Business

What is a Payment Network?

By September 19, 2018 No Comments

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The gig economy is taking over the U.S. workforce – 50 percent of millennials are already freelancing. Within the next 10 years, it’s projected that freelancers will represent a majority of the workforce. But there are some important things that must be in place to make this freelancing dream a reality, including a successful payment network.

An easy definition of a payment network is a way for money to move from one party to another. Unless transactions happen in cash, which is rare in the digital gig economy, a payment system is required for a smooth transaction.

In this blog post, we will explain exactly what a payment network is and how it works.

From there, we’ll talk about the differences between various types of payment methods. Finally, we will provide recommendations on how to choose and then use your network successfully.

Understanding a Payment Network

Before the age of technology, customers and vendors exchanged payment directly. In the very early days of commerce, this happened with livestock or precious resources like gold or silver. As civilization advanced, society developed currency to hold value instead of raw resources.

Later, checks were introduced as payment and became the new normal for exchanging money. This is when the first real payment methods were introduced. Eventually, checks were given up in preference of debit and credit cards.

Today, most people use debit or credit cards for common consumer purchases. When you go to the grocery store and swipe your card, the terminal transmits your account information to a third-party company. That company then sends the request to your financial institution, which approves or denies it based on your balance or credit limit.

The third-party company then sends that information back to the merchant terminal, which approves or denies the purchase. The third-party company involved in all of this is known as a payment network. There are other steps in the process, including acquirers and transaction settlements, but a detailed explanation of card processing is beyond the scope of this article.

Common payment networks today include Visa, MasterCard, and Maestro. But you can’t directly send payments through these networks.

To send or receive payment, you need a payment system that you can rely on to interface with networks and financial institutions.

5 Payment Systems Available Today

The different payment options that businesses use today have various pros and cons. Here is an overview of the options you have:

1. Checks

This is an older, outdated method that you don’t find as often as you used to. However, they are still popular with some businesses who prefer to use paper methods and records. However, checks generally take the longest time to process.

2. Credit and Debit Cards

The basics of this payment system were outlined above. Credit and debit cards are easy to use, but if you are paying a freelancer or contractor, they still need to have a way to accept these payments (more on that later).

3. ACH Payments

ACH stands for automated clearing house, which is an electronic network that processes a large number of payments in batches.

If you’re an employer paying your staff with a payroll, you’ve probably used ACH. Individual contractors and employees may also be able to use ACH, but they’ll need to work with a processor or their individual financial institution.

4. Bank Transfer

Another way that you can make or receive payments is to transfer funds directly from one bank to another.

However, most banks will charge for this service. Some banks may not be compatible with making transfers to other banks, depending on their size and geographic region.

5. Blockchain

Cryptocurrencies have become popular in the mainstream as a fluctuating investment opportunity. Although many associate them with a scam or a shady money-making opportunity, crypto can actually be used as a way for freelancers to receive payment. We will go into a detailed explanation of blockchain payments later.

One of the newest trends in the payment industry relates to mobile payments. This option is great because people have the option to send and receive payments in any location, whether they are near a computer or not.

All about Mobile Payment Networks

Mobile payment systems are exactly what they sound like – a way for people to handle payments on mobile devices. Usually, they are operated by a device like a smartphone or a tablet, but some can also be used on laptop computers.

Many mobile payment networks are operated by startup companies. These smaller startup companies will typically identify a certain niche or area to target and then aggressively pursue business from them.

For a great example of this tactic, consider Square.

Founded by Jack Dorsey, Square is a startup designed to provide easy card processing to smaller customers like food vendors, coffee shops, and other mom-and-pop businesses. As of 2017, the company had a valuation of $17 billion, making it one of the most valuable startups in the world.

Of course, there are several other mobile payment options. Large financial institutions aren’t just standing by and letting startups dominate the field. In 2016, it was announced that major players like BB&T, JPMorgan Chase, and Wells Fargo were teaming up for the clearXchange network.

This network is responsible for 60 percent of the current mobile payment market. A few other common options for mobile payment today include PayPal, Stripe, and Venmo.

How Secure Is a Digital Payment Network?

It’s true that digital payment methods have become popular thanks to their convenience and speed. They represent a way for contractors and freelancers to receive payment quickly instead of waiting days or even weeks to get their money.

Unfortunately, like many other digital systems, payment networks come with some security risks.

We’ve all heard about major data breaches in recent history affecting organizations like Target and Equifax. But the stakes are much higher when it comes to payment networks since an attacker could get access to information from more people.

Traditionally, credit and debit card processors will provide protection that meets the Payment Card Industry Data Security Standard (PCI DSS). While this may be enough for credit and debit card transactions, more security is generally needed for digital payment systems.

Most networks are using a minimum of 128-bit encryption to keep sensitive data protected from fraud and hackers.

According to CXO Today, another big area where payment networks can improve security is in the updating of databases. Stored information should be updated automatically so that they can be approved and verified in real time.

While most networks are safe to use, it’s always wise to take steps to protect yourself and your business.

If you’re thinking about working with a specific provider, ask them about their security practices. In case they can’t provide you with a direct, straightforward answer, it should raise a red flag.

If they do provide you with a clear answer, try to find out how their security methods compare to the industry standards. They should at least be up to par with industry standards. Ideally, you want to find a payment network that goes above and beyond the minimum to protect their customer data.

What is a Payment Processor?

If you’re new to the world of digital payments and trying to get up to speed on current technology, you might be wondering about the differences between all the terms used. Since most of them are similar, it can get confusing pretty quickly.

One of the more common terms you’ll hear is a “payment processor.”

Most of the time, a payment processor is the same company that handles the payment network. However, there are occasionally times when a business that accepts payments will use a different protocol to accept payments than to process them.

When this happens, you may hear people reference or speak about a “payment gateway.” You can think about a payment gateway the same way as the card terminal you would see at a brick and mortar store. The only difference is that a payment gateway is designed to handle transactions that take place on the internet.

Choosing the Right Solution for You

You should now have a better understanding of what a payment network is. We’ve also explained some of the things that make up a network. All of this information is important but you still need to select one that works well for your business.

The right network will allow you to focus less on administrative tasks and more on things that will make your business money. Here’s what to consider:

Security

As addressed above, payment networks can be a top target of hackers and cybercriminals.

Ensure that your network has a way to deal with these threats. They should also be able to quickly inform you if there is a breach or problem with your payment account.

Fees

You’ll also want to know the relative costs of using one network or another.

Many networks will charge a fee per transaction, in addition to a monthly subscription fee. Others may only charge a percentage of sales but might have a setup fee that you have to pay to get started.

Customer Support

It’s nice to think that you’ll never need help using your payment network system. But this is rarely the case.

If you have a question or run into difficulty with your system, your provider should offer comprehensive help.

Reputation

Your customers are trusting you with their payment information. In turn, you are transmitting that trust onto the vendor you rely on for payment.

Make sure that they can inspire confidence and faith in your consumers. You shouldn’t have to worry about losing business because of your payment network.

Remember to take your time and compare as many options as possible. Deciding on the right option is an important step. You don’t want to get it wrong, as changing your provider is a big hassle that will cost time and money.

What about the Blockchain?

If you’ve been paying attention to the mainstream media in the last year, you’ve probably heard about cryptocurrency.

Cryptocurrencies built with blockchain technology, especially Bitcoin, are all the rage these days with investors and tech enthusiasts. Unfortunately, there is a tendency for people in the media to view all things crypto and blockchain as a get-rich-quick scam.

In reality, cryptocurrency is poised to completely disrupt the modern payment network. The use of blockchain allows for payments that are completely transparent. That’s because blockchain transactions are stored on what’s known as a distributed ledger.

You can think of this ledger as a log of transactions that anyone can view. Since it’s based on complex math and is open to public view, blockchain-style payment transactions are impossible to forge. If someone did try to manipulate the system, it would be obvious by checking the blockchain records.

Although blockchain may soon be a key player in the world of payments, it is still relatively early for these tools. Keep an eye on this sector, however, as many (including some of us here at Spera) believe it will soon become the norm for online payments.

Final Thoughts

Everything about the working world has changed in the last several years. The advent of the gig or freedom economy means that people no longer have to seek traditional employment.

If you don’t want to be a slave to the nine-to-five grind, it’s easier than ever before to escape.

While the new working economy has led to some great gains for both workers and employers, it’s also brought about new challenges. One of the top concerns of contract workers and the companies that hire them is how to make prompt and timely payments.

Here at Spera, we understand that getting paid is critical. That’s why our project management software has a built-in payment solution. Never again worry about creating a professional-looking invoice, sending invoices to your clients on the same day each month or accepting multiple payment methods.

Check out our payment features here.