Digital Payment Lifecycle: Understanding How Money Moves Payment lifecycle is a process which involves various procedures to be completed. One technical fault or procedure skipped can make your transaction vulnerable

By Bhavin Turakhia

Opinions expressed by Entrepreneur contributors are their own.

You're reading Entrepreneur India, an international franchise of Entrepreneur Media.

Unsplash
Representational

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.

Payment Legs

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.

Bhavin Turakhia

CEO and Founder, Flock & CEO and Co-founder, Zeta

Related Topics

Science & Technology

How Can Marketers Use ChatGPT? Here Are the Top 11 Uses.

With the recent developments in AI and the popularity of ChatGPT, you may want to integrate AI into your marketing practices. Find out how.

Marketing

5 Ways ChatGPT Will Impact Digital Marketing

ChatGPT is creating ripples across the digital landscape right now. Here are five ways it can benefit your ads, campaigns and marketing strategies.

Business Ideas

55 Small Business Ideas to Start in 2024

We put together a list of the best, most profitable small business ideas for entrepreneurs to pursue in 2024.

News and Trends

Why Is Venture-debt Picking Pace in India Like Never Before

The trend reflects the market's maturity and the increasing sophistication of venture-debt solutions tailored to the needs of companies, according to a recent report

Starting a Business

How Can You Make Sure Your Business Will Survive Anything? Try These 3 Proven Strategies

No matter how uncertain the economy is, you can survive anything as long as you prepare. Here are a few strategies to consider.

Science & Technology

The Deepfake Threat is Real. Here Are 3 Ways to Protect Your Business

The rising use of deepfakes is a growing threat to businesses and society as technology advances. Here are three tips for companies to combat this threat.