Online Payments for Developers - Part 1

I must admit, when I joined PayPal 2 months back (in Nov) as the Developer Evangelist for PayPal X, I was little excited and little scared. Well everyone can feel the excitement with new Job, new opportunities, new place, new colleagues, etc., but back of my mind there was always a little uncomfortable feeling about Payments and related things, mainly because it's not only a new technology area for me, but also I never knew how payments work behind the scene. Though I am big time online shopper (bought my car online 10 years back on carsdirect.com - still the biggest purchase I've made online) and a heavy credit/debit card user, to be honest I never really bothered about how they work.

Given my technical background in Online Identity, Authentication and Authorization areas, I was able to quickly come up to speed on the technology side, and with great help from my new colleagues and friends at PayPal, and a few resources online, I've learned a lot about what goes on behind the scenes on the Payment networks now. I know there are a few out there just like me, who is kind of curious to know how it works or want to build something that deals with online Payments but little apprehensive due to lack of understanding of various things that you would have to deal with. So I thought I would give some basic information, which might help you learn a little bit more and helps in building something that might change the way we pay. :-)

Well to begin with, as we all know, Payments in the modern days usually mean transfer of money (in whatever currency it is) from one party to other, made in exchange of goods, and services, or some times as gifts, donation and support. Payments started back in the old days with people exchanging goods and services that they could offer, for another (bartering) from their fellow citizens. But in the modern days, payments are commonly made using Money (currency/cash notes and coins), Credit/Debit Cards, various forms of Checks (Personal, Demand Drafts, Cashier’s, etc.), and Bank transfers from account to account. While the first one that involves money in physical form is called “Cash-based Payments”, all the others that do not involve money in physical form are called “Cashless Payments“.

Also just as there are different types of payments being in use today, there are quite a few different names used to indicate who the Senders and Receivers are for a given payment transaction based on their role and participation.

Cashless Payments are more appealing to everyone as they reduce the overheads of handling cash, cuts down on the risk of theft, the inconvenience of having to the find the right amount of change for a vending or car park machines, and more over, they make payments possible in the online electronic world where direct Cash-based Payments are just impossible.

There isn’t much to discuss on the technical side of Cash-based Payments, apart from the conversion rates across different currencies, several rules and regulations imposed by different countries and governments, several accounting systems that the financial organizations operate on and last but not least the actual printing of the currency J. On the other hand, Cashless Payments are technically more challenging given the various forms of online money transfers, and due to the fact that there is no physical money moved between different parties.

The Cashless payments are typically processed through commercial and Govt. controlled Payment Networks. There are several Payment Networks available to provide the cashless payments functionality in both physical and online worlds. Fortunately for developers, the Payment networks they use online hide most of these complexities. So that gives the developers the choice of choosing the form of payments that best fits their applications and use cases, and in some cases that provides them with the best transaction fee too. Almost every form of payment through a payment network involves either a per-transaction fee or a subscription fee or a combination of both.

Payment Networks

As mentioned earlier, the cashless payments consist of payments using Credit and Debit Cards, various forms of Checks (personal, cashier’s, demand drafts, etc.), and bank transfers between accounts. Out of the 3 types, though more recently they are processed through the same payment network as bank transfers (after they are scanned and processed by banks), the Checks based payments are generally not suited well for the online transactions. The rest of the two falls into 2 types of payment networks categories:

• Clearing House Based Network
• Card Based Network

Alright I think that's too much for a single post :-) - I will write more about these 2 Payment networks in the next couple of blog posts starting with Clearing House Based Networks.

Disclaimer: This information is in no way a complete/authoritative guide to payments and payment networks. This is just for giving a very quick and high level intro to how online payments work for people like me.