Payment gateway

A payment gateway is a merchant service provided by an e-commerce application

service provider that authorizes credit card or direct payments processing
for businesses, online, bricks and clicks, or traditional brick and mortar.[1] The payment
gateway may be provided by a bank to its customers, but can be provided by a
specialized financial service provider as a separate service.
A payment gateway facilitates a payment transaction by the transfer of information
between a payment portal (such as a website, mobile phone or response service) and
the front end processor or acquiring bank.

Function of Payment Gateway

All this halla-boo around E-Commerce and Internet Startups would not have been
possible without quality FinTech Startups called Payment Gateways.  A Payment
Gateway or a Payments Aggregator is an infrastructure company which is essentially
software and is marketed as a service (SAAS).  The infrastructure of the payment
company is embedded into the core of the e-commerce or payment accepting company
via an API.  Every transaction that is successfully routed through their infrastructure is
charged with a transaction processing fee called TDR in Payment Gateway (TDR
– Transaction Discounting Rate expressed as a Percentage of the transaction value).
Here we present a detailed overview of their business model.

Payment Gateway Business Model

The Payment Gateway Business Model is pretty complicated from the source itself.
For understanding how these aggregators of payment methods make money, it is
essential to understand the business model of the Big Daddy’s of payment World i.e.
The Cards either Master Card or Visa or the Likes.

How Card Issuers Make Money

The Largest card Issuers are Master Card and Visa.  Any Banks that issue either of
these cards to its customers are called “Network Participating Banks“.  Both these
Giants sell their cards to banks and financial institutions for a fixed fee called Network
Participation Fee (One Time Per Card), then an ongoing transaction fee linked to every
transaction.  This fee is ultimately passed on by the bank to the vendor who use the
“Point of Sale” for swiping customer provided cards, thus you must have seen small
merchants accepting cards are generally reluctant to process cards because bank
charges them anywhere between 1% to 3% to process that transaction.
This is how a Transaction looks like:  Customer Purchases 1000 INR worth of goods
from a seller who sells from a physical store.  The customer pays via Master Card
(assume).  The bank processes the transaction.  The merchant keeps a receipt for his
counter check while receiving payment from bank into his linked account.  Assume in
the week, the merchant does 9 more of such similar transactions.  Total Transactions
worth 10,000 (1000 * 10 Transactions), the bank charges 2% on card payments +
service tax, thus the merchant would receive 9,771 INR (10,000 * (1 – 2%*(1+14.5%)))
i.e. 2.29% Less = This 2.29% levied by the bank is called Transaction Discounting
Rate – TDR (The bank has reduced the value of the transaction by 2.29% i.e.
Discounted by 2.29%).
The Card Issuer will ultimately charge the bank for processing this Transaction i.e.
Master Card will further levy a charge of 1% (assume).  Thus the bank will have to pay
about 100 INR to the Card Issuer and in the whole process makes about 1% of the
transaction value.

How Payment Gateways Make Money

Now continuing the above transaction to a level down assume the physical store owner
closes shop and starts an online venture.  This online venture will not be able to
physically carry point of sale (POS) machine to swipe the card at every location.  Thus
Payment Gateway comes to the rescue, The payment gateway acts as a virtual POS on
the webpage to accept money.
Lets assume the same customer made a purchase of 1000 INR on the website of the
merchant, the merchant did some 9 similar transactions in the week i.e. Total Value of
Weekly sale is 10,000 INR, now at the time of settlement from the payment gateway
(PG) to the seller the PG will get a discounted amount from the bank, since the PG has
a higher bargaining power with the bank on account of its large transaction volume the
bank agrees to cut down TDR from 2% to 1.5% (assume).  Thus the PG will receive
(10,000 * (1-1.5%*(1+14.5%))) = 9828.25 INR and will further discount it by 1%
(assume) to pass it on to the merchant i.e. the merchant will finally get about 9715 INR
(9828.25 * (1-1% * (1+14.5%))).
Thus in the whole process – The Card Issuer made the same amount of money, the
bank made slightly lesser money on account of customer acquisition and the payment
gateway made some money.  The merchant lost about 285 INR on account of bank
charges, payment gateway charges and government taxes.

Charges on Different Modes of Transactions

Customers may use different modes of payment while making payment online, it may
be a credit or a debit card issued by either master card of visa or maestro or it may be
an American Express Card, or they may simply choose to pay via Internet Banking.
The TDR for each of these modes is different.  Here is a screen shot of the charges of
one of the leading payment gateways CC Avenue (Picture Source: CC Avenue Website
> Pricing Tab).

Growth Prospect
Ken Research announced its latest publication on “India Payment Services Industry
Outlook to 2019” which provides a comprehensive analysis of the scenario of payment
and banking services in India. The report covers various aspects such as market size of
m-banking, mobile wallets and mPOS systems along with segmentation on the basis of
revenues and value and volume of transactions. The report is useful for financial
institutions, IT service providers, IT hardware manufacturers and new players venturing
in the market.
The payment industry in India has witnessed growth in recent years on the account of
rising number of transactions through mobile based services. The advancement of this
sector has been fuelled by the on-going trend of expeditious adoption of mobile
technology across the country. Surge in growth is majorly originated from the success of
mobile point of sale terminals. Factors such as increase in awareness about high
security provided by digital modes of payments and movement towards card based
transactions have supplemented the industry. The payment industry in India is
composed of various segments with each segment comprising of a number of players.
Mobile banking has been dominated majorly by banking institutions such as ICICI,
HDFC and the State Bank of India whereas, mobile wallets have witnessed strategic
partnerships between various financial institutions and telecom companies such as
Airtel, Idea and Vodafone to promote services. Ezetap, Mswipe and iKaaz are some of
the major players in the MPOS segment. The payment services industry grew at a
CAGR of 142.9% during FY’2012-FY’2014.
According to the research report published by “Ken Research”, India payments market
will grow at a considerable CAGR, thus exceeding INR 8,172.7 Billion by 2019, to be
driven by rising number of digital payments and increase in ease of access of financial
services across various regions in the country.