Towards a Better Understanding of the Payments Landscape

By David Schmidt

The complexities within the accounts receivable (AR) process arise in large part due to the diverse nature of payment methods, the volume of transactions, and the need for accurate data management and reconciliation. In the context of the rapidly evolving landscape of electronic payments, these complexities become even more pronounced with the integration of multiple digital platforms and an increasing volume of electronic transactions. Here's a deeper dive into these complexities and the necessity for improved data management and reconciliation:

• Diverse Payment Methods: With the advent of electronic payment options, AR departments are now faced with managing a variety of payment methods, such as credit/debit cards, digital wallets, bank transfers, and a multitude of online payment gateways. Each method comes with its own set of protocols, security measures, and transaction fees, thereby necessitating a comprehensive understanding of each payment type and its associated processing requirements.
• Transaction Volume and Velocity: The shift towards electronic payments has led to a significant increase in transaction volumes and velocities, especially in businesses that operate globally. Managing large volumes of transactions in real time requires robust systems that can handle the influx of data and ensure that every transaction is accurately recorded and reconciled.
• Data Management Challenges: Efficient data management is critical for AR departments to maintain accurate records of all incoming payments, track customer payments, and manage outstanding invoices. Ensuring the integrity and security of financial data becomes paramount, as any discrepancies or errors can lead to significant financial losses and operational disruptions.
• Reconciliation Complexities: Reconciliation involves the matching and balancing of financial records to ensure that all transactions are accurately recorded. In the realm of electronic payments, reconciling multiple transactions across various platforms, currencies, and payment gateways can pose significant challenges. Ensuring that each payment corresponds to the appropriate invoice or account is essential for maintaining financial accuracy and transparency.

To successfully navigate these complexities, AR departments need to implement advanced payment automation systems that can streamline payment processes, enhance data accuracy, and facilitate seamless reconciliation. Such systems should offer real-time tracking, automated invoicing, and robust reporting capabilities, enabling businesses to gain better insights into their cash flows, identify payment trends, and optimize their overall financial operations. Moreover, investing in secure and integrated financial technology solutions can help AR departments mitigate the risks associated with electronic payment processing, ensuring compliance with industry regulations and safeguarding sensitive financial information.

The Payments Landscape

When companies try to implement a payment structure on their own, they may inadvertently become their own payment company. As they strive to meet the diverse payment demands of customers across different countries, a complex process laden with regulatory and compliance challenges, they often end up reinventing the wheel for each instance. The costs associated with establishing and unwinding multiple payment partnerships across various countries become substantial, underlying the importance of conducting thorough due diligence in selecting solution providers from the very beginning.

Automating the payment processes associated with domestic and international receivables first requires an understanding of the terms used within the payments industry. You also need to have a clear understanding of the mechanisms employed in money transfer, get executive buy-in, and prioritize partnerships over mere vendor-client relationships. Superficial assessments of any payment providers you are considering may lead you in the wrong direction – you need a deeper understanding beyond the standard claims found on their websites. Here then, are some terms and concepts you must know before you begin evaluating payment solutions:

Payment Provider Types: A payment provider can be a payment facilitator, payment gateway, money services business, Money Transfer License (MTL), or Merchant of Record. It is crucial to understand the distinct capabilities, constraints, and operational flexibilities associated with each type of provider, both on a global and local scale. There are complexities involved in transitioning from one provider model to another and potential limitations that may arise when expanding cross-border or diversifying payment methods. Baseline functionalities you should look for include know-your-customer (KYC) solution sets as well as capabilities ensuring statutory, regulatory, and industry standards (such as PCI and GDPR) compliance.

It’s important to evaluate one's current and future needs when selecting a payment provider, particularly in the context of incorporating diverse payment options such as bank transfers, PayPal, or alternative local payment methods. A nuanced understanding of the specialized expertise and capabilities offered by different providers is required to ensure compatibility with specific payment requirements. Keep in mind that there is a big difference between processing high-value, low-volume, and low-value, high-volume payments.

 ACH or Wire:

It is important to understand the differences between ACH and wire transfers, whether domestic or international. This is because your customers will use different methods to send payments to you, but not always be precise about the means of their electronic payments. Sometimes ACH and wires are used interchangeably, but they are not the same.

ACH stands for Automated Clearing House. It's a domestic network governed by NACHA that handles electronic payments and automated money transfers in the United States. Direct debits, EFT (electronic funds transfers), electronic bank transfers, and eChecks move on the ACH Network, which reaches all US banks and credit unions. Most countries will have domestic solutions that are analogous to ACH.

In contrast, wire transfers, also known as bank wires, are a method of electronic funds transfer that can be used for both domestic and international payments. Wires are often faster and more secure but come with higher fees compared to ACH-type transfers. For the most part, wires are either sent via SWIFT or Fedwire.

 Payment Rails: Payment rails refer to the infrastructure or systems used to facilitate the movement of funds from one account to another. They are the underlying networks that support various payment methods, such as ACH, wire transfers, and credit card processing. Understanding payment rails is crucial because they can impact the speed, cost, and availability of payment options. It is important, therefore, to find out which payment rails your provider uses.

These are the primary payment rails used in the USA:

• The Credit Card Networks – Visa, Mastercard, American Express, and Discover
• ACH (Automated Clearinghouse)
• RTP (Real-Time Payments) Network
• FedNow
• Fedwire
• SWIFT
• Proprietary Networks (e.g., Zelle, Paypal, Venmo, Cash App)
• Blockchain-Based Networks (e.g., Metamask, Circle, Coinbase Commerce, MasterCard Blockchain, and TransCrypt Global)

Open Loop Payment Systems, a type of shared network, process transactions between two accounts at different banks without requiring either participant to hold an account with any specific app or financial institution. For example, ACH, RTP Network, Zelle, and FedNow route and settle payments for any financial institutions enrolled in that network.

Closed Loop Payment Networks process transactions through a single provider, thereby requiring both the sender and the receiver have an account with the provider in order to complete payments. Apps such as Venmo, Cash App, and Paypal operate on closed-loop systems.

Card Schemes: When businesses decide to accept card payments, they need to understand a few things. First, there's something called surcharging laws, which may vary from state to state and country to country and determine if the business can pass the fees onto customers or not. This is important because it can affect how much the customers end up paying. Also, there are different kinds of card payments. Some are push payments from your customer (usually one-off payments), and others are pull payments where you initiate the transaction, such as when there is a recurring charge. Lastly, you need to consider the interchange fee, which can vary. They are set by the card networks and paid by the merchant’s bank to the cardholder’s bank.

There are many players in a card network besides the issuing bank. Here are the most relevant:

• Acquirer Processors plug in the financial institution (Merchant Acquirer) that holds the merchant’s account (g., Redsys, Monext, Elavon)
• Independent Sales Organizations (ISOs), also called Merchant Service Provider (MSPs), are third-party sales organizations that provide a distribution channel for acquiring banks, payment service providers, or payment processors. ISOs sell card services from these institutions to the merchant.
• Issue Processors connect the banks that issue cards
• Payment Gateways provide a technical layer that collects payment credentials on the merchants’ client-side and securely forwards them to the relevant payment service provider (PSP) or acquirer (e.g., Switch, PAY.ON, Braintree)
• Payment Service Providers (PSPs) offer merchants connections with multiple acquirers and payment methods like credit cards, direct debit, bank transfers, and other value-added services (e.g., Stripe, Adyen, Mollie)

Accepting card payments can have its benefits. For instance, it can make it easier for international customers to pay in their local currency without worrying about currency conversions. However, not all businesses find it suitable, especially those with very small profit margins or large invoices. Accepting card payments can also be a good idea for some businesses, especially if they want to provide a smooth payment experience for their customers. However, it's important to understand the ins and outs of choosing a payments partner.

Cross-Border Payments: Cross-border payments involve financial transactions between entities in different countries. These payments can be complex due to currency conversion, regulatory compliance, the correspondent relationships of the sending and receiving banks, and different banking systems. When expanding internationally, it's important to have a strategy for handling cross-border payments. You should consider how your chosen payment provider addresses cross-border payment challenges and whether they can streamline the process for you.

The Importance of Partnerships

Payment partners are not just vendors; they should be true partners in your business. Look for providers who align with your industry, offer value beyond rate sheets, and can provide ongoing support and expertise as you grow. If you only focus on transactions, you may be able to address your current needs, but if you are expanding, especially when that expansion is international, you want a payment partner that can meet your needs every step of the way.

In the world of payments, clarity is essential. You should seek to understand the exact processes and systems a payment provider uses, including how funds move, what fees are involved, and what their expertise covers. Don't settle for vague information or make assumptions, and above all make sure you are aligned with your payment processor’s approach.