In the field of payment system design, clear and easy-to-understand diagrams often help us quickly understand complex concepts and processes better than obscure text. With more than ten years of experience in payment architecture design, the author of this article has carefully drawn more than 300 hand-drawn illustrations, covering the core business of the payment system, account classification, accounting direction, capital flow, clearing and settlement process, cross-border acquiring and other key areas.
Payment systems are often obscure due to their specialized terminology or concepts. And I like that “a picture is worth a thousand words”, so I drew more than 300 hand-drawn pictures for the concept of the payment system, and the excerpts are for your reference.
Extremely simplified, the real implementation will be much more complex.
Looking through the entire Chinese Internet, talking about the payment system, this article is the best, welcome to leave a message in the comment area to refute.
At the end of the article, there is a QR code and personal WeChat of the payment discussion group, welcome to add communication.
1. Account classification
In the accounting system, the following account types are usually included:
- Customer account: visible to customers. Including: private personal customer accounts and public merchant accounts.
- Internal account: Not visible to customers. Including: positions, fee income, transition accounts (also known as intermediate accounts), etc.
2. Accounting direction
Illustrate:
The account type and the borrowing direction are the same as plus, and the difference is minus, which is the so-called: DD+, DC-, CC+, CD-.
Example: The user withdraws 100 yuan, and the account is recorded as follows:
DR: User balance (liability account) 100
CR: Withdrawal transition account (liability account) 100
3. Real-time bookkeeping and buffer bookkeeping
Generally speaking, the accounting of customer accounts needs to be real-time, such as user recharge, cash withdrawal, merchant cash withdrawal, user refund, etc.
If these accounts do not do real-time accounting, it will damage the user experience and risk of capital loss. For example, if a user recharges 100 yuan, if the account is not delayed, the user may complain. If the withdrawal is not recorded in real time, the user may withdraw successfully repeatedly. If the refund is not recorded in real time, it may be overdrawn in the refund scenario.
Assuming that accounting takes tens of milliseconds (determined by database performance), an account can only support a few dozen TPS billing requests at most, which must be insufficient for some high-concurrency accounts (also known as hotspot accounts). At this time, buffer accounting is generally used to improve performance. Buffer accounting is usually an internal account or an outflow scenario that allows merchants to overdraft.
To achieve these three challenges, product managers will only continue to appreciate
Good product managers are very scarce, and product managers who understand users, business, and data are still in demand when they go out of the Internet. On the contrary, if you only do simple communication, inefficient execution, and shallow thinking, I am afraid that you will not be able to go through the torrent of the next 3-5 years.
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Buffer bookkeeping usually records the flow first, and then starts a regular task to retrieve the flow, summarize and then bookkeep. The premise is to do a good job in the prevention and control of property loss.
In addition to buffer bookkeeping, there is also a way to split accounts to solve the problem of hot accounts.
The painting is not finished yet, occupy a pit.
4. Accounting accounts and accounting entries
Accounting subjects are to classify accounting elements, such as assets, liabilities, etc. There are usually multiple levels of classification.
Examples of accounting accounts:
Illustrate:
It is enough for the general payment system to use the third level of subjects. Some particularly complex systems may use Level 5 subjects.
For ease of understanding, the above example has been greatly simplified, and the compilation of subjects within each company may vary greatly.
5. Accounting plan
With accounts and accounting accounts, how to let the system automatically record a transaction when it occurs? This is what the bookkeeping plan does. One of the solutions is to formulate different transaction codes for different transaction scenarios, and drive bookkeeping through transaction codes.
Below is an example of a typical payment system’s billing scheme.
6. Accounting date and cut
A fiscal day, also known as an accounting settlement date or accounting settlement date, is a specific date on which a payment platform processes and settles accounts during an accounting cycle. For example, in a distributed environment, there may be a time difference between machines, and a transaction may be processed across days at zero o’clock.
The so-called daily cut, simply understood, is to switch to the next accounting day. Main work:
Lending trial balance: that is, the so-called accounting identity of “borrowing must be loaned, borrowing must be equal”.
- Father-son subjects are calculated and balanced.
- General ledger trial balance.
- Daily, monthly, quarterly, and yearly summaries.
- Accounting date changes.
The core logic of daily calculation balance:
- Debit accrual = credit accrual
- Debit balance = credit balance
- Closing balance = Beginning accrual + accrual
- Cumulative amount of parent account = Cumulative amount of sub-account7. Reconciliation discrepancy processing
Reconciliation generally has several results:
- Balance: The transaction type, number, status, currency, and amount of both parties are the same.
- Long Payment: We have a lot of money. Long payment: Pay 90 yuan, channel liquidation 100 yuan, or we fail, channel success. Refund long payment: 100 yuan refunded, 90 yuan liquidated by channel. Analogy between recharging long money and withdrawing long money.
- Short payment: We have less money. Payment of short payment: 00 yuan, channel liquidation of 90 yuan. Refund long payment: 90 yuan refund, channel liquidation 100 yuan. Analogy of recharging short money and withdrawing short money.
Because there is a certain time difference between us and the channel, when the long and short payments do not match in the T+1 reconciliation, they often enter the doubt list first, and the T+2 reconciliation is still not correct, and then it will enter the difference treatment.
The painting is not finished yet, occupy a pit.
8. Three-tier reconciliation system of bank channels
The first level is the detailed reconciliation of information flow. Check our flow and the flow of bank clearing documents one by one. There may be long and short models.
The second level is bill reconciliation. It is to summarize our statements to generate our bills, and then summarize the bank statements to generate bank statements for reconciliation. There may be inconsistencies between the bank bill and our bill, such as paying a total of 1 million, and the channel is divided into 2 payments, one of 980,000 yuan and the other of 20,000 yuan.
The third level is the reconciliation of accounts. It is whether the bank position recorded internally by us is consistent with the bank’s real balance. There may be a situation where our recorded position is 2.2 million, but the actual bank balance is only 2 million.
9. Payment bookkeeping
We usually talk about bookkeeping, even if it is a simple payment, there will be multiple bookkeeping. What accounts are recorded at what node is generally decided by the financial personnel.
The following is a typical accounting using bank channels for payment, which involves multiple internal accounts such as gateway transition accounts, channels to be cleared, merchants to be settled, handling fees, bank positions, etc.
Illustrate:
Only normal scenes are drawn in the figure, such as differences in detailed reconciliation (long and short payments), bill disparities (less or more channels) and other scenarios are not drawn.
The above is just a typical accounting scheme, and some of the real scenarios are simpler and some are more complex.
Open multiple intermediate accounts, and which account is recorded in what scenario is generally decided by the financial team.
10. Merchant settlement and bookkeeping
Merchant billing and user payment are two separate processes.
Taking a typical merchant settlement to card accounting as an example, it usually involves merchant accounts to be settled, gateway transition accounts, channels to be cleared, channels to be cleared, bank positions and other internal accounts.
Illustrate:
The above is the scenario of merchant settlement to card.
The internal account establishment may vary from company to company.
11. Concise double-entry bookkeeping
The bookkeeping of financial institutions must be based on the double-entry accounting method. The following is a brief explanation of the user using the bank to pay 500 yuan through the payment platform.
Hypothesis: The payment platform uses CMB as the acquirer and has a reserve account in CMB.
Payment platform internal accounts involved:
Accounting steps:
Illustrate:
1) The bookkeeping of licensed payment institutions must be double-entry accounting. Many accounts and subjects were opened internally.
- Debit accounts: assets, receivables, etc.;
- [Credit] account: liabilities, owner’s equity, payables, etc.;
2) Brief lending formula (not too rigorous, but sufficient):
- [Debit] account (such as assets, receivables), [increase] is [borrow], [decrease] is [loan];
- [Credit] accounts (such as liabilities and owner’s equity, payables), [increase] is [loan], [decrease] is [borrow];
3) There are many professional books on double-entry bookkeeping, here are only a few important explanations:
Definition of double-entry accounting: a method of simultaneously registering each economic business in two or more related accounts according to an equal amount.
Bookkeeping principle: there must be a loan, and the loan must be equal.
Accounting basis: accounting identity: 1. Assets = Liabilities + Owner’s Equity; 2. Profit = Revenue – Expenses.
Account: It has a certain format and structure, which can be used to reflect the increase and decrease of a certain economic business and its results in a continuous, systematic and comprehensive record.
Account: The classification of similar financial transactions, such as assets, liabilities, owner rights, income or expenses, etc. belong to the account. General subjects will be divided into multiple levels.
The difference between an account and an account: An account only has a name, and the account includes a structure and format, and each account corresponds to a specific account.
12. Payment system core business
Payment platforms, especially licensed acquirers, will provide a lot of services, in addition to common payments, refunds, cash withdrawals and other services, they will also provide services such as personal bill inquiry and merchant bill download.
Here are only a few of the most core services perceived by customers, including individual customers and merchants.
A licensed payment institution’s system will generally provide the following core customer capabilities:
- Payment (Acquiring): Help merchants deduct users’ money from the payment platform’s account.
- Reversal: Direct closing orders without successful payment, and the money that has been successfully paid is returned to the user.
- Refund: Refund the money paid by the user back to the user.
- Liquidation: External channels give money to the payment platform.
- Settlement: The payment platform pays the merchant for the payment.
- Recharge: The user recharges money to the balance account opened on the platform.
- Transfer: Transfers between users or merchant accounts.
- Dropshipping: Help merchants transfer money to individual users’ accounts. There are drop-to-card and drop-to-balance.
- Transfer: Transfer money between multiple bank accounts within the payment platform due to liquidity management needs.
- Withdrawal: Users withdraw money from the platform’s balance account to an external bank card.
In some cross-border scenarios, the payment system also needs to provide foreign exchange services, such as Chinese merchants selling goods on Duoduo’s overseas brand Temu, and users pay US dollars in the United States, but Chinese merchants need to get RMB in China.
In addition, there will be many auxiliary capabilities, such as merchant settlement, merchant self-service, personal self-service, etc.
Any business within the payment system is completed by multiple subdomains. For example, the sub-process of placing an order in the payment business is first the verification and decryption of the entrance gateway, then the permission verification of the merchant platform, then the risk control system is requested to do risk control verification, the product center is verified, etc., and finally saved and stored in the acquiring domain.
13. The nature of payment
Illustrate:
- The essence of payment is to help merchants deduct users’ money to the account of the payment platform.
- The special ones are balance payment and marketing, which is a virtual account opened by platform content and will not call external channels. Marketing is often also called to the internal marketing system for write-off, divided into paid and unfunded.
- The accounting involved is not drawn here. It is described in detail in the Accounting System section below.
14. Payment Fund Flow
The capital flow will be described in detail in the accounting chapter below, and here is only a brief explanation.
The first is the virtual capital flow, that is, the capital flow within the payment platform, taking the instant arrival mode as an example, as follows:
Illustrate:
After the channel is successfully deducted, the “payment gateway transition account” and “channel to be cleared” will be recorded at the same time. For the sake of simplification, only the payment gateway transition account is written here.
There is also a split account and profit sharing model. For example, merchant A settles in the payment platform through a large merchant B, merchant A charges 98 yuan, large merchant B charges 1 yuan, and the platform directly settles to merchant A and large merchant B, which is a typical profit sharing model.
Physical capital flow is the flow of funds between external banks.
15. Refund Nature
Illustrate:
- The essence of a refund is to deduct the money from the merchant first and then transfer it to the user.
- Refunds for balance payments do not call external channels.
The complete process is long, such as:
After receiving the refund request from the merchant, you need to check the historical contract to check whether the contract supports refunds, whether the refund validity period has passed, and whether the minimum refund amount is met.
The next step will be to enter the stage of preparing refund funds, because from the perspective of capital loss prevention and control, unless otherwise agreed in the contract, the payment platform will generally not refund the advance fund.
In the preparation stage of refund funds, the merchant’s money to be settled needs to be deducted in real time, which is very different from the payment process.
Of course, some payment companies may agree with the merchant to deduct money from a separate refund account, which also needs to ensure that the balance of this refund account is sufficient.
16. Refund Fund Flow
Illustrate:
After the refund verification is passed, funds need to be prepared and collected in the refund transition account. After successfully calling the channel, go to the channel to be cleared.
In order to simplify, only unilateral accounts are drawn, and the actual accounting is double-entry accounting.
There are also some processes that have not been drawn, such as the liquidation documents will be reconciled, and the channel should be cleared, and after reconciling with the channel, it will also be promoted to the bank position.
17. External channel clearing
Simply put, the external channel will first roll the payment and refund transaction data of the day, and then generate a clearing file, after the payment platform gets this file, it will analyze and reconcile with the internal transaction, after the reconciliation is successful, from the account to be liquidated, after the real payment in the channel, the bill is checked, and then from the liquidation to the bank position.
For more details, please refer to the following accounting domain content.
Illustrate:
The external channel pictured in the picture is a third-party wallet scenario, that is, the payment platform and external channels are all accounts opened in the bank, then there will be inter-bank transfers.
In special cases, the external channel is a bank, and the payment platform directly opens an account in this bank, that is, the external channel transfers internally.
18. Merchant Settlement
In the acquirer (payment platform), settlement is to settle the money collected by the merchant to the merchant accurately and in a timely manner according to the agreed settlement rules.
Before settlement, it is necessary to divide the money paid into several parts according to the contract signed at the beginning. For example, if you pay 100 yuan, the platform fee will be 1 yuan, and the merchant will pay 99 yuan.
According to the contract, it can be settled to the balance, or to the card, and the settlement also has a settlement cycle, which is the so-called T+n, where T refers to the transaction time, and n refers to the settlement on the next day. For example, T+0 means that the transaction of the day is settled on the same day, and T+2 means that the transaction of the day is settled on the 3rd day.
19. Deposit
Recharge is to charge the user’s money to the balance account of the payment platform. Because the balance involves the safety of funds, it basically needs to be licensed to operate at home and abroad.
Many licensed institutions want users to recharge, and the benefits are obvious, such as:
- The success rate of paying with balance is extremely high.
- Because there are funds retained, users open more often.
In foreign countries, if liquidity management is used well, because the amount of funds is large enough, the interest or wealth management income is also very high.
The core of the recharge has only 2 points:
- The payment platform calls the channel to transfer the money from the user’s account to the account of the payment platform.
- The payment platform adds the user’s balance account to the corresponding amount.
20. Transfer/Distribution/Transfer
The essence of transfer, distribution, and transfer is to transfer funds from one account to another.
There are some minor differences between the three:
- Transfer: Generally refers to the transfer from person to person. Includes balance to balance, balance to card.
- Agency: generally refers to the transfer from merchants to individuals. For example, paying wages.
- Transfer: Generally refers to the transfer between multiple bank accounts within the payment platform for liquidity management.
There are also two special transfers, namely red envelopes and AA collection. One-to-one red envelopes are essentially one-to-one transfers, and one-to-many red envelopes are essentially one-to-many transfers. The essence of AA collection is many-to-one transfers.
Taking the transfer to the bank card as an example, user A transfers his balance of 100 yuan to user B’s bank card at China Merchants Bank as follows:
Illustrate:
The payment platform first deducts the balance account of user A.
Then call the external channel to transfer, and the bank will transfer the funds of the payment platform reserve to user B’s account.
21. Withdrawals
The essence of withdrawal is also transfer, but the user transfers the money from the balance account of the payment platform to his account in external channels.
The difference from the general sense of transfer is that the transfer is usually a transfer between different users or merchants, while the withdrawal defaults to the money in your own balance account and the account you have opened in an external bank. For example, Alipay or WeChat balance withdrawal to your account in China Merchants Bank.
22. Forex
On the surface, the foreign exchange business is just the exchange of one currency for another, but in reality it is very complicated. For example, it is necessary to distinguish between free-flowing currency and controlled currency, and transactions include spot, forward, swap, etc., involving cross-border e-commerce foreign exchange settlement and inbound foreign exchange settlement.
In addition, the foreign exchange market is the largest financial market in the world.
23. Acquiring evolution pattern
No acquirer model
This is the model of going to the canteen to buy sugar when I was a child, paying money with one hand and delivering it with the other.
Benefits: Easy enough. Disadvantages: Unable to complete online transactions.
In-line acquiring mode
The so-called in-bank acquiring means that the issuing card and the acquirer are the same bank.
Benefits: low handling fees and high success rate. Disadvantages: The business is relatively limited, taking offline acquisition as an example, merchants cannot deploy all bank POS machines.
Issuer and acquirer separation mode
In most cases, the user’s card issuer and the merchant’s acquirer are different banks.
However, this situation has basically become extinct, because the issuer and acquirer need to be connected in pairs to form a huge mesh structure, which is expensive to maintain.
Clearing institution model
There is no direct connection between the card issuer and the acquirer, but through the clearing agency. Clearing institutions are usually financial institutions that operate under the central bank. In this way, a star-shaped structure is formed around the clearing institution, and all banks only need to connect with the clearing institution.
The current interbank transaction is basically this form. For example, China’s UnionPay, foreign VISA, MASTERCARD, etc., are card decks and clearing institutions.
Third-party payment (e-wallet) form
With the rise of Internet payment, another star structure has been formed with third-party payment as the center.
The above diagram is greatly simplified. In China, because of the direct connection relationship, Alipay, WeChat Pay, and other third-party payment institutions behind WeChat Pay are connected to UnionPay and Netlink, rather than directly connected to banks. However, direct banking is still allowed abroad.
24. Payment Consultation
Before paying, you need to call the cashier to check the payment methods available to the user, referred to as payment consultation, or payment method consultation.
The above pictures are the cash register of e-commerce (JD.com) and the cash register of the payment platform (WeChat Pay). It shows that the cash register has many forms of existence.
In the payment consultation stage, the following tasks need to be done:
- Basic checks: payable checks (possible orders have already been paid), user checks, merchant checks, etc.
- Asset consulting: card binding data, account balance, marketing (such as full discount, red envelope, etc.).
- Channel consultation: through currency, amount, channel switch, etc.
- Quota consultation: single quota, daily cumulative limit, monthly cumulative limit, etc.
- Payment method assembly: Assemble the above assets, channels, etc. into a payment method that is easy for users to understand.
- Payment method sorting: Rank the recommended payment methods available to users (consider both user experience and marketing strategy).
Finally, the payment method is returned to the user for the user to choose when paying.
25. Payment acceptance
The user selects the payment method and clicks “Confirm Payment” to reach the payment acceptance stage. It mainly does the following work:
Do all the work in the payment consulting stage. Because users may pay long after the payment method is rendered, a lot of data may have changed in the background, such as the balance has changed, or the order has expired.
After all of them are passed, risk control is called for risk judgment.
If it is a card payment from an external channel, you also need to call the channel routing to select the optimal channel.
Then submit a payment request to the payment engine for a real debit.
Finally, poll the transaction results from the acquiring platform.
To clarify: Why are polling results from the acquirer and not from the payment engine?
Because for the user, the result of the acquisition represents the final payment result.
For example, after the user pays back, the payment engine is successful, but the acquirer will initiate the fund return operation because the order has expired and closed, so that the order of the acquirer platform is actually not successfully paid. The user will be prompted: “The order has been closed, if the payment has been deducted, the payment is expected to be returned in its original way within X working days.” ”
26. Common channel types
Some companies are called channels, and some companies are called channels, both of which mean the same thing. Hereinafter collectively referred to as channels.
The definition of channel type varies from company to company, there is no industry standard, and it is constantly evolving. Let’s start with a few classifications that are still commonly used today.
From the perspective of capital flow, channels are divided into four categories: payment channels, outflow channels, foreign exchange channels, and information channels.
Payment channels
The core role of this type of channel is to realize the inflow of user funds. Specifically, they transfer the user’s funds in the bank account to the payment platform’s reserve account at the bank. This process is extremely common in our daily lives, and typical scenarios include users’ recharge operations and online payments.
For example, when you use a mobile app to pay for a purchase, funds flow from your bank account to the payment platform’s account, and finally settle to the merchant.
outflow channel
Compared with the inflow of funds, outflow channels deal with the outflow of funds. This includes two main scenarios:
- Transferring the reserve funds of the payment platform to the user’s personal or merchant’s bank account is commonly used in scenarios where users withdraw cash or merchants receive payments;
- Transferring funds from one reserve account to another is often used to pay for liquidity allocation within the platform.
Outflow channels ensure the smooth flow of funds between users and merchants, and are an important support for the entire payment system.
Forex channels
These channels involve currency exchange and cross-border fund transfers, supporting the conversion and settlement between different currencies. In scenarios such as cross-border e-commerce and international tourism, foreign exchange channels provide key services for cross-currency capital conversion. With the growth of global trade, the demand for cross-border payments is increasing, and the role of foreign exchange channels has become more important.
Information channels
Such channels do not involve capital flow, such as personal real-name authentication (KYC), bank card binding (pure card binding), etc.
Payment channels
With the development of business and technology, the definition of payment channels is also strange, or keeping pace with the times, the following are some general classifications.
Card channel
Debit/credit card payments: This is one of the most traditional and widely used payment methods. Users make payments by entering their card information, and the funds are deducted directly from their bank accounts. Among them, credit cards also have pre-authorization, invoicing, 2D, 3D and other scenarios.
There are also so-called prepaid cards, which are payment cards that are recharged in advance, and when the user pays, the funds are deducted from the balance of the prepaid card. This is generally not perceived by the payment platform.
Credit card payments in European and American countries are generally used.
In addition to using card plain text for direct payment, many channels now also support the mode of binding first and then using tokens to pay:
The payment process is similar to card plain text payment, except that the token is used to replace the card text in the message sent to the channel.
There are so-called four-way transactions for card payments: merchant, acquirer, deck, and issuer. The four parties here refer to the four types of institutions.
Online banking channels
Complete the payment by jumping to the bank’s website. This operation is troublesome, and password control may also be required, and the success rate is not high, and it is rarely used in China. There are many more abroad.
Fast payment channels
Users bind their bank cards to the payment platform in advance, and there is no need to enter card information repeatedly when paying, which is convenient and fast. It was first invented and promoted by Alipay in China, and the payment success rate increased from about 60% of online banking to more than 96%.
Some foreign countries are called “one-click payment”, which means almost the same thing.
Withholding channels
Withholding payment is a payment method in which a bank or third-party payment platform automatically deducts money directly from the user’s bank account or associated payment account based on the user’s authorization.
The biggest difference between this method and fast payment is that fast payment is the user’s real-time participation in the transaction process, which may cause risk control challenges, such as OTP (SMS verification code), or password, etc. Withholding is authorized in advance, and users will not participate in the transaction process in real time, so there is no way to challenge, either succeed or fail.
Withholding is widely used in cyclical payment scenarios, such as automatic payment of utility bills, membership service fees, subscription services, etc., and Didi taxis, which can get off the car and leave. This method saves users from the hassle of manual payment every time.
Third-party wallet channels
Payments based on third-party wallet accounts. In China, there are Alipay, WeChat Pay, etc., and abroad there are PayPal, GCash, etc.
A third-party wallet is usually a comprehensive payment tool, and in addition to the wallet balance, the wallet may also be bound to a bank card.
Wallets typically offer two modes of interaction:
- Jump mode: For example, if you place an order on the JD.com APP and choose to use WeChat Pay, you will be redirected to the WeChat APP.
- Non-jump mode: For example, place an order on the Taobao APP and directly call Alipay’s password-free payment in the background.
VA channel
Virtual Account. Users pay through a virtual account generated by the bank and are often used in cardless payment scenarios. It is especially used in Southeast Asia.
To put it simply, the user does not have a bank card, but wants to shop online, then the payment platform calls the bank to generate a VA, and bind this VA to the order, and then show it to the user, the user holds this VA, goes to the bank’s ATM or bank counter to deposit cash, the bank notifies the payment platform that the VA is successfully credited, and the payment platform notifies the merchant to ship.
VA will also be used for merchants’ collections (VA accounts), which is another scope and does not belong to payment channels.
OTC channel
Over-The-Counter, over-the-counter payments. In the payment scenario, it is very similar to VA, which also generates a payment code, but this payment code is generated by chains such as 7-11 and KFC, and VA is a bank account. The user takes this OTC code to the offline chain store, gives the clerk cash, the clerk recharges this OTC code, the chain store system notifies the payment platform of the successful payment, and the payment platform notifies the merchant to deliver the goods.
Credit payment channels
The channel grants a certain amount according to the user’s credit, which can be consumed first and then recharged. It is usually called BNPL (Buy Now Pay Later) abroad.
There are Alipay’s Huabei and JD.com’s Baitiao in China. There are many third-party financial institutions abroad that offer similar services.
The payment process is similar to that of a third-party wallet, except that you need to open an account and authorize the quota first.
The difference between credit payment and credit card installment: credit card installment is based on credit cards issued by banks, while credit payment is based on account authorization from third-party financial institutions (without a card, non-banks can also provide services).
In some countries and regions where the penetration rate of bank cards is not high, credit payment is very advantageous.
27. Channel routing
The core role of channel routing is to select the optimal channel based on various factors such as payment success rate, payment cost, user experience, and channel status when multiple channels meet business demands at the same time. The details are as follows:
- Improve payment success rate: By choosing the most suitable channel, you can improve the success rate of payment and reduce user churn caused by payment failure. The reason is that different channels have different risk appetites within them, and the same request will fail in channel A but succeed in channel B.
- Optimize costs: Fees for different channels may be different, and with reasonable routing, payment costs can be reduced. Some channels also have tiered charges, which need to be diverted through different channels to maintain the optimal overall cost.
- Improved User Experience: A fast and stable payment experience enhances user satisfaction and loyalty. If users often pay in channel A, the success rate of sending new requests to channel A for payment tends to be higher.
- Load balancing: Reasonably distribute payment requests to different channels to avoid overloading one channel and improve the stability of the overall system.
28. Minimal payment process
Illustrate:
This is the most streamlined payment process. Real interactions are much more complex than this, and a single cashier render can write an entire article. But it is enough to clarify the role of the payment system.
From the figure, the core role of the payment system can be deduced: helping merchants collect money. Therefore, those with licenses are also called “acquirers”. If you don’t have the qualifications, just do information forwarding, also known as “acquiring transfer”.
Of course, there are reverse operations such as refunds and cancellations, and complex cross-border payments will also have foreign exchange transactions, cross-border settlements and other businesses.
29. Simplified settlement process
Illustrate:
The information flow is drawn here.
The relationship between banks and payment platforms is an institution-to-institution relationship, and the concept of clearing is usually used because the clearing services are mostly completed by independent clearing institutions between financial institutions.
Between the payment platform and the merchant, the settlement concept is usually used, and the payment platform directly pays the merchant. (The difference between clearing and settlement is only in the Chinese environment, the essence is one thing)
The above picture is the balance of the internal account opened by the merchant on the payment platform, so the merchant needs to withdraw money manually, and the payment platform usually supports direct settlement to the card, so that the merchant does not need to withdraw money manually.
The three words clearing and settlement have another meaning: clearing + settlement. The former is to calculate the money clearly, and the latter is to make real payments. There are also some companies called clear division and repayment, the former calculates how to divide the money, and then completes the end of the creditor’s rights and task relationship. Essence is also a thing.
30. The simplest version of this acquiring process
Illustrate:
The so-called cost-to-cost acquiring means that the merchant’s product price currency, the currency of the order to the payment system, the user’s payment currency, and the merchant’s settlement currency are all in the same currency. No forex trading is involved.
A Chinese took a China Merchants Bank credit card and bought two catties of Shandong cherries through Duoduo in China, which is a standard book-to-money acquisition.
31. Simplify the cross-border acquisition process
Illustrate:
The so-called cross-border acquiring means that the currency settled to the merchant is different from the currency paid by the user, and it needs to be exchanged through a foreign exchange agency.
After the EUR deduction is successful, the payment platform will call an external foreign exchange institution to lock the foreign exchange (HA).
After the bank clears, the payment platform calls an external foreign exchange institution for a real foreign exchange (TA).
Finally, the payment platform settles the bill to the merchant in USD.
The above is also just a small cross-border scene, and the real cross-border scene is extremely rich and complex. If you don’t believe me, ask your friends who are doing Russian business and collecting rubles during this time.
If you change to a time series chart, it would look like this:
Illustrate:
The reason why there is foreign exchange lock above is because foreign exchange is changing all the time, and the payment platform does not want to bear the risk of exchange loss, so it directly adds some handling fees to the payment. Powerful payment institutions also do not need to lock up foreign exchange, which is riskier but may have more benefits.
There are also channels that directly provide the ability to exchange currency over the air. For example, if a Turkish user uses TRY to pay, after the payment is successful, the channel side will directly convert it into USD, and then the channel will directly settle USD to the payment platform.
Generally speaking, the currencies of many countries are controlled and cannot leave the country freely, and if you use air exchange to get it directly in USD, it is easier to leave the country.
When it comes to cross-border scenarios, it is often necessary to design a variety of capital flows, the most important of which is to consider compliance demands, and sometimes income. If the ability is strong, the use of liquidity management, the amount of funds is large, the income is still very considerable, after all, it is not like a country that requires 100% of the reserves to be deposited with the central bank and does not pay interest.
32. Slightly more complex cross-border payment examples
Let’s take the most typical e-commerce shopping as an example (just an example): Xiao Ming used PayPal to pay $50 through Duoduo Wallet (overseas) at Pinduoduo e-commerce (overseas).
The simplified interaction diagram is as follows:
Illustrate:
Licensed third-party payment institutions and e-commerce are independent legal entities, so Duoduo Wallet and Duoduo E-commerce are independent of each other and need to go through independent settlement.
In order to highlight the key points, many intermediaries are omitted in the middle, such as Citigroup can only transfer money to HSBC through the clearing network, and the clearing network is skipped first.
To simplify the description, there are a few more assumptions:
Suppose Pinduoduo e-commerce chooses to settle to a bank card. There is also a scenario where the e-commerce company chooses to settle the balance and then withdraw it manually.
Assuming a single-currency scenario, the cross-currency scenario also involves foreign exchange exchange.
33. Minimal information flow and capital flow
Illustrate:
When a user recharges 10 yuan on the payment platform, the payment platform initiates a deduction request from the bank, and these instructions belong to information interaction and information flow.
Real Money Flow: Changes in bank account balances. For example, the bank internally reduces the user’s balance by 10 yuan and adds 10 yuan to the reserve account of the payment platform.
Virtual Fund Flow: Changes in account balances within the payment platform. For example, the payment platform will add 10 yuan to the bank receivable account and 10 yuan to the user’s balance account.
Why is there a distinction between real and virtual capital flows? Because the place where we can really get money is the bank, what we see in the payment system is only a number, if we want to turn it into real-world money, we have to send it to the bank to withdraw money.
34. Added simplified information flow and capital flow for settlement
In the payment process, the merchant entrusts the acquirer (payment platform) to collect the user’s money, and then settle the money to the merchant.
The following is an example of a typical card payment through an external channel.
Illustrate:
The user’s money ends up in the merchant’s receiving bank account. In real life, the money paid by users will be divided into multiple parts, including fees charged by the channel, handling fees charged by the payment platform, taxes, marketing profit sharing, merchant settlement payments, etc. Channel fees can also be further subdivided into card issuer fees, acquirer fees, clearing agency fees, etc.
Inter-bank generally needs to go through a clearing agency, which is not drawn here for simplification.
The flow of funds inside the payment platform is given in the detailed version.
This diagram has duplicates.
35. Simplify the agreement relationship of cross-border acquiring
Illustrate:
This is just a kind of agreement relationship for cross-border acquiring, and there are many forms in real scenarios.
The above-mentioned acquirers are licensed, but do not have the ability to settle cross-border, so they need to entrust financial institutions with cross-border settlement licenses to handle cross-border settlement business on their behalf.
The cross-border e-commerce platform is only a merchant platform and does not have the qualification to acquire, so it needs to entrust the acquirer to settle and pay the suppliers below it.
The rest of the agreements are clear at a glance, but we don’t pay attention to them on a daily basis. For example, there will be a membership agreement to be signed between the user and the e-commerce platform when registering.
Under special circumstances, some powerful institutions, such as Ant, Tenpay, Lianlian Payment, Air Yunhui, etc., will set up multiple entities, and then use different entities to apply for different licenses (acquiring, banking, foreign exchange, cross-border consignment, etc.), so that on the surface, all of them are handled by one company, but the actual agreement relationship is still the same as above, and various agreements still need to be signed between entities.
If the cross-border e-commerce goods are all self-operated by the e-commerce entity, it is even simpler, and there is no agreement for suppliers to entrust settlement.
If the e-commerce company wants to open a balance, it can entrust a third-party licensed company to host it (usually also an acquirer, and the acquirer will generally apply for a PA and PG license at the same time), in this case, the e-commerce platform and the acquirer will also sign an account entrustment agreement.
36. Simplified cross-border funding scheme
Illustrate:
This is a typical case of cross-border capital flow. When the user pays USD, the acquirer receives USD, but needs to settle CNY to the merchant in China.
The acquirer (i.e., the payment platform) needs to convert USD into CNH (Offshore Yuan), and then the inbound issuance agency will settle CNY to merchants in China. This is the so-called “foreign exchange settlement entry”.
If the method of “inbound foreign exchange settlement” is adopted, the acquirer will directly settle USD to the merchant’s overseas bank account, and the merchant will remit USD into the country and then convert it into CNY. Or the acquirer first remits USD to the domestic reserve account, then converts it into CNY, and then settles CNY to merchants in China.
The above different fund treatment plans are collectively referred to as funding plans.
Different capital plans, on the one hand, should consider compliance demands, and on the other hand, consider the maximization of returns and the timeliness of capital turnover.
37. Core System Dependency Diagram
Illustrate:
The picture is drawn more clearly, and there is not much to add.
The blue line is the main payment link.
The real call relationship is like a spider web, starting from simplicity, some dependencies are not drawn, such as the cashier core will also rely on the card center to write and read card binding information.
38. Payment security
Payment security is a comprehensive system project, in addition to technical means, it also needs to establish a sound security system and compliance system, the latter two are usually ignored by most people.
The following figure is a simplified version of the payment security map, which contains the core points to consider for payment security.
The system is the foundation.
In which scenario encrypted storage is required, what algorithm is used for encryption, how many digits are required for the minimum key length, and which scenarios need to be signed and verified, these are all clear in the system. Systems are usually divided into industry systems and internal security systems. Industry systems are usually laws and regulations formulated at the national level, such as the Cybersecurity Law and the Measures for the Administration of Payment Business. Internal security systems are usually established by companies based on their own business and capabilities, and small companies may not have them.
Payment security is a big category, but we generally only need to focus on the following core points:
1. Secure storage of sensitive information.
Secure storage of sensitive information for individuals and merchants/channels.
Sensitive personal information includes ID card information, payment card plaintext data and passwords, etc., while sensitive information of merchants/channels involves merchant login/operation passwords, channel certificate keys, etc.
2. Secure transmission of transaction information.
Ensure the security of data transmission between the client and the payment system server, between the merchant system and the payment system, between the internal server of the payment system and between the server, and between the payment system and the bank. This includes measures such as encryption to ensure security during data transmission.
3. Anti-tampering and anti-denial of transaction information.
Ensure the integrity and authenticity of transaction information and prevent transaction information from being tampered with or denied. A typical transaction usually involves four parties: users, merchants, payment institutions, and banks, ensuring that the information sent by all parties has not been tampered with or denied.
4. Fraudulent transaction prevention.
Identify and prevent fraudulent transactions, including cash-out, money laundering, and other violations, as well as protect user assets by identifying user information leaks and suspicious transactions. This aspect is usually the responsibility of the payment risk control system.
5. Service Availability.
Prevent DDoS attacks and ensure the stable operation and service availability of payment systems. By deploying firewalls, intrusion detection systems and other technical means, we can detect and respond to possible DDoS attacks in a timely manner to ensure the normal operation of payment services.
39. Capital loss prevention and control
All payment companies attach great importance to capital loss (loss of funds), ranging from money to public opinion turmoil.
Payers who often walk by the river, if they want to reduce wet shoes, must understand the construction of the property loss prevention and control system.
The essence of capital loss
The essence of asset loss prevention and control
The whole life cycle of asset loss prevention and control
Classification of asset loss risk There are many types of asset loss scenarios, but the classification is only the following categories:
Asset loss scenarios and responses
Too large, skip it.
40. Organizational Structure of CLS
The system with the largest daily transaction volume in the world is CLS (Continuous Linked Settlement), which focuses on foreign exchange trading.
Illustrate:
CLS Group is a private company based in Switzerland with 79 shareholders (including the Bank of China), and the central banks of each participating country form the CLS Supervisory Committee.
CLS Group owns CLS UK, which owns CLS Bank, which is a bank that operates the CLS system, as it is based in New York, USA, and regulated by the Federal Reserve.
CLS Service provides services to CLS Bank.
The CLS system is connected to the RTGS system of central banks to provide real-time settlement services. CLS has accounts with central banks for trading.
Currently, 75 clearing member banks can directly participate in CLS trading, and the other 35,000 trading through these 75 clearing member banks.
41. How the CLS system works
The core concept of the CLS system is Payment Versus Payment (PVP).
To put it simply, both buyers and sellers of foreign exchange send funds to CLS, and after CLS receives funds from both sides, they send funds to buyers and sellers at the same time to complete the delivery, and CLS plays an intermediary role.
Through this mechanism, the CLS system ensures that the funds of both parties are delivered at the same time, thus avoiding the risk of unilateral performance failure.
This model is very similar to Alipay’s guaranteed transaction, except that Alipay first collects the buyer’s money, the seller delivers, and after the buyer confirms the receipt, Alipay calls the money to the merchant, and Alipay is the intermediary.
Specifically, the operation process of the CLS system is as follows:
- Transaction confirmation: Banks and financial institutions around the world report foreign exchange transactions to the CLS system through SWIFT, including transaction amounts, exchange rates, and other information.
- Transaction Matching: The CLS system matches all submitted transactions to ensure consistent transaction information between both parties. If the information is matched, CLS will hold the transaction and wait for the delivery date to arrive.
- Settlement and clearing: On the settlement date, the CLS system will notify the participants to transfer the funds payable and receivable to the accounts opened by CLS Bank in the central banks of various countries. The CLS system ensures that funds can be received in a timely manner by connecting with real-time full settlement systems in various countries (such as Fedwire in the United States, CHATS in Hong Kong, etc.). The CLS system will only deliver funds after both parties have received their funds.
- Payment and Delivery: After confirming the funds, the CLS system completes the delivery of the foreign exchange transaction and pays the funds to both parties.
CLS ensures the synchronization and security of fund delivery, avoiding the risk of funds not being delivered in time.
42. Chargeback and chargeback evidence
Illustrate:
(1) The cardholder initiates a chargeback (chargeback occurs) → (2) The card issuer reviews the chargeback → (3) The card issuer issues a chargeback request to the acquirer through the card network → (4) The acquirer notifies the merchant → (5) The merchant provides evidence of the transaction (chargeback proof) → (6) The card issuer or card organization decides whether to maintain the chargeback based on the evidence submitted by the merchant (chargeback liability).
If it is determined that the merchant is responsible, the refusal is established and the money is returned to the user.
If it is determined that it is the user’s responsibility, it is a reversal of refusal and settlement of money to the merchant.
The initial chargeback decision is not a definitive decision. When the merchant is dissatisfied with the initial refusal decision, it can provide more complete and stronger evidence again within the specified time. This is known as “secondary evidence”.
The result of secondary evidence may determine the responsibility of the merchant or the user.
After the second judgment, if there is still a dispute between the two parties, the deck will intervene in the final arbitration.
The result of the arbitration shall be final. And the losing party shall bear the arbitration costs. Arbitration fees are often hundreds of dollars, just to allow everyone to negotiate and avoid arbitration.
43. Cross-border Acquiring
Note: The above process is only one way of cross-border acquiring, and there are many other ways, such as entering US dollars before settling foreign exchange. It also involves the review and interaction of the SAFE, which has been simplified. It is also possible that merchants directly collect US dollars and then settle foreign exchange into the country by themselves.
44. Cross-border collection
Illustrate:
The above is just an example of one of the business forms (foreign exchange settlement and entry), in reality, collection institutions usually provide a variety of services.
For convenience, use Yinhui as an example of a collection agency, which can of course be WF or Pingpong. Airwallex signed a contract with CITI to get a batch of VA accounts.
After the merchant signs up with Airwallex, the merchant is assigned a VA account. The merchant configures the VA account assigned by Airwallex to Amazon’s collection account. After the consumer pays on Amazon, Amazon will transfer the settlement to the VA account at checkout.
CITI receives VA payments through Airwallex, which adds an amount to the merchant’s account, and then remits the funds to the merchant’s account in the domestic bank through “inbound settlement” or “foreign exchange settlement”.
45. Conclusion
A picture is worth a thousand words, I hope this selected 60 high-definition large pictures will be helpful to everyone to learn the design and implementation of the payment system.
The content mainly includes the core business of the payment system, payment process, settlement process, cross-border acquiring, information flow and capital flow, account design, bookkeeping, reconciliation, etc.
Most of the related concepts have been simplified to the extreme, which is excellent for introduction and sufficient for understanding concepts. However, the actual implementation is much more complex.
These concepts are like small pieces of the puzzle of the payment core system, and strung together these small pieces are of great benefit to understanding the big picture of the payment system.
