payment types and currencies, offer real-time data and analysis, and provide modular, compliant solutions is crucial.
The Payments Ecosystem: Key Players
To fully understand the payments industry, it's essential to recognize the roles of various entities:
Merchant
Merchants sell goods or services, either physically or online. They are the starting point of the transaction process, accepting payments from customers for the products or services provided.
mPOS and POS Providers
Mobile POS (mPOS) and point-of-sale (POS) providers offer the hardware and software solutions for merchants to accept card payments in physical locations. These systems can include traditional card readers, mobile card readers, and integrated software for inventory and sales management. Examples are Square, Clover, and Verifone.
Payment Gateway
A payment gateway is software or an API that accepts credit card transaction information from the card reader (either a POS terminal or an online checkout page) and securely communicates this data to the acquirer processor. Examples include players like Stripe, PayPal, Adyen, and Braintree.
Orchestrators
Orchestrators manage the flow of transactions across various payment methods and providers, ensuring seamless integration and optimal routing for each payment. They enable merchants to offer multiple payment options and optimize transaction costs and authorization rates. Examples include Spreedly and Yuno
Payment Facilitators (PayFacs)
Payment facilitators simplify the process for sub-merchants to accept card payments without needing individual merchant accounts. They aggregate multiple sub-merchants under a single master merchant account, streamlining the onboarding process and compliance requirements. Examples include Dlocal, Ebanx, Square, PayU, and PayPal.
Acquirer Processor
An acquirer processor serves a technical role, transmitting data from the gateway to the card networks (and back) and ensuring the authorization and settlement of the transaction. Examples of Acquirer Processors include First Data, Worldpay, Credibanco, Redeban, Prisma, Global Processing, Transbank, Totalnet, Fiserv, ACI tech among others.
Acquiring Bank
An acquiring bank, often called the “merchant acquirer,” signs up and onboards merchants, providing them with merchant accounts for receiving settlement funds. Without a merchant account, merchants cannot accept credit card payments. Examples include Chase Paymentech, Bank of America Merchant Services, First Data, Worldpay, Global Payments and Bancolombia among others.
Card Networks
Card networks supply the electronic infrastructure that enables processors and banks to communicate and process transactions in real-time. They also set the rules and standards for network participants. Examples include Visa, Mastercard, AmEx, and Discover.
Issuing Bank
The issuing bank is the entity that issues credit cards to consumers, underwriting their credit accounts. Examples include Chase, Citi, Capital One, Bank of America, and AmEx, Itau Unibanco, Banco do Brasil, Banorte, Santander, among others.
Issuer Processor
An issuer processor provides several services to issuing banks, including card approval authorizations and funds settlement. Examples include TSYS, Fiserv, StarkInfra, Paymentology, Pomelo, Galileo, Dock,Global Processing, Celcoin, ACI tech among others.
Are Acquirer Processors the same as Clearinghouses? Or do Clearinghouses also act as Acquirer Processors?
Clearinghouses play an independent role from that of the acquirer processor. However, in the case of Mexico, Colombia, and Chile, incumbent networks perform both roles. Below is an explanation of each role, considering Mastercard and Visa as clearinghouses but keeping in mind that Prosa/e-global are also low-value payment systems.
Interrelation between Mastercard and Visa Clearinghouses in Mexico and an Acquirer Processor
Mastercard and Visa Clearinghouses:
Facilitate the clearing and settlement of payments between issuing and acquiring banks.
Ensure secure and efficient fund transfers.
Acquirer Processor:
Works for acquiring banks, processing merchant transactions.
Handles authorization, fraud detection, routing, and communication with card networks like Mastercard or Visa.
Payment Process with the Clearinghouses:
Authorization:
The customer makes a purchase with a Mastercard or Visa card.
The payment request goes from the merchant’s terminal to the acquirer processor and then to the Mastercard or Visa network.
Mastercard and Visa obtain authorization from the issuing bank and return the response to the issuer processor and merchant.
Clearing and Settlement:
Authorized transactions are sent to the Mastercard and Visa clearinghouses.
Mastercard and Visa clear and settle the transactions between issuing and acquiring banks.
Merchant Credit:
The acquirer processor provides the technology for the acquirer to credit the funds to the merchant's account, completing the transaction.
Navigating the Complexity
Understanding the payments processing ecosystem can be challenging, especially since many companies play multiple roles and partner with others. It's important to note that true acquirer processors in the US only include First Data, Worldpay, Global Payments, Elavon, and Chase Paymentech. This concentrated situation is replicated in Latin America. Acquirer processors in Colombia include players such as Redeban and Credibanco. Eglobal and Prosa exist in Mexico, and Prisma, Fiserv and Global Processing in Argentina. Brazi is the exception, where the government and the main networks - VISA and Mastercard - helped unlock the number of acquiring processors growing from 2 to 25 from 2004 to 2021.
For instance, PayPal, Stripe, and Square partner with major acquirer processors for transaction processing. Even though merchants might consider these companies as their processors, they merely provide the connection to true processors like First Data or Chase Paymentech.
The Future of Acquirers and Acquirer Processors
Looking ahead, the lines between fintechs and technology businesses will continue to interconnect. As more businesses, particularly small and niche ones, require acquiring services, the demand for real-time data, plug-and-play modules, and simplified compliance will grow. Acquirers and processors who can adapt to this evolving landscape will be better positioned to succeed.
The electronic card payments industry is a complex but essential system that facilitates secure and efficient transactions. As technology continues to evolve, the need for advanced, adaptable acquiring processors becomes increasingly important, ensuring that businesses can meet the demands of modern consumers and navigate the complexities of the payments landscape effectively.
The Relevance of Building a New Acquirer Processor in LATAM: A Cloud-Native Approach
The payments landscape in LATAM is rapidly evolving, driven by increasing digital adoption, regulatory changes, and the need for more inclusive financial services. In this context, developing a new acquirer processor that is cloud-native, equipped with cutting-edge features and efficiently interacts with all key players in the electronic card payment industry presents a significant opportunity. Here’s why this endeavor is relevant and potentially transformative for the region.
Key Drivers for Developing a Cloud-Native Acquirer Processor in LATAM
Growing Digital Economy:
The digital economy is expanding, with more consumers and businesses adopting online transactions.
E-commerce growth is driving the need for reliable and efficient payment processing solutions that can handle high transaction volumes seamlessly.
Regulatory Changes:
Many countries are modernizing their financial regulations to promote competition and innovation in the payments sector.
These changes enable new players to enter the market and offer advanced services, challenging traditional banks and processors.
Increased Financial Inclusion:
A significant portion of the population in LATAM remains unbanked or underbanked.
Innovative payment solutions can bridge this gap, providing more people with access to financial services through digital means.
Fragmented Payment Ecosystem:
The payments ecosystem in the region is diverse, with multiple local and international players.
A cloud-native acquirer processor can integrate various payment methods and systems, providing a unified solution for merchants and consumers.
Benefits of a Cloud-Native Acquirer Processor
Scalability:
Cloud-native solutions can scale effortlessly to handle fluctuating transaction volumes.
This scalability is crucial for accommodating peak times, such as Black Friday or seasonal sales.
Agility and Flexibility:
Cloud-native architectures support rapid deployment and iteration of new features and services.
This agility allows the processor to quickly adapt to changing market demands and regulatory requirements.
Cost Efficiency:
Cloud infrastructure reduces the need for significant upfront investments in physical hardware.
It allows for a pay-as-you-go model, optimizing operational costs based on actual usage.
Enhanced Security:
Cloud providers invest heavily in security measures, ensuring data protection and compliance with international standards.
This security is critical in maintaining trust with merchants and consumers.
Cross-Border Capabilities:
A cloud-native processor can easily expand its services across different countries in LATAM.
This capability supports merchants looking to operate in multiple markets, enhancing regional trade and economic integration.
Strategic Features for a Cloud-Native Acquirer Processor
Real-Time Data and Analytics:
Provide merchants with real-time insights into their transactions, helping them make informed business decisions.
Advanced analytics also help in detecting and preventing fraud.
Omnichannel Support:
To Ensure seamless integration of in-store, online, and mobile payments.
This omnichannel approach enhances the customer experience and boosts merchant sales.
API-First Approach:
By developing robust APIs, it will allow an easy integration with various payment gateways, e-commerce platforms, and fintech solutions.
This approach facilitates innovation and partnerships within the payments ecosystem.
Regulatory Compliance:
To ensure the processor adheres to local and international regulatory standards.
Compliance with PCI DSS, GDPR, and local data protection laws is crucial for operating in multiple jurisdictions.
Fraud Prevention and Risk Management:
Implement advanced fraud detection algorithms and machine learning models to minimize fraudulent transactions.
Provide merchants with tools to manage and mitigate risks effectively.
Building a new, cloud-native acquirer processor in LATAM is not only relevant but also critical to addressing the region's unique challenges and opportunities. By leveraging the scalability, agility, and security of cloud technology, this processor can offer superior services that meet the evolving needs of merchants and consumers. Furthermore, the strategic integration of real-time analytics, omnichannel support, robust APIs, regulatory compliance, and advanced fraud prevention will position the processor as a key player in the regional payments ecosystem. This initiative can drive financial inclusion, stimulate economic growth, and foster innovation in one of the world's most dynamic regions.
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