What are the Differences Between Payment Institutions and Banks?
The question, “What are the Differences Between Payment Institutions and Banks?“, is one of the first questions that everyone interested in or beginning to work in the field of financial technologies is curious about. In this context, we also encounter this type of question quite frequently. Let’s briefly explore what they are, what they are not, and their differences.
When asked “What is a bank, and what is banking?” the answer is as follows:
A bank is a financial institution that conducts banking operations. Banking can be defined as a commercial activity that accepts and safeguards funds owned by individuals and organizations and subsequently lends these funds for profit. However, over time, the scope of banking has expanded, and banks now operate with a much broader range of products and services. Today, banking services include the issuance of debit and credit cards, secure storage of valuable items, ATM services, national and global online money transfers, and payment services such as Sanal POS.
Especially with the rise of e-commerce and digital wallets, payment institutions have become directly integrated into our lives. Let’s briefly explain how payment institutions operate and the needs they aim to address.
Payment institutions, both in terms of their operations and structure, are considered a type of banking institution. Since they exclusively provide collection services to corporate entities (those with a tax ID), we can say they operate in the field of commercial banking.
While this is the shortest acceptable definition, you can explore this topic in much greater detail in our article titled About Payment Institutions.
Let’s generalize the question about the difference between payment institutions and banks to shed light on the difference between a financial institution and a bank.
What is the Difference Between a Financial Institution and a Bank? How Do They Operate?
All banks are financial institutions, but not all financial institutions are banks. A financial institution is an organization that conducts financial transactions such as investments, loans, and deposits.
Some of the main categories of financial institutions include:
- Commercial Banks (Payment institutions can also be considered in this category.)
- Investment Banks
- Insurance Companies
- Brokerage Firms
- Investment Companies
- Non-Bank Financial Institutions
The Difference Between Payment Institutions and Banks
By now, you probably have a good idea about the answer to this question. Both are financial institutions, but their operations and revenue models differ. As Mahmut Gülerce stated in his article, “What is a Payment Institution“:
“The revenue model of these institutions is based on charging for the service that facilitates collections between the seller and buyer. This revenue can be obtained either by taking small percentages from the transaction amount, charging a monthly/annual service fee, or a combination of both. It is legally impossible for payment institutions to have other sources of revenue.”
Payment institutions operate in a highly specific field, offering only payment services. They are subject to banking-like regulations and are licensed and audited by banking authorities. In this sense, these institutions can be thought of as banking entities. They have effectively filled the gaps left by traditional banks, especially in areas like electronic wallet creation and payment acceptance for digital product sales.
The resources we referred to while preparing this article include: Katz, J.G., Munoz, E.S., and Stephanou, C. (2009). Credit Rating Agencies: No Easy Regulatory Solutions. International Finance Corporation, The World Bank Group, Crisis Response Policy Brief 8. Korkmaz, T., Yaman, S., and Metin, S. (2017). The Impact of Country Credit Ratings on Returns: An Event Study Analysis on the BIST 30 Index. Social Science Texts. 171-187.