The Payments Industry Ecosystem: Trends, Components & Key Players
Money makes the business world go round.
If you own or manage an ecommerce business, understanding the payment industry ecosystem can open doors to smoother transactions and more satisfied customers.
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To make things easier to take in, I’ve broken this guide down into five digestible sections:
- Payment industry history overview: From ancient times to the digital age.
- Getting to know the key players: Who's who in the modern payments ecosystem.
- The payment processing cycle: How these players work together to complete transactions.
- Industry regulations and compliance: The rules they must follow to keep everything running safely and smoothly.
- Developing trends: What’s on the horizon for the payments sector.
Each one will help you understand how payments work in ecommerce and spot opportunities for process optimization.
Let’s start.
Payments Industry: History And Evolution
People in the past found ways around the limitations of ancient payment systems, which led to the many innovative solutions we know today.
Understanding their history can clue us into where they are headed. So let’s go back to where it all started:
- Neolithic and Bronze Age credit systems: Ancient economies relied heavily on credit in the form of verbal agreements or written IOUs.
- For example: Babylonians ran up a tab in the local alehouse, which they’d settle come harvest time using monetized grain and silver. This early credit system was more common than barter in everyday transactions and formed the backbone of most local economies.
- Barter (between strangers): Contrary to the popular myth, barter didn’t replace earlier credit systems. It was primarily used between strangers or groups without established trust, while regular trade partners continued to rely on credit.
- For example: No one would carry grain or silver to a pub to buy a drink—they’d simply run a tab. According to anthropologist David Graeber, barter was never a dominant form of exchange in ancient economies; it mainly occurred in one-off interactions, not as a widespread practice.
- Coinage. The earliest records of coins were traced back to the Lydian kingdom in the 6th century BC.
- Coinage was made from precious metals like gold and silver, and their intrinsic value allowed them to be used across a wide range of regions. As governments diluted metal content in coins, their value became more dependent on the stability of the issuing authority.
- Paper money. The inspiration for paper money was the promissory notes of China, Carthage, and Rome from 2,000 years ago. These written IOUs meant paying an individual its equivalent in precious metal (which became coins later on).
- In the 11th century (Song dynasty), China developed paper money called “jiaozi” based on these promissory.
- First European checks. Trade networks flourished across medieval Europe. By the 1400s, European cities used checks to eliminate the need for multiple intermediaries required with bills of exchange.
- Bills of Credit. Massachusetts issued the first bills of credit in 1690 to circumvent the British’ suppression of banknotes and other developments. Other colonies followed suit.
- Wire transfer. Western Union pioneered the world’s first wire transfer service in 1871. Telegraph wires enabled faster and more secure long-distance transfers than traditional mail.
- First credit card. On October 1, 1958, American Express introduced the first internationally accepted use of a credit card in a paper format with hand-typed details. It then released the embossed ISO 7810 plastic cards the following year.
- First public packet-switched network. The U.S. Department of Defense launched the Advanced Research Projects Agency Network (ARPANET) in 1969. ARPANET enabled secure communication and data transfer, pioneering the development of online payment systems.
- EMV. EMV—Europay, Mastercard, and Visa—enhanced card security in the 1990s by introducing embedded chip technology. Before this innovation, credit and debit cards used magnetic stripes that were easily reproduced and susceptible to fraud.
- First ecommerce payment. The first retail purchase made over the Internet happened between two friends on August 12, 1994.
- Dan Kohn sold a Sting CD to his friend Phil Brandenberger through his website, NetMarket. The transaction used encryption technology to secure Brandenberger’s credit card information during the purchase.
- Encryption protocols. This first Internet sale set off a series of innovations in online payments. The next major leap was security and accessibility.
- Introduced in the mid-1990s, secure encryption protocols like Secure Sockets Layer (SSL) made it virtually impossible to intercept payment information. If hackers attempt to eavesdrop on the data flow, the information would be scrambled and unreadable.
- Digital payments. Digital and mobile wallets followed and enabled consumers to complete payment transactions with a single tap or swipe.
- PayPal, founded in 1998, was one of the earliest digital payment platforms. It facilitates online payments and money transfers between users via email and later through its website and mobile app.
The emergence of digital payments wasn't the end of technological advancements in this sector. Further developments continue to make online payments more reliable, efficient, and convenient through the years.
These have helped customers welcome ecommerce as an alternative to traditional shopping with open arms.
Security innovations have made shoppers feel more at ease with sharing their sensitive payment information over the internet. They also value the speed and accessibility modern payment solutions provide.
In the case of ecommerce companies—regardless of size—these solutions are instrumental in reaching a global audience.
They’re one of the key players shaping the future of payments. Below, we’ll dive into the rest, and illustrating the importance of their roles within the ecosystem.
Key Players of the Payments Ecosystem
The payment industry is made up of different players.
Knowing how their role fits into the workflow will help you identify the right technology and partners for your business.
Issuing banks
Issuing banks (aka card issuers) are financial institutions that provide payment cards to your customers.
Whenever a customer makes a purchase on your site, the issuing bank decides whether to authorize or decline the card transaction.
These banks charge the acquiring bank—your bank—a credit card processing fee because they take on the risk of fraud and non-payment.
Acquiring banks
Acquiring banks process card payments on your behalf and deposit the funds into your merchant account, minus any processing fees.
They face pressure from card networks like Mastercard and Visa to monitor and help merchants facing high chargeback rates, as they’re in charge of handling disputes.
However, reducing chargebacks falls squarely on your shoulders. The acquiring bank can impose stricter requirements and classify your business as high risk if the issues persist.
It can also lead to account termination and inclusion on the Member Alert to Control High-Risk Merchants (MATCH).
With your business appearing on the blacklist, it’ll be difficult to find new acquiring banks, limiting your ecommerce payment processing capabilities.
Payment networks
Payment networks, also called card networks, route transaction information from your payment processor to the issuing bank for authorization.
Mastercard, Visa, Discover, and American Express are industry giants with which we’re all familiar.
They handle various tasks—from payment verification and authorization to fund transfer—to guarantee the money flows smoothly from the customer’s bank to yours.
Payment processors
Payment processors manage the electronic transfer of funds between customers and businesses.
They integrate with your checkout system, validate transactions, safeguard payment data, and facilitate fund transfers.
In exchange for using their service, they charge processing fees.
Each payment processing software has their own fee structure, which you'll have to learn about.
As Eric Cohen of Merchant Advocate, a platform that helps businesses cut down on credit card costs, shared:
Merchants can greatly benefit from educating themselves about the language processors use so they can proactively review their statements for any discrepancies or hidden fees and ask the processor to remove them.
The best processors offer more than secure movement of funds. They’re also transparent.
The following solutions tick both boxes and more:
Payment gateways
Payment gateways are the ecommerce equivalent of a brick-and-mortar shop’s point-of-sales (POS) hardware systems.
They encrypt data to protect customer payment information before from unauthorized access during checkout. Then tosses it to the payment processor to complete the transaction.
Choosing the best digital middleman for the job boosts payment security, so you need a reliable one.
Here are our top picks:
Merchant services providers and ISOs
Merchant Services Providers (MSPs) set up merchant bank accounts and supply the necessary hardware and software for transactions.
Independent Sales Organizations (ISOs) are one of these third-party MSPs.
MSPs and ISOs operate as intermediaries for card networks and traditional banks, but they provide better support for small businesses and startups than the latter.
While acquiring banks focus on the broader market, MSPs and ISOs can tailor their processing services to meet specific business needs, often offering better rates and more innovative solutions.
Moreover, they often provide better customer service and faster response times.
Digital wallets and mobile payments
Integrating digital wallet options, like Apple Pay and Google Pay, reduces friction during checkout, as modern shoppers prefer them owing to their convenience.
It’s likely why 70% of US customers made a mobile phone or tablet payment at least once in 2023.
They don’t have to manually enter credit card details or leave the checkout page to enter a security code.
They simply have to tap their device for payment or use biometric authentication like fingerprint or facial recognition.
The Payment Processing Cycle
With too many entities involved, payment processing can be difficult to grasp.
To make it easier to take in, we’ll put you in the shoes of a nutraceutical brand called LumiNourish.
Let’s go through the different milestones of the cycle, as well as pitfalls and the best practices to counter them.
1. Customer initiates payment
Rue, a loyal LumiNourish patron, treats herself to her favorite hydrating skincare set on their website.
She opts for a saved digital wallet to expedite the checkout process.
Alternatively, when visiting LumiNourish’s physical shop, she taps her card on the terminal equipped with Near Field Communication (NFC) technology.
NFC technology secures contactless payments by enabling wireless communication between a card or mobile device and the terminal.
2. Payment gateway encrypts and transmits transaction data
Once Rue finalizes her online payment, LumiNourish’s payment gateway encrypts the transaction data to protect her card details.
Encryption scrambles her credit card number, expiration date, and CVV code into a secure, unreadable code malicious hackers can’t intercept.
This process may encounter timeouts or errors if the gateway and the platform’s APIs aren’t properly configured.
Retry mechanisms, like automatic reattempts and fallback protocols, can help resolve issues. Payment gateways like Stripe use machine learning to increase the chance of payment success.
3. Payment processor forwards data to the acquiring bank
The payment processor forwards the encrypted data to LumiNourish’s bank.
If the payment processor sends an incorrect bank account number or routing number, the latter can’t route the payment. This mismatch can result in failed transactions.
If the details are correct, LumiNourish’s bank will receive the encrypted data for verification.
4. Acquiring bank requests payment authorization
The merchant’s bank requests payment authorization from the issuing bank—Rue’s bank—via the payment network. Tokenization adds a layer of security in this stage by replacing her data with a token.
5. Issuing bank approves or declines the transaction
Rue’s bank checks if her card is valid and if it has enough funds or credit to complete the purchase.
If everything checks out, the transaction is approved; if not, it’s declined.
Network downtime with the issuing bank’s system may cause authorization errors.
Offering other payment methods like digital wallets can help reduce cart abandonment in this case.
6. Payment network communicates back the transaction status
After Rue’s bank approves or declines the authorization, the payment network sends the response back through the payment chain.
This message travels to LumiNourish’s bank, which forwards it to the payment processor to update their system.
7. Acquiring bank settles the transaction if approved
Authorization codes are time-sensitive. Once authorized, LumiNourish must submit a capture request to Rue’s bank through their payment processor to receive the funds.
Merchant must capture the transaction within 7 days, else issuer might drop the authorization code and has the ability to issue chargebacks.
Based on my experience, 90% of the transactions get captured within 2-3 business days.
Disrupting the flow at any stage can cause delays, errors, or failed transactions.
Keep each part of the process and key player in check to maintain a smooth payment experience.
Regulations and Compliance in the Payment Processing Industry
Online payment fraud can lead to global losses exceeding $343 billion by 2027.
Without stringent compliance with standards, businesses leave themselves vulnerable to fraud and security breaches.
Ecommerce businesses and financial services need to adhere to the following regulations to protect their operations and avoid severe legal repercussions.
Some of these regulations are region-dependent, meaning they apply specifically to businesses operating in or dealing with customers from certain areas.
- Anti-Money Laundering (AML). AML is a global payment regulation enforced by organizations like the Financial Action Task Force (FATF). It requires online retailers to monitor transactions for money laundering signs, including high-value transactions or transactions from high-risk countries.
- Know Your Customer (KYC). KYC is a specific, actionable component of AML. Ecommerce sites require customers to provide personal information and identification documents to verify their identity. The platform verifies details like name, address, date of birth, and government-issued IDs to ensure the customer is legitimate.
- PCI Data Security Standard. Merchants must comply with PCI DSS and protect cardholder data whether they use self-built or third-party payment systems. Read the full PCI DSS ecommerce guidelines here.
- General Data Protection Regulation (GDPR). GDPR mandates that ecommerce businesses minimize data collection, restrict database access, and ensure third-party compliance. They must also promptly report breaches to authorities and affected customers to comply.
- Payment Services Directive (PSD2). Enforced by the Financial Conduct Authority (FCA), PSD2 bans surcharges on B2C (business-to-consumer) card transactions. It doesn’t apply to B2B ecommerce sales. It also enforces Strong Customer Authentication (SCA) with two-factor authentication to verify customers.
- OFAC Sanctions Compliance. US ecommerce businesses must avoid trade or financial activities with entities or persons listed on OFAC’s sanctions lists. They must screen consumers, suppliers, and partners in direct or third-party transactions. The European Union maintains its own sanction lists and regulations. Post-Brexit, the Office of Financial Sanctions Implementation (OFSI) manages the sanctions for UK-based businesses.
From merchants to payment service providers, adhering to these regulatory frameworks is crucial for everyone in the payment ecosystem.
Implementing robust compliance measures better positions businesses to capitalize on industry trends and advancements.
Payment Industry Trends and Future Predictions
Reports showed: 13% of shoppers abandoned their carts due to limited payment methods. Another 9% did so after their card was declined.
Moving out of legacy payment systems and exploring modern solutions will serve your customers well.
Here are the top trends and future predictions that are shaping the future of payment processing.
Contactless payment methods
Contactless payments are hitting the mainstream.
67% of retailers accept some form of no-touch payment, while over 50% of customers use it. Its transactions are set to hit $15.7 trillion globally by 2029.
ExxonMobil, one of the world's largest publicly traded oil and gas companies, sought to enhance customer experiences by offering more convenient and contactless payment options.
Partnering with Fiserv, ExxonMobil integrated Google Pay into their payment systems through Fiserv’s Carat platform.
Google Pay’s touchless payment lets consumers pay at the pump by scanning a QR code or using the app to activate the pump.
This trend minimizes physical contact and speeds up transactions for companies with brick-and-mortar stores.
Cryptocurrency integration into payment systems
Accepting cryptocurrency payments or introducing it as a redeemable option in loyalty programs can help boost revenue and attract customers.
Credit card companies have been integrating cryptocurrency into payment systems to offer merchants more flexibility in accepting payments.
For example: Mastercard’s Crypto Credential initiative lets users send and receive cryptocurrencies using simple aliases instead of long blockchain addresses.
However, regulatory challenges exist.
Austin Shave, CFO at ChicksX and a crypto industry expert, noted that payment processors may encounter varying regulations depending on the country:
For example, in the US, businesses that deal with crypto must follow SEC regulations and register with FinCEN..
Multifactor authentication (MFA) and biometrics
Researchers expect the multifactor authentication market share to grow to $40 billion by 2030.
MFA combines physical (smartphone or key fob), logical (passwords), and biometric validation methods (facial recognition).
Each method complements the other to fill the security gaps that may exist.
Strong passwords reassure 50% of shoppers about online security. Your business can gain their trust by implementing comprehensive and convenient MFA solutions.
Wink, an innovative biometric technology, integrates facial recognition, voice authentication, and device verification into one solution.
This payment trend example ensures a seamless experience across all online and in-store touchpoints.
The authentication process must be consistently secure and user-friendly.
At Wink, we tackle this by developing device-agnostic solutions that ensure privacy, reliability, and ease of use, irrespective of the platform—making each transaction as simple and trustworthy as the next.
BNPL subscription
Buy Now, Pay Later (BNPL) is a financing option that allows shoppers to purchase a product and skip the upfront payment.
Instead, they can defer payments over a period of time, with zero to low interest.
The industry is expected to grow at a CAGR of 20.7%, reaching up to US$167.58 billion by 2032. These figures show how much customers, especially the younger crowd, value this service.
So much so that Klarna, a popular BNPL platform, had launched a subscription program for its US customers in early 2024.
Aside from its main service, the plan comes with premium benefits and special offers.
We've got some favorites in this category, too. Check out our top 10 BNPL platforms, if you are ready to jump into this valuable payment method:
Artificial intelligence in fraud detection
Fraud detection (43%) is one of AI’s top applications, and it holds great promise for payment processing.
AI algorithms can analyze transaction patterns in real time. Retail companies can employ this technology in POS monitoring and customer behavior analytics to identify anomalies and potential fraud.
A good example, according to Edward Tian, CEO at GPTZero, is its ability to “spot patterns or duplicate/padded information that indicate fraud.”
The faster businesses flag and address suspicious activities, the fewer disruptions customers encounter.
This positive reputation can help attract new customers and retain existing ones.
AI and machine learning are significantly enhancing both security and customer experience.
AI algorithms continuously analyze transaction patterns, swiftly identifying and preventing fraudulent activities before they impact customers.
IoT devices in payment ecosystems
IoT-enabled POS (Point of Sale) terminals and other devices address connectivity issues that disrupt transactions.
Traditional payment terminals struggle with unstable Wi-Fi or Bluetooth connections in remote locations.
Example: Yoco’s IoT-enabled card readers support over 120,000 small businesses in South Africa.
The fintech company’s point-of-sale card machine devices achieve nearly 100% uptime and higher transaction approval rates of 9 to 94%.
70% of these businesses had never been able to accept card payments before.
For Michael Nemeroff, co-founder of Rush Order Tees, IoT’s impact goes even further.
He believes IoT device integration will shape the future of payments, particularly for the on-demand e-commerce industry.
“The potential for IoT to streamline processes, such as automated inventory management tied directly to payment systems, could revolutionize how we handle orders and payments,” Michael explained.
This real-time synchronization allows his team to anticipate order volume spikes and adjust inventory levels as needed.
Final Thoughts
Ecommerce businesses—or any business, really—need to keep a close eye on any developments in the payment processing industry.
Why?
Because staying updated can help you reduce checkout friction, safeguard customer payment info better, and offer flexible payment options.
All are excellent ways to improve the overall customer experience.
If you’d like to dive deeper into this sector and its relevance to your organization, check out the following resources:
- 14 Expert Ecommerce Payment Processing Tips For Savvy Ecomm Brands
- Credit Card Authorization vs. Authentication: What’s the Difference?
- Setting Up Credit Card Authorization for Your Business: Best Practices
Payments Industry FAQs
Got some unanswered questions about the busy payment industry? Find the answers here:
How big is the payment processing market?
Statistics reported that the payment processing market would be worth $150.6 billion in 2024 and $569.2 billion by 2030. It creates prospects for higher revenue and innovation for merchants and key players in the payment landscape.
What are the latest advancements in payment processing technology?
Contactless payments, crypto integration, multifactor authentication, AI fraud detection, BNPL subscriptions, and IoT-enhanced POS systems are the latest payment processing advancements.
Integrating these technologies boosts transaction speed, security, and ease, benefiting ecommerce businesses of all sizes.
The payment processing industry is developing rapidly. To keep up with trends is to stay ahead of costly security breaches and rising cart abandonment rates.
What are the biggest challenges in payment processing today?
Network congestion during peak times can slow transactions and frustrate customers. Payment fraud attacks and attempts also affect 80% of businesses.
These challenges, if not mitigated, can impact revenue and damage brand reputation.
