My first payments engine, or everyone out here, was calculating the total price of carrots to be paid by Bob to Alice, in 4th grade, by doing addition and subtraction of balances. And Voila! Bob paid Alice. End of Transaction.
Almost 2 decades later, I’m still helping Bob transfer money to Alice for the carrots received!
From barter systems and gold coins to e-wallets and crypto, we’ve come a long way in transacting from items as simple as food orders to as complicated as acquiring a company. But, one constant thing is the thirst for instant gratification of a transaction to provide you with your essentials or dreams. From a simple math problem, countless companies have built the Payments system so instantaneous and mammoth.
My last 1 year at Grab in the Payments Team has made me aware of the sophistications the day-to-day payment solutions bring to our table. For example, users want their payments provider to be flawless, whether it's the happy path or an errored-out flow. Well, I'm so glad to break it to you; it's easier said than done.
Hence, I'm cashing out on my drive to share what I've learned to provide insight into how convoluted the payment services are. Therefore, I intend to deliver some high-level details, complemented with some technical-but-not-so-technical information, over a series of articles to share what I understand so far.
Finally, although I understand Crypto quite a bit, I’m going to keep that out for now and maybe tackle it after a few articles. So, if that’s your expectation, I’d recommend not reading it further.
So, let’s get started!
Modes of Payment
First and foremost, we need to have a mode to pay to create a transaction even before it begins. It is part of the equation that holds money/amount/balance. Earlier, it was the vaults of Gold or even briefcases of cash. But, we all know about these, so let’s not dive into them.
Over the past decade, we’ve seen an exponential increase in online transactions. Today, if I want a flight ticket, I buy it using my GrabPay Wallet or my card. I travel around Singapore without cash, knowing everyone accepts online payment methods. Hailing from a cash-heavy country like India, I was surprised to see the enablement of online transfers even at that corner-of-the-road stall.
The progress has been Humongous! Unbelievable!
So, what have been these different payment methods that have recently grown in acceptance and usage?
Wallets
Technically, something similar has been around since the advent of Net-Banking, if you look closely. For example, using your balance to pay for online transactions and seeing that number on the screen go down or depositing money in the account to see that number go up.
Wallets are similar, with a bit of flexibility and complexities to provide you with a similar experience, sometimes even better. In addition, wallets have capitalised on the concept of rewards that can be won and used when using the providers' wallets to make payments. Rewards and offers have been around for a while. However, I find that wallets nowadays provide more of them to attract customers.
One of the cool things about them: They have more integrations and features to allow for a one-stop shop.
Virtual Private Address
VPA is a relatively new concept and one of the fastest-growing payment methods. It's like an email where you can transfer the amount and it’s received into your bank account. It removes the hassle of adding account numbers and SWIFT codes to your bank account to be able to transfer funds.
It's my fav payment method. It's swift, even though it doesn’t use SWIFT codes, and hassle-free.
Buy Now Pay Later
One of the latest offerings by almost all payment service providers is “Buy Now, Pay Later.” You get the goods and services today while promising to pay after a specific time, usually at 0% interest and in instalments. So, it’s not like your Credit Cards. Instead, it’s an extended version of the same.
The goods and services are provided to you on credit while ensuring you can pay, like attaching a default debit card or payment account to the profile. Each company offering BNPL has its due diligence process to enable this feature. For example, is your credit score good enough?
Here, the seller usually pays interest to the credit provider behind the scenes. Sellers are attracted to it as it enables more buyers to transact.
Types of Transactions
Now, here's where it starts to get interesting. I believe most of us have seen all the below payment methods, even if it might look like we're not. However, considering we know how complicated and prone to error distributed systems and databases are, we'll not dive into these details here. So instead, the idea is to introduce all of these below-mentioned payment types.
So, let's dive briefly into it.
Direct Charge
The simplest form of transaction, one that we learned in 4th grade.
Deduct from an account and add into another. All at the same time. Easy-peasy!
It is one of the most prominent transaction types in the history of payments. For example, transferring amount to your friend. Another partial example would be, paying at the grocery stores. Well, why partial? We’ll see it in a bit.
Postpaid
When I hear about postpaid, I think about those landline and telecom postpaid connections that send a monthly bill to the registered address. You'll be thrilled to know; it's precisely that. However, postpaid is now applied to your everyday necessities and purchases too.
It would be an offering of BNPL if I were to categorise it. However, it can also be considered like credit cards, where the bill comes due at the end of each billing cycle.
Instalments
I believe we've had EMIs for quite some time now. And yet, instalments are taking a turn. How so? In almost every scenario, an interest is attached to your EMI. It would be added to your monthly credit card bill. However, BNPL offers 0% instalments most of the time. Is that what every buyer has been craving? Maybe or maybe not. The trends suggest that the answer to that question is a huge Yes.
Again, it resembles almost all the properties of credit cards. However, as I mentioned earlier, BNPL, to me, feels like an extended version of Credit Cards.
Auth and Capture
Oh! It sounds cool! Auth and Capture!
What if I were to say that you've been using this payment mechanism if you've ordered food online from one of the online food delivery providers? Online food deliveries or ride-hailing apps, for that matter, usually use this mechanism.
So, what are Auth and Capture?
A transaction for a food order executes in 2 separate steps, Auth and Capture. In the two-step process, an amount gets blocked as per your order amount when you place an order. You've not been charged yet. It's blocked, so you cannot use that amount. When the food is delivered is the time when you get charged on your account for that order.
It works the same way for ride-hailing apps or services. You're not charged until the ride completes. After that, however, you cannot use the amount as it's blocked to be charged later by your payment provider.
It is to assert that you'll be able to make the payment once the service completes.
Hence, as I mentioned, we've all used this payment type before. It works behind the scenes and is oblivious to the buyer or rider.
Summary
We’ll stop here for now! It’s a journey to share what I’ve learned so far at Grab and how I’ve come to understand the intricacies of our day-to-day payment systems. Focusing more on online methods of payments and types of transactions, I introduced a few already known terms like postpaid and instalments. Moreover, we also picked up some of the new terminologies, like VPA and BNPL, as the payments ecosystem advances globally.
In the next blog, I’ll dive into the transaction entities involved. Additionally, we’ll learn about other processes apart from the addition and subtraction of balances crucial to a transaction. Finally, I’ll introduce you to a straightforward payment engine and how it works. Towards the end, we’ll target to understand how a single payment provider integrates and works with multiple providers and banks.
I look forward to seeing you at the next one! Please do leave constructive feedbacks or questions in the comments section below!
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