The Landscape of Payment Processing

As both a customer and business owner, I’m excited about the potential that mobile payments present.

Mobile payments can speed up the checkout process, make it not necessary to bring my credit card everywhere, and allows me to make purchases or lend money to my friends with just the tap of a button.

Despite the possibilities, the payment industry has yet to catch-up.

For example, it’s great that I can use my phone to make an ecash purchase, but if I still have to carry my dang wallet because I need my ID or license, it’s not really all that life changing.

On top of that, there are also a lot of questions that haven’t been answered.

How much am I being charged to accept or receive funds from someone in another country? When will I have access to these funds? How secure are these payments?

Unfortunately, when you start digging for answers, there may be even more questions because the current payment infrastructure is so confusing that it downright sucks. For example:

Quotes, Pricing Models and Fees

Let’s say that you just opened up a coffee shop. You have multiple ways to accept credit cards, like getting the typical POS terminal or a gadget like Square.

But, do you know how much that terminal or payment gateway is actually costing you?

This is one of the most confusing, and infuriating, things about payments. There’s no consistency when it comes to quotes for payment processing fees, pricing models, and transaction fees.

In most cases, the average credit card processing cost for a retail business is around 1.95 percent to 2 percent, if the card is physically swiped in-person, but will be approximately 2.3 percent to 3.1 percent for card-not-present transactions, such as with your phone or online orders.

Since that percentage can vary, you should do some homework and compare quotes from multiple vendors in order to get the lowest quote possible.

Yet this is very time consuming. If you’re not familiar with the average cost of processing, then you could get taken advantage of, and most people do.

There are also different pricing models to consider, but the most popular options are tiered pricing and interchange-plus.

Tiered pricing gives the merchant an opportunity to qualify for vendor-determined rates.

With interchange plus rates, the rates have already been set by companies like Visa or MasterCard. Since interchange plus rates are more transparent, it’s better to use that option when comparing quotes.

But, this doesn’t mean you’re out of the clear just yet. There are the attached fees that include:

Monthly fees
PCI compliance fee
Gateway fee
Annual fee
Equipment warranty fee
Monthly minimum surcharge

There’s also incidental fees, such as:

Chargeback fees
Early termination fees
Application fees
Setup fees
PCI non-action fees

And, that’s not getting into the fees it costs you to withdraw money from an ATM or when sending funds overseas.

These fees should be addressed in your contract. But, there are a lot of shady reps out there who only want to tell you what you want to hear.

Make sure that you thoroughly review a contract before signing it so that you’re not caught off-guard.

Compatibility

To be fair, this is an area that has been somewhat addressed. I remember years ago the headache that I had when figuring out how to accept payments online.

I would have to set-up a merchant account with my bank, find a payment gateway like PayPal, and then use payment solution software to integrate my site or app. Today, Square and BrainTree have simplified this process.

However, those solutions haven't completely solved the issue of easily transferring funds between parties.

For example, Dwolla is a great payment gateway. But, you can only send money to someone if they have a Dwolla account too.

This is not the end of the world, but can you imagine the ease and the joy of just being able to send money via a phone number, regardless of which payments gateways you or the other party is using.

But, there is still some confusion on the compatibility of devices.

For example, you may have noticed that a lot of retailers now have those new POS terminals that accept EMV, aka those credit card with chips in them.

Does that mean that your old card no longer works? Are all businesses required to update their terminals? (BTW: no, they are not required to change their terminals.)

In short, your old card does work, but you’ll probably get a new card with a chip soon, and retailers are supposed to make the shift.

There’s also been a lot of talk surrounding Apple Pay, Android Pay, and Samsung Pay. If you’re not familiar with these devices then this presents a whole new set of problems.

For example, you can’t use these digital wallets with all carriers, devices and merchants.

For example, if you own an iPhone, you can’t use Samsung Pay. You’ll have to use Apple Pay, but Apple Pay may not be accepted by the retailers that Samsung Pay is.

Ugh. I know. It can make your head spin if you’re new to mobile wallets.

Non-Payments

If your business relies on subscriptions or recurring payments, then you probably have a system in place that automatically charges your customers or clients.

But, does this system keep tabs on when the credit card that is stored expires? For some small businesses, they don’t have software that notifies them and the customer that their payment information has to be updated.

If you fall into that category, then you may have already had the of experience non-payments. Not only does this decrease your cash flow, it essentially just gave your customers or client free services.

And, trying to recoup those lost expenses is another nightmare that you have to handle.

Unless you have a system with an automatic account updater that monitors any changes in billing information, such as expiration date or change of address, you may have to manually do this.

And, that’s not exactly the most ideal situation for either party.

Security

Whether it’s transferring money online, checking out with an EMV card, or using a digital wallet, the main concern involving payments is the security.

The security may not actually be all that great. According to a survey of 900 cyber security experts, a mere “23 percent believe that mobile payments are secure in keeping personal information safe.”

To make matters worse, just because a payment platform claims that it’s secure doesn’t mean that it's true.

Dwolla was recently busted for just that. The Consumer Financial Protection Bureau slapped the online payment platform with a $100,000 penalty after discovering that not all data was encrypted.

In fact, the company failed to live up to it’s claim that it surpassed industry security standards.

With payment platforms promising customers that their system is secure, each platform is using various methods to deliver this promise.

Apple Pay and Samsung Pay, for example, both use fingerprint identification and tokenization, but not all platforms offer these levels of security.

This makes choosing a secure platform a bit tricky since you can’t be 100 percent sure on the level of security.

Most customers and businesses aren’t aware of PCI compliance, which are the security standards for processing credit cards.

Global Payments

The world has gotten a whole lot smaller as technology continues to advance. We can Skype, text, email, or sell goods to a friend, relative, or customer from anywhere in the world in real-time.

The exception? Payments.

Erin McCune of Glenbrook Partners, a research and consultancy firm focused on payments, says, “There is no such thing as an international wire.” Instead, “Each country has its own payment systems.”

McCune adds, “There are typically two flavors of bank transfers: option one: an ACH or credit transfer system, generally slower and cheaper; and option two: wires, which are faster, typically irrevocable, and more expensive. These payment systems only work within their respective countries. Typically only banks that are licensed and regulated in a country have access to its payment system. Payment system transactions are denominated in the currency of their respective country.”

“International correspondent banking is, in essence, a giant, decentralized network. Each bank makes a decision as to how it wants to handle cross-border payments for its customers," McCune says. “At the end of the day, money doesn’t cross borders. There is no international wire, just a series of domestic transactions. One bank ends up with more money in its correspondent account: the other bank ends up with less money in its correspondent account.” This is not only confusing, it also presents the following problems, according to PYMENTS.com:

International payments are slow. For example, sending money from the UK to Australia can take 2 days.
International pays are also expensive. For some customers, it could be as high as 15 percent.
Since international payments go through multiple banks, you will have to tack on additional transaction fees that each bank takes out. This prevents you from knowing how money you’re actually spending.

In short, global payments are absolutely not working. They're broken.

Will Payment Systems Improve?

If there’s a bright side to all of this, it’s that the fintech industry is booming. In fact, it’s projected that banks will be spending $19.9 billion in 2017 on financial technology.

One of the more promising developments, is digital currency, such as bitcoin and blockchain. The blockchain is one of the most talked about cryptocurrencies these days, and for good reason.

As Bitcoin.org describes it:

“The blockchain is a shared public ledger on which the entire Bitcoin network relies. All confirmed transactions are included in the blockchain. This way, Bitcoin wallets can calculate their spendable balance and new transactions can be verified to be spending bitcoins that are actually owned by the spender. The integrity and the chronological order of the blockchain are enforced with cryptography.”

Transactions can only be verified if both parties sign each transaction with a private key. This means that transactions are very secure.

Since coins can’t be used more than once or duplicated, there is no concern over counterfeiting or fraud.

Since the blockchain is decentralized, you can bypass all of the fees and confusion that come with the current payment industry.

And, blockchain transactions are almost immediate and are compatible on all devices if you have a digital currency app installed.

Digital currency like the blockchain may not solve every fault with payment systems, but it’s still an incredible piece of technology that can remove most of the confusion and repair the current payment infrastructure.

Payments Suck: Breaking Down the Current Landscape of Payment Processing