The Evolution of Payment Cards

 

From hybrid cards to digital wallets, the future of payments is innovative and diverse. With the ongoing digitization of payments, it’s easy to get caught up in the narrative that the traditional payment card could become obsolete. However, this couldn’t be further from the truth. In fact, card payments are thriving, adapting to the new age of fintech and smartphones.  

Having worked in the payments space for many years, I have travelled across global markets, and I've observed firsthand the evolving landscape of financial transactions. My conclusion is that one size does not fit all. Different markets have different payment requirements.  

In mature markets, I've witnessed the swift adoption of instant payment solutions, revolutionizing the way transactions occur. Meanwhile, in developing markets, the focus shifts towards the proliferation of card-based systems, both physical and virtual, along with the rapid expansion of instant networks. In these diverse environments, traditional notions of card usage are undergoing profound transformations.  

While some regions are still familiarizing themselves with physical card formats, the true innovation lies in the integration of cards with cutting-edge technologies. This entails the emergence of virtual cards, digital wallets, and tokenization mechanisms, heralding a new era of convenience and security in financial transactions. 

The advent of hybrid cards 

One of the most exciting developments in this area is the emergence of hybrid cards. These are not your typical single-function payment cards. Instead, hybrid cards flip between debit and credit functions, switch currencies, and even enable the conversion of digital assets. This opens up a wide variety of possibilities for consumers, allowing them to navigate through an increasingly digital financial landscape with ease. 

Such changes are not only increasing the use cases that cards can support but are embedding ‘payment by card’ into a wide range of user journeys. This enables faster and hyper-personalized customer experiences where the payment is invisible and can drive increased customer satisfaction, loyalty and engagement. It demonstrates that whether for in-person transactions, online payments, international transfers, or navigating blockchain technologies such as Web 3.0, the physical card remains fundamental. 

A new payments landscape 

Another important point to consider is that the landscape of payment methods is as diverse as it is innovative. Digital wallets, wearable technology, and biometric authentication are becoming increasingly popular – as well as contactless payments. The contactless payment market is set to grow at an 18% compound annual growth rate to reach more than $12 billion globally by 2032. The physical card is not diminished with this recent innovation but embedded throughout the next generation of payment technology. It now enables a wide range of unique customer journeys, transforming its role to a source of truth in the sprawling payments ecosystem.   

However, it’s important to remember that attitudes towards these new payment methods vary significantly across different demographics, geographical regions, and between consumers and businesses. For example, in Kenya, the mobile money pioneer M-Pesa reigns supreme offering a range of P2P payments, virtual wallets and credit cards – and mobile money transactions make up more than half of Kenya’s $110 billion GDP. Meanwhile, in North America, credit cards are practically extensions of self, with 82% of U.S. adults having a credit card in 2022. Rewards programs and ingrained financial habits keep plastic firmly in wallets. 

Understanding these geographical nuances is key to appreciating the broader context of payment evolution. 

Tokenization and connectivity 

At the heart of these new payment innovations is tokenization and the connection to payment rails - be it local networks or global giants like Mastercard, Visa, and Union Pay. This connectivity is not just a technical feat; it is what enables a smooth, embedded payment experience, whether through mobiles, wearable tech, or even more futuristic avenues. 

The ultimate aim of these developments is to make payments as seamless and unobtrusive as possible. The idea is to embed the ‘payment by card’ process into various user journeys, making it faster, more convenient, and almost invisible. This seamless experience is key to driving customer satisfaction, loyalty, and engagement. 

The future of cards 

Looking to the future, the question is not about which technology will replace the card. It is about understanding how the fundamentals of card technology will continue to influence and shape new payment methods. The physical card's widespread adoption enables interoperability, ensuring seamless transactions across continents and platforms. 

The world of payments is witnessing a transformation, with cards playing a central role. The challenge and opportunity lie in anticipating which payment methods will evolve from this technology and dominate the market and which will fade away. One thing is certain: the journey of the payment card is far from over. Ultimately, we are not the ones to decide where the journey will go – it is about users, and our role is to give them the choice.  

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What Is An Online Merchant?

 

An online merchant is a business that sells goods and processes payments over the Internet. This ecommerce store transacts through a virtual terminal and payment gateway. These merchants are similar to physical store merchants except that the point-of-sale and all business is conducted online.

What Does An Online Merchant Do?

The role of an online merchant is to sell products on their website. It is most common for new business owners to start off as online sellers. This is different than an online merchant because the merchant has more responsibilities such as managing inventory and organizing payment services. These merchants can choose to charge a flat rate or monthly fee aka recurring billing.

For an online merchant to be successful, they must maintain the product or service quality, set pricing, manage payment services, and execute strategic marketing. Advertising online is essential for business growth and sustainability. It is important for the merchant to be knowledgable of new media trends in order to properly maintain the company brand and successfully sell products.

Online Merchant Transaction Process

The process of a transaction from the card holder’s bank account to the online merchant account is intricate, but broken down becomes quite simple and clear. Below is a flow of online payment processing from point-of-sale to the online merchant bank account.

What Are The Different Kinds Of Online Merchants?

01. Ecommerce Merchant

An Ecommerce merchant sells products or services exclusively over the Internet. An online merchant account is different than an online seller. The online seller only buys products and sells them for profit. The online merchant has additional responsibilities. The major responsibility is that the online merchant is in charge of payment processing. They also need to manage inventory, develop the company brand, and promote the products or services.

02. Wholesale Merchant

A wholesale merchant, also known as a wholesaler, purchases goods in bulk. After the products are purchased, the merchant redistributes them to retailers in smaller volumes. In the past, it was more common for wholesale merchants to operate out of large warehouses, but lately, the trend has swayed towards the merchant acting as a broker of the transaction. This method of business is called drop shipping.

03. Retail Merchant

A retail merchant, also known as a retailer, purchases goods from wholesale merchants in smaller quantities. The retailer sells products directly to consumers. Usually these types of merchants are much better at marketing and advertising then wholesalers.

Retail prices are always higher than wholesale. One major contributor to the price difference is that retail spends more on promotion, PR, advertisements, and marketing. The retailer is also more responsible for their public image and customer service since they are customer-facing.

Retail merchants are essentially resellers. This allows them to change labels and repackage products using a different brand. Not all companies allow the packaging to be changed. Trademark rights and other agreements can affect the freedom a retailer has for re-branding. This selling strategy is effective, however there is much more involved in product promotion. Reselling seems to be the most popular form of product distribution among business owners. In the wake of the Covid-19 pandemic, it is apparent that retail merchants will be taking their business online more and more as social distancing and shelter-in-place continue.

04. Affiliate Merchant

An affiliate merchant is a business that generates sales of products through a network of affiliates using links and ads. Affiliate merchants advertise merchandise on a website and then earn a percentage of the sale when the buyer makes a purchase. A membership fee is commonly charged for merchants to be a part of the network. An additional commission is taken from every sale in order for the affiliate program to function.

The Status Of Online Merchants

Every year online sales grow as more merchants open online. This trend is likely to continue, especially considering the effects of the Covid-19 pandemic on the public’s decision to not shop at physical locations. Instead, shoppers are being driven to use their debit card, American Express, Visa, Mastercard or Apple Pay to purchase products from online merchants using ecommerce websites and online credit card processing resources.

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How Does Credit Card Processing Work?

 

Credit card processing happens in three phases: authorization, clearing and settlement;

Authorization

The first phase is credit card authorization, which typically only takes a few seconds.

1. A customer pays for a purchase with a card at a point-of-sale (POS) terminal in a store, online or by mail order/telephone order (MOTO).
2. The merchant submits an online authorization request for the charge amount to the merchant bank. This request is usually transmitted through a POS terminal or payment gateway.
3. The authorization request is routed through the appropriate card network to the issuing bank.
4. The issuing bank reviews the cardholder’s account and approves or declines the transaction. If the transaction is approved, the issuing bank places a hold on the cardholder’s credit limit for the amount of the charge.
5. The issuing bank sends the approval or denial back through the card network to the merchant.

Clearing

The second phase is the clearing process, which is how payment information is communicated through the card network.

1. The merchant electronically sends batches of authorized card transaction data to the merchant bank, typically at the end of the business day.
2. The merchant bank forwards the transaction data through the card network to the issuing bank.
3. The issuing bank receives the transaction data and converts the hold on the cardholder’s account to a charge that will appear on the cardholder’s monthly billing statement.

Settlement

The final phase is the settlement process, which typically occurs the day after the clearing transaction is submitted to the card network.

1. The card network establishes the net positions of all settlement participants (i.e., issuers and acquirers), collects funds from the issuing bank and transfers the funds to the merchant bank.
2. For cross-border transactions involving more than one currency — such as when a card issued in one country is used for purchases in another country — foreign currency exchange is handled as part of the settlement process.
3. The merchant receives either a gross settlement or a net settlement. In the case of a net settlement, the merchant receives the transaction value minus fees. In the case of a gross settlement, the merchant receives the full transaction value and is periodically invoiced for the fees due to the various parties.

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Payment Links: What They Are and How To Use Them

 

Payment links are a simple way to accept payments however you do business, whether that’s in person, on social media, or through email and text communication with customers.

What is a payment link?

A payment link — also referred to as a checkout link — is a clickable link or scannable code that allows a customer to complete a purchase. Payment links are offered in the form of digital links, by buttons, or QR codes, and are used across websites, social media platforms, apps, messaging tools, and in person.

When a customer uses a payment link, they’re typically taken to the merchant’s online checkout page to complete their transaction. Payment links can be used for both a single transaction, such as a customer invoice, and for multiple transactions, such as a buy button on a social media platform.

What are the benefits of using payment links?

Payment links facilitate simple online payments and don’t require additional infrastructure, a website, or any code to set up and use. Any merchant can easily create a payment link that takes customers to a straightforward checkout page to complete a transaction.

Payment links are used to:

Take payments anywhere you sell products or services: Whether you send clients a payment link via text message or direct customers to your online checkout page from multiple social media platforms, payment links allow you to get paid however you do business.

Customize a purchase: Payment links come in different forms, so choose the ones that work best for the platforms you sell on. Direct payment links work well for customer interactions and conversational commerce, while buy buttons and QR codes work well for online, social, or in-person selling.

Offer customers multiple ways to pay: Once customers have accessed your payment link, you can accept credit or debit card payments, or digital payment methods such as Apple Pay, Google Pay, Cash App Pay, or Afterpay.

Keep payments simple: Customers don’t need an account or a special app to use a merchant’s payment link. They can access your payment link from any device for direct payment.

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What Is a Secure Payment System?

 

Payment fraud is increasing, and U.S. consumers experience more fraudulent transactions than shoppers in other countries. Secure payment systems safeguard customer information, which is essential to mitigating the risk of credit card fraud and protecting your business’s reputation.

Implementing trusted payment processing software improves financial transaction integrity. Moreover, it proves to customers that your small business can handle data protection and security just as well or better than that of your competitors. In this article, we define the components of a secure payment system, provide examples, and discuss how to choose trusted payment services.

What are secure payment systems?

A secure payment system (SPS) refers to the technologies, infrastructure, and policies that protect sensitive information. It keeps personal data and credit card details confidential and prevents unauthorized access during checkout, ensuring safe processing, transmission, and data storage.

What makes a payment system secure?

An SPS works by applying encryption, tokenization, and authentication. The infrastructure consists of many components. While some elements are mandatory across all platforms and systems, others are specific to certain industries or apps.

How do SPSs protect businesses and their customers? For starters, encryption is a fundamental component of payment security. Electronic processing — whether through an Automated Clearing House (ACH) transfer, in-person credit card payment, or e-commerce purchase — scrambles information into unreadable text. Even if hackers access the data, it's unintelligible.

Tokenization increases security and occurs before encryption when using payment gateways, EMV chip cards, contactless payments, and digital wallets. It replaces sensitive information like credit card numbers with a token, a unique identifier without any exploitable value, meaning it's worthless to malicious actors.

Authentication methods prevent unauthorized purchases by verifying the user's identity. These vary by payment method. For instance, in-person sales require a signature or four-digit PIN. Credit card networks use 3D Secure for online transactions, which may ask for a PIN, password, or 2FA verification.

Mobile payment systems like Google Pay and some digital wallets use biometrics (touch ID or face ID) and device authentication. These methods confirm the payer's identity by scanning facial or fingerprints and reviewing the hardware's profile.

Fraud detection services monitor financial transactions for suspicious activity. Payment processors often have built-in fraud protection systems and may offer add-on tools for high-risk industries or locations. The systems analyze data and patterns to flag or halt unusual transactions.

Lastly, bank or processor-specific systems may take additional steps to confirm the payer's identity before processing a financial transaction. These may include a one-time password or fingerprint scan.

How to choose a payment system

Credit card processors play a significant role in payment system security. The best services partner with your business to fight fraud while delivering excellent checkout experiences. When choosing a payment provider, consider your company's sales channels, accepted payment methods, and risk posture.

See if the processor offers resources or assistance with small business PCI compliance. Also, review their dispute resolution process, fraud detection systems, and customer support options.

Why businesses should prioritize financial transaction security

Fighting fraud isn't easy. But can you afford to lose money and your customers' trust?

The AFP survey found that 30% of organizations couldn't recover funds lost due to payment fraud, whereas 41% retrieved at least 75%. Data breaches, chargebacks, and negative reviews impact your company in countless ways, from the time it takes to respond to clients or follow data protection regulations to operational costs and losses.

Using an SPS and implementing strategies reduces these risks. With the right payment processing partner and a multilayered approach, you can deliver excellent customer experiences while fighting fraud. Best-in-class tools give you a competitive edge and protect your reputation. Instead of putting out fires, your team builds stronger customer relationships.  Source

How Banks Should Choose Their Next Payment Partner

 

Choosing the right payments partner is a critical decision for banks aiming to enhance their service offerings and customer satisfaction. A well-chosen partner can not only streamline banking operations but also significantly improve the customer experience. 

Here are key factors that banks should consider when selecting a payments partner:

1.) Expertise in Product Development: A payments partner with strong product experts ensures that the bank is always at the forefront of innovation. These experts should have a deep understanding of current market trends, regulatory compliance, and the evolving needs of both the bank and its customers.

2.) Sales Enablement and Support: The partner should provide robust sales enablement to ensure the bank's staff are well-equipped to promote and support the new services. This includes training, marketing materials, and ongoing support to help the bank maximize the adoption and utilization of new payment solutions.

3.) Exceptional Customer Service: Outstanding customer service from the partner is crucial. This means having a responsive, knowledgeable, and accessible support team that can quickly address any issues or questions that arise, both from the bank and its end customers.

4.) Diverse and Innovative Product Selection: A wide array of products allows the bank to cater to various customer needs. This range should include the latest in payment technologies, ensuring that the bank remains competitive and can offer cutting-edge solutions.

Banks looking to enhance their payment offerings should carefully consider these factors. With its strong product expertise, sales support, exceptional customer service, and diverse product offerings. Source

1099-K: History and Hints

 

Section 6050W of the IRS tax code came with the Housing Assistance Act of 2008 (although it’s completely unrelated to housing) and introduced us to the 1099-K.

Known as the “Merchant Card and Third Party Network Payments” form, the 1099-K is an IRS effort to increase tax compliance and decrease the “tax gap,” or the difference between what people earn and what they actually report for taxes. It went into action during the 2012 tax season for 2011 income.

Payment settlement entities (PSEs), like us, are required to submit an annual 1099-K to the IRS showing, month by month, exactly how much each of our client merchants earned in electronic sales—credit, debit, stored-value cards and electronic funds transfers—over the fiscal year. PSEs also send the 1099-K to merchants (by January 31) so that they can use it to properly file their other tax forms. Before the dawn of the 1099-K, a lot of tax gaps were thought to come from small businesses accepting payments through platforms like eBay, Etsy, Amazon, ridesharing apps and other third-party sites.

Others also managed to fly under the radar with underreported, or completely unreported, sales. The 1099-K allows the IRS to tighten up the accuracy and enforcement of business taxes.

Businesses who bring in less than $20,000/year and have fewer than 200 transactions/year are exempt from the requirement and won’t receive a 1099-K.

1099-K Business Tips

Make sure you provide your payment processor with the correct Tax Identification Number (TIN), tax filing name and your legal name as the business owner. Also, be sure these match all of the information on your other tax documents. If you provide an incorrect TIN, the IRS may instate backup withholding—taking a hefty 24% of your future earnings until the federal income tax is met. If you do become subject to this backup withholding (you’ll receive what’s called a B Notice warning you of it), you can fix it by providing the correct TIN, amending your return, properly filing any returns that were missing, and paying the owed taxes. Avoid this (literally and figuratively) taxing process by double checking that your business information is up to date and consistent everywhere!

Provide your payment processor with the correct mailing address to ensure timely receipt of your 1099-K. This is particularly pertinent for ecommerce merchants who may not be tied to a physical location.

If you switched payment processors at some point during the year, be sure to include 1099-K reporting data from both of them. A business with multiple merchant accounts will need separate 1099-Ks for each. But any businesses, or branches of a business, with the same TIN use the same 1099-K.

During the year, avoid processing any personal expenses through your business’s electronic payment system. For example, say your friend owes you money and wants to pay you back with a credit card. It might be tempting to use your business’s payment terminal to take the payment. However, that money then becomes part of the 1099-K, and is taxable.

Your 1099-K shows your gross sales from electronic transactions, and does not include chargebacks or returns, so you’ll have to report adjustments under the Returns and Allowances section of your tax return. The IRS understands discrepancies between tax returns and 1099-Ks, particularly for entities like restaurants, as tips made with payment cards aren’t considered taxable income. But they will investigate large inconsistencies that seem suspicious by asking for more documentation to account for the differences, so it’s important to keep all of your transaction records handy.

1099-K requirements can either be a pain or a breeze you barely notice. To keep it the latter, the main things to remember are to keep your TIN up to date with your payment processor, file your taxes honestly, and, when in doubt, bring questions to your payment processor to avoid problems down the road. Source