What is Payment Infrastructure?

Payment infrastructure is the integrated network of technologies, systems, and processes that enable modern financial transactions. It includes payment gateways, processors, and the communication networks that facilitate electronic payment methods such as credit cards, e-wallets, and bank transfers.

Today, seamless and secure payment processing is crucial for providing a good customer experience, maintaining trust, keeping cash flow consistent, and ensuring operational efficiency. Reliable payment systems prevent transaction delays, reduce the risk of fraud, and support the smooth flow of commerce, which is essential for businesses to thrive in the digital economy.

The infrastructure behind customer payments is the backbone of the modern financial system. It is constantly evolving to meet changing consumer needs and demands for faster, more convenient, and secure payment methods. 

Synonyms

• Electronic payments
• Payment gateway
• Payments network
• Payment rails
• Payments ecosystem

Understanding Payment Infrastructure

Whether it’s individual customer payments or B2B payments, businesses need payment infrastructure because it supports the financial services they need to operate. It provides the necessary framework and technology to transact quickly, securely, and accurately. 

For example, when a customer makes a purchase using their credit card, the backend system verifies and processes the transaction in real-time. It guarantees that the card they’re using is valid and that the correct amount is transferred from the customer’s account to the merchant’s account.

Let’s take a closer look at the different components of payment infrastructure and how they work together:

The Payment Process

There are three entities involved in the payment process:

• The payer is the person initiating the transaction by making a purchase or transferring money (i.e., your customer).
• The payee is the entity receiving the payment, usually a merchant or service provider.
• The payment intermediary is the software that facilitates the transfer of funds between the payer and payee, also known as the payment gateway.

Payment Transactions

At its most basic level, the payment process works like this:

1. The payer initiates a transaction by providing their payment information to the payee.
2. The payment details pass through the intermediary/payment gateway.
3. The intermediary verifies and authorizes the transaction with the payer’s bank or credit card provider.
4. If the transaction is approved, the intermediary releases the funds to the payee’s account. At the same time, funds are deducted from the payer’s account.
5. The payer receives a confirmation of payment along with an invoice or receipt and completes the transaction.

Key Components of Payment Infrastructure

The payment process itself includes three main components: authorization, clearing, and settlement.

• Authorization involves verifying the customer’s payment information and ensuring they have enough funds to complete the transaction. This step typically involves the issuing bank, card networks (such as Visa or Mastercard), and payment processors.
• The clearing process transfers funds from the customer’s account to the merchant’s account. It includes settling any fees charged by intermediaries in the payment chain.
• Settlement is the final step of the process, where funds are transferred from the customer’s bank account to the merchant’s account.

The execution of these components is supported by payment networks, processors, and gateways. Let’s take a closer look at each one:

Payment Gateways

A payment gateway is a software application that transmits transaction data between the payer, payee, and payment processor. It acts as the intermediary between a website’s shopping cart and the bank that issued the customer’s credit card.

Examples of payment gateways include:

• PayPal
• Stripe
• Square

The payment gateway encrypts sensitive data, such as credit card numbers, to ensure secure transmission of information. It also verifies that the card is valid and has sufficient funds for the transaction.

Once approved, the payment gateway sends a confirmation to the merchant’s website, allowing the transaction to be settled.

Payment Processors

Payment processors are financial institutions or third-party companies that provide the technology and infrastructure to process payments. They manage the flow of transactions between the payer’s bank, payment networks, and merchant accounts.

Payment processors charge a fee for each transaction or a percentage of the total amount processed. The fees vary depending on the type of transaction, volume, and any additional services the business requires.

Merchant Accounts

A merchant account is a type of bank account that allows businesses to accept credit and debit card payments. It acts as a temporary holding account for funds from customer transactions before being transferred to the business’s main bank account.

The merchant account is maintained by an acquiring bank, which is responsible for processing and settling the transactions made by the business. Some payment processors also offer merchant accounts as part of their services.

If you don’t use a payment provider but want to accept card payments, you need to have a merchant account. They’re most commonly used by brick-and-mortar stores, but ecommerce stores also sometimes have merchant accounts.

Issuing Banks

Issuing banks are financial institutions that issue credit and debit cards to customers. They provide the payment card, set the terms and conditions, and manage the cardholder’s account.

When a customer makes a purchase using their credit or debit card, the issuing bank is responsible for authorizing the transaction and sending funds to the merchant’s account.

Acquiring Banks

Acquiring banks, also known as merchant banks, are responsible for processing and settling transactions made by businesses. They’re the financial institution that holds the merchant account and is responsible for making sure the funds from customer transactions are transferred to the business’s bank account.

Examples of acquiring banks include:

• JPMorgan Chase
• Bank of America
• Wells Fargo

Acquiring banks usually provide additional services, such as fraud and risk management, to merchants as part of their payment processing services. They sometimes charge fees for their services, which can include setup and monthly maintenance fees.

Payment Networks

Payment networks act as a bridge between issuing banks (which provide the customer’s credit or debit card) and acquiring banks (which manage the merchant’s accounts). They facilitate the routing of funds between these banks and ensure that the correct amount is transferred.

Examples of payment networks include:

• Visa
• Mastercard
• American Express
• Discover

Payment networks earn revenue by charging fees to both the issuing and acquiring banks for their services. They also set interchange fees, which are fees the acquiring bank pays to the issuing bank for each transaction.

Characteristics of Modern Payment Infrastructure

As the trend toward digital finance continues, the payment infrastructure landscape is constantly evolving. Along with it, the underlying technologies and processes are also improving.

Modern financial infrastructure is defined by:

• Security. Fraud prevention measures like encryption and tokenization protect customer data and guarantee secure transactions.
• Speed. Customers can make instant payments through technologies like contactless payments, mobile wallets, and peer-to-peer (P2P) payment apps.
• Scalability. Modern payment software can handle large volumes of transactions quickly and efficiently, even during peak times. And as you grow your business, the software can adapt to your changing needs.
• Flexibility. You can integrate different payment methods with your ecommerce platform or POS system, making it easier for customers to pay how they want. You can also integrate those tools with your accounting software and CRM to streamline your business operations.
• Omnichannel payment experience. Customers can use the same payment method whether they’re shopping online, in-store, or on a mobile device.
• Intelligence. Payment data can provide valuable insights into customer behavior and purchasing trends, helping businesses make informed decisions.
• Global reach. Modern payment infrastructure allows businesses to accept international payments nearly as quickly as domestic ones.
• Automation. Processes like revenue recognition and reconciliation can be automated with modern billing and payment processing tools, saving time and reducing human error.

For SaaS companies and other subscription-based models, modern payment infrastructure also allows them to automatically bill customers, recognize revenue without manual intervention, and manage customer subscriptions and renewals.

How CPQ and Billing Software Integrate with Payment Infrastructure

CPQ (configure, price, quote) software is used by businesses to manage the sales process, from configuring complex products and services to generating quotes and proposals for customers. Billing software automates the invoicing process, so every time a sale is made, an accurate invoice is generated and sent to the customer.

Both CPQ and billing software can integrate with payment infrastructure to streamline the entire sales process.

With this integration, businesses can streamline the entire quote-to-revenue process:

1. Reps generate a quote with accurate pricing and product information, based on pre-defined rules and logic.
2. The customer approves the quote and converts it into an order.
3. The billing software automatically generates an invoice based on the order information.
4. The invoice is automatically sent to the customer, along with a secure payment link.
5. When the customer makes a payment, the backend infrastructure processes the transaction and transfers the funds to the business’s account.

This eliminates manual data entry, removes all the friction from the customer’s payment experience, and ensures all information is accurately captured and transferred between systems. It also means you only have to use one platform to manage the entire sales process, from configuring products to receiving payment.

The Future of Payment Infrastructure

The diversity of payment methods — from traditional credit cards to mobile payments with digital wallets and cryptocurrencies — has increased the complexity of payment processing. Businesses need a robust, scalable payment infrastructure to manage multiple currencies, comply with regulations, and integrate new payment technologies.

Here’s a look at some trends shaping the future of payment infrastructure:

Open Banking

Open Banking is a regulatory initiative that allows third-party financial service providers to access customer data from financial institutions with the customer’s consent. It allows for more innovation and competition in the market and provides customers with new payment options.

An example of an Open Banking solution is Plaid, which connects a customer’s bank account to their preferred payment method, allowing for direct and secure payments.

Contactless Payments

Contactless payments allow customers to make transactions using their mobile devices or contactless cards, eliminating the need for physical credit/debit cards. NFC (near-field communication) technology powers contactless payments and mobile wallets like Apple Pay, Google Pay, and Samsung Pay.

Blockchain Technology

Blockchain technology has the potential to revolutionize payment infrastructure by providing secure, decentralized transactions. It also offers transparent and immutable record-keeping, reducing the risk of fraud.

Real-Time Payments

Real-time payments allow for instant transactions, giving customers and businesses faster access to funds. This technology is already widely used in peer-to-peer payment apps but is expected to expand into other areas of finance, like cross-border payments.

Artificial Intelligence (AI)

AI, as a part of payment infrastructure, improves security measures for payment infrastructure by analyzing data and detecting potential fraud. It also streamlines processes, such as reconciliation and transaction monitoring, making them more efficient and accurate.

Revenue and Finance Considerations

Having a robust payment infrastructure in place is essential for any business, but it also has significant implications for revenue and finance management.

Here are some key considerations:

• Accurate revenue recognition. You have to consider ASC 606 (or IFRS 15 for international transactions) when automating billing and payment processing. With modern systems, you can ensure accurate and timely revenue recognition in compliance with accounting standards.
• Processing fees. Payment processing fees can vary significantly among providers. These fees include interchange fees, assessment fees, and markup fees. Compare different providers to find the most cost-effective solution.
• Fraud mitigation. Your system should use technologies like machine learning algorithms to detect unusual patterns, two-factor authentication (2FA), and tokenization to secure sensitive information.
• Data security. Encrypting transaction data, adhering to security standards like PCI-DSS, and regularly updating security protocols to guard against new threats.
• Reporting and analytics. Having access to real-time data on transaction volumes, success rates, and other metrics can help businesses make informed decisions about their payment infrastructure.

For your revenue and finance teams specifically, you’ll also want to consider user adoption. If one element of your payment infrastructure creates friction in their workflow, it will negatively impact their ability and willingness to adopt the system. The result is lower efficiency and productivity.

People Also Ask