Digital Payment Lifecycle: Understanding How Money Moves
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The coronavirus pandemic represented a turning point for the payments industry, with a surge in digital payments where India was finally getting the change that was long due. According to a Razorpay report, digital payment transactions saw a 23 per cent jump only in a month’s time. While digital transaction is fairly new with Indian audiences, here's a look at how online transactions take place and what are the safety measures that can be ensured to save oneself from fraudsters. Digital payments industry is also revolutionizing and incorporating new-age technologies such as artificial intelligence (AI) and machine learning for security of customers.
During an online transaction, there are two important elements. The first involves receiving money from the customers, the payee, and the second involves the payer who is making the payment. There is a third process as well which is the payment channel such as UPI, IMPS or NEFT which facilitates the process.
Payments can be classified into two major groups: push payments (initiated by the payer) and pull payments (initiated by the payee).
Payment lifecycle is a process which involves various procedures to be completed. One technical fault or procedure skipped can make your transaction vulnerable. To understand the whole concept here’s a paradigm on a card payment that has been initiated by the payer.
An issuing bank is one that issues cards to customers. Customers can then use these cards to make a purchase from a merchant. The merchant’s bank, in turn, is the acquiring bank. And, the card network (VISA, Mastercard, etc.) is the medium facilitating this entire process. The process can be divided into two phases: authentication and authorisation.
Payment Authentication and Authorisation
Payment authentication is the process of confirming a customer's identity through various authentication factors such as knowledge, user location, ownership and inherence. Knowledge is the most common category used for transaction authentication. Payment authorization is confirmation of digital payment by a customer. During a payment transaction, the merchant uses the authorisation process to obtain the bank’s approval on issuing the payment.
In authentication, the identities of the payer and payee both are determined, followed by a verification of the payer’s credentials. Once the authentication process is successful, a fund check process is performed for payer’s account to check if sufficient fund is available, post that the payment gets authorised. The authorisation of the payment transmits a response to the merchant, thus letting the acquiring bank know on how to proceed with the payment.
There are two legs of payments in the cashless payment procedure: forward and backward. The former deals with the original payments process, while the latter deals with the associated refunds, money reversals etc. Post that comes the process of clearance and settlements, which involves data sharing process, involving banks for reconciliation purposes. Settlements are mostly handled by banks. During this process, money is moved from the issuing bank to the acquiring banking via the payment network. Settlements happen through both the forward and backward legs of payments.
Safety Measure Ensured Platforms in Payment Lifecycle
The payment lifecycle is complex and building a compliant and secure financial product can be quite time consuming. Fintech companies are introducing revolutionary banking platform with world-class financial products and technology imbibed in it to ensure significantly safer and faster payment process. The new-age technologies can be a versatile platform which runs on a rule-based engine and has real-time tracking the progress of the payment which ensures safety. Various finance platforms have enabled fintechs to participate in the authorisation process and Webhooks, which share real-time payment data with fintechs. These kinds of platform allow fintechs to solve a variety of use cases as well as accelerating their go-to-market.