Understanding Payment Networks: Types, Benefits, and How They Work
4 min read
Did you know that 40% of all payments done in India are digital? With growing access to digital payment modes and increasing customer demand for more convenient payment options, businesses in India are facing more pressure than ever to accept and process digital payments.
Digital payments are facilitated through payment networks. Understanding how these systems work can help you navigate digital payments better and select the right payment networks for your business and your customers.
What are Payment Networks?
A payment network is an interconnected system that brings together different financial institutions to transfer money between customers and merchants. These networks manage transactions and ensure that the payments from customers reach the right merchants.
For example, when a customer swipes their credit card or makes an online payment, a payment network verifies their card or account information and checks that they have enough funds. Then it transfers the payment from their account to your merchant account. Payment networks can go through this entire process in just a few seconds.
What are the Different Types of Payment Networks
There are different types of payment networks based on the transactions they process and the needs of the users who use them. Here are the most common types you should know about:
1. Credit Card Networks
Credit card networks allow customers to make purchases with credit cards. They authorise all transactions and settle payments between the cardholder and the seller’s bank account. Some well-recognised credit card networks are Visa, MasterCard, and RuPay.
2. EFT Networks
Electronic Fund Transfer (EFT) payment networks allow customers to move money from their bank accounts to your business’s account. EFT is a common network used in online transactions and digital banking.
3. Peer-to-Peer Payment (P2P) Networks
Peer-to-peer payment networks allow individuals to send money directly to each other without conventional banking. In a P2P network, users link their payment platforms with their bank accounts or cards, and funds can be transferred directly from these accounts. PhonePe is a popular P2P payment network in India.
4. ATM Networks
Automated Teller Machine (ATM) networks allow you to access cash withdrawals and select banking services. The ATM network connects ATMs and banks, facilitating cash withdrawals, account balance checks, and funds deposits.
When a digital transaction is processed through a payment network, the network goes through several steps in just a few seconds. Here’s how it works:
1. Payment Initiation
A payment initiation occurs when a customer provides their payment information. This may involve swiping a credit card, entering payment details online, or using a digital wallet.
2. Authorisation Request
Once a payment is initiated, the payment request sends an authorisation request to the customer’s bank. This ensures that the customer has the necessary funds or credit to complete the transaction.
3. Verification and Approval
The bank or financial institution verifies the customer’s financial situation and approves the transaction if everything is in order. It then sends an authorisation code back to the merchant through the network.
4. Transaction Completion
The merchant can complete the transaction based on the authorisation. The customer is sent a confirmation of the payment.
5. Payment Settlement
In the next stage, the merchant receives the funds in their bank account. This process is known as payment settlement, and it is facilitated by the payment network. Different types of payment networks may have different speeds at which they process settlements.
6. Fund Transfer
Finally, the funds are transferred to the merchant’s account, and the transaction is completed.
Benefits of Payment Networks
Better payment security: Payment networks often use encryption technology to ensure all transactions secure. This reduces the risk of fraud and unauthorised access.
Wider acceptance: Payment networks support a wide range of payment methods. This means your business can cater to a larger customer base with different payment preferences.
Greater convenience: Networks handle the entire transaction process, which means you do not have to worry about it. This results in better payment experience for you and your customers.
Increased innovation: Payment networks are constantly evolving and introducing new technology. Some features like contactless payments and cryptocurrency integrations are recent additions that meet the latest customer preferences.
The End Note
Payment networks enable all business transactions to run smoothly. When choosing a payment network, consider factors such as global reach, security features, and customer preferences. As digital payments continue to grow, it’s important to actively protect your business from fraud. Selecting a secure and reliable payment network can help you safeguard your business and create a better experience for your customers.
