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  • Writer's picturePooja Yadav

Understanding the Indian Payment Processing Ecosystem: Roles, Responsibilities, and Revenue Streams

The digital payment landscape in India has seen a significant transformation over the past decade. With the rise of online transactions, the ecosystem has expanded to include various players, each with distinct roles and responsibilities.


In this blog, we’ll delve into the key players in the payment processing ecosystem—merchant acquirers, payment processors, and payment gateways. 


We will also provide examples of Indian companies in each category, explain how they earn, and break down the fees and responsibilities in a typical transaction.


What is a Payment Processing Ecosystem?


Imagine you're buying that new game online. You hit pay, fingers crossed, and then – poof! The order is confirmed. But wait, some unseen heroes are working behind the scenes.


It's like a high-tech relay race for your money! Your bank, the seller's bank, and some savvy payment processors all team up to securely transfer the cash. These processors are like the stick carriers, ensuring everything is legit and the money gets where it needs to go – fast and safe.


That's the magic of payment processing!


 

Key Players in the Payment Processing Ecosystem


The payment processing ecosystem comprises several key players:


Key Players in the Payment Processing Ecosystem

1. Merchant Acquirers


Responsibilities:


  • Onboarding merchants to accept card payments

  • Managing transaction handling and settlement

  • Handling fee management and security compliance

  • Providing customer support to merchants


Examples in India:


  • HDFC Bank

  • ICICI Bank

  • Axis Bank


How They Earn: Merchant acquirers earn through transaction fees, monthly fees, and setup fees charged to merchants. They may also charge fees for additional services such as chargeback handling and fraud prevention.


2. Payment Processors


Responsibilities:


  • Processing transactions between merchants and acquiring banks

  • Ensuring secure transaction processing

  • Managing processing fees and supporting chargeback handling


Examples in India:


  • Pine Labs

  • PayU

  • Atom Technologies


How They Earn: Payment processors charge a fee for each transaction they process. This fee can be a percentage of the transaction amount or a flat fee per transaction. They may also charge for additional services like recurring billing and fraud prevention.


3. Payment Gateways


Responsibilities:


  • Facilitating the connection between merchants and payment processors

  • Providing APIs and SDKs for integration with POS systems

  • Ensuring secure transaction routing


Examples in India:


  • Razorpay

  • CCAvenue

  • Instamojo


How They Earn: Payment gateways earn through transaction fees, setup fees, and monthly maintenance fees. They may also offer premium services like enhanced security features and analytics, for which they charge additional fees.


4. Issuing Banks


Responsibilities:


  • Issuing credit and debit cards to consumers

  • Managing customer accounts and credit lines

  • Handling card-related disputes and fraud prevention


Examples in India:


  • State Bank of India (SBI)

  • Punjab National Bank (PNB)

  • Kotak Mahindra Bank


How They Earn: Issuing banks earn through annual card fees, interest on credit card balances, and interchange fees charged to merchant acquirers.


5. Card Networks


Responsibilities:


  • Providing infrastructure for processing card payments

  • Ensuring secure and reliable transaction routing

  • Setting and enforcing transaction standards


Examples:


  • Visa

  • MasterCard

  • RuPay


How They Earn: Card networks earn through interchange fees charged to merchant acquirers and annual fees from issuing banks. They also charge fees for processing transactions.


6. Digital Wallets and UPI Platforms



Responsibilities:


  • Facilitating online transactions and peer-to-peer payments

  • Providing mobile applications for easy payment processing

  • Ensuring transaction security and compliance

Examples in India:


  • Paytm

  • Google Pay

  • PhonePe


How They Earn: Digital wallets and UPI platforms earn through transaction fees, merchant service fees, and premium service charges. They may also earn interest on the balance held in user accounts.


7. Regulatory Bodies


Responsibilities:


  • Regulating the payment ecosystem and ensuring compliance with financial laws

  • Setting standards for security and transaction processing


Examples in India:


  • Reserve Bank of India (RBI)

  • National Payments Corporation of India (NPCI)


How They Earn: Regulatory bodies typically do not earn revenue as they are government entities. They are funded through government budgets and fees from regulated entities.


8. Fraud Prevention Services



Responsibilities:


  • Providing fraud detection and prevention services

  • Monitoring transactions for suspicious activity

  • Ensuring compliance with security standards


Examples:

  • Simility (acquired by PayPal)

  • FIS Global


How They Earn: Fraud prevention services earn through subscription fees, transaction fees, and charges for premium fraud detection features.


 

What are the Roles & Responsibilities of Merchant Acquirers, Payment Processors, & Payment Gateway?


Here’s a comparative table highlighting the roles and responsibilities of merchant acquirers, payment processors, and payment gateways:


Functions

Merchant Acquirers

Payment Processors

Payment Gateways

Merchant Onboarding

Enroll merchants to accept card payments

Not directly involved

Facilitate the integration of merchants into the system

Transaction Handling

Accept card payments on behalf of merchants

Process transactions between merchants and acquirers

Route transaction data between merchants and processors

Settlement

Deposit funds into merchant accounts

Facilitate fund transfers between banks and acquirers

Not directly involved in fund transfers

Fee Management

Manage transaction fees charged to merchants

Charge processing fees for transactions

Charge fees for transaction routing and security

Security

Ensure compliance with PCI DSS and other regulations

Ensure secure transaction processing

Provide encryption and security protocols for data

Dispute Handling

Handle chargebacks and disputes

Support chargeback processing

Not directly involved in chargebacks

Integration with POS

Integrate with Point of Sale systems

Not directly involved

Provide API and SDK for POS integration

Branding

Often operate under their own brand or as a white label

Typically operate under their own brand

Often provide white-label solutions

Technology Provision

Provide technology for transaction acceptance and management

Provide infrastructure for transaction processing

Provide technology to connect merchants with processors

Customer Support

Offer support to merchants for payment-related issues

Offer support to merchants and acquirers

Offer support to merchants for integration and technical issues


 

Example Of Transaction Breakdown


transaction flow table chart

Let’s take an example transaction of INR 100 and break down each player's roles, fees, and responsibilities.


Transaction Flow


  1. Customer initiates a payment of INR 100 on an e-commerce website.

  2. Payment Gateway (e.g., Razorpay) routes the transaction data securely to the payment processor.

  3. Payment Processor (e.g., PayU) processes the transaction and communicates with the issuing bank and card network.

  4. Card Network (e.g., Visa) verifies the transaction details and routes the request to the issuing bank.

  5. Issuing Bank (e.g., SBI) approves the transaction and sends a confirmation back through the card network.

  6. Payment Processor finalizes the transaction and settles the amount with the acquiring bank.

  7. Merchant Acquirer (e.g., HDFC Bank) settles the funds into the merchant’s account, minus any fees.

Fees Breakdown

Entity

Role

Fees

Merchant Acquirer

Handles transaction and settlement

Charges a fee (e.g., 1% of the transaction) = INR 1

Payment Processor

Processes the transaction

Charges a processing fee (e.g., 0.5% of the transaction) = INR 0.50

Payment Gateway

Routes transaction data

Charges a gateway fee (e.g., 0.25% of the transaction) = INR 0.25

Card Network

Verifies transaction

Charges an interchange fee (e.g., 0.1% of the transaction) = INR 0.10

Issuing Bank

Approves transaction

Earns interchange fee from card network = INR 0.10


Total Fees


Total fees deducted from the transaction = INR 1 + INR 0.50 + INR 0.25 + INR 0.10 = INR 1.85


After all fees are deducted, the merchant receives INR 98.15 from the INR 100 transaction.


 

Conclusion


Understanding the roles and responsibilities of each player in the payment processing ecosystem is crucial for businesses navigating the digital payment landscape. Merchant acquirers, payment processors, and payment gateways each play vital roles in ensuring secure and efficient transactions. By comprehending how each entity earns and its fee structures, businesses can make informed decisions to optimize their payment processes.


By leveraging the services of established players like HDFC Bank, Razorpay, and PayU, businesses can enhance their transaction efficiency and security, ultimately benefiting from a seamless payment experience.


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Jun 20
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