About Payment Institutions
Hello! In this article, as the eticsoft team who has provided IT systems and technology to many payment institutions, we wanted to explain the concept of “payment institution” in the simplest way possible while touching on important details. After dozens of projects we have experienced, we have probably become the most experienced team in our country regarding “payment institutions”. We would like to share all these experiences with you.
Payment institutions are banking institutions that provide payment services. If we use the term “payment” more specifically, they generally provide services for electronic payments and particularly credit card electronic payment methods.
You might be familiar with the credit card form that appears during the payment step of our online shopping. Here, we can define a payment institution as the structure that receives the payment from the credit card’s bank and notifies both you and the merchant about the transaction result.
Payment institutions are banking institutions both in terms of their activities and structure. We can say they operate in the field of “commercial banking” as they only provide collection services to legal entities (those with tax plates).
The revenue model of payment institutions is based on charging for collection transactions between sellers and buyers. This revenue model can be in the form of taking small percentage transaction fees from collections, charging monthly/yearly service fees, or a combination of these. Payment institutions are legally not allowed to have income from other activities. In other words, they cannot operate like commercial companies we often see in our country with extended titles like “legumes transportation construction industry….”. Like banks, they are established to perform only specific tasks. Speaking of titles: Even the names of payment institutions are determined by law. For example, XYZ Payment and Electronic Money Inc.
In our country, there are supervision and accreditation processes for payment institutions. This means not everyone can establish a payment company and start providing collection services. The fundamental legal text regarding payment institutions in our country is Law No. 6493. According to this law and its sub-texts, a capital company needs to obtain an operating license to function as a payment institution. To apply for this license, they need to create a comprehensive organizational chart and document that everything works and will work securely like clockwork. In practice, the most critical point of this process is the technical part called “Payment Institution Information System”. Almost everything runs through this. The licensing and supervision process, which was carried out by the BDDK until last year, was transferred to the TCMB in 2020 with a text published in the Official Gazette on 22.11.2019. If you wish, you can access my article titled “HOW TO ESTABLISH A PAYMENT COMPANY” from here.
Payment institutions operate in a transparent structure and are continuously supervised, just like banks. Additionally, these institutions work under rules similar to banks, such as paying a relatively high minimum establishment capital and keeping all financial assets they will manage in protection accounts. We can approach one of our most frequently asked questions, “Are payment institutions safe?” from this perspective. Payment institutions and banks receive their operating licenses from the same institution. Their audits are also quite similar. So payment institutions have reliability very similar to banks. We can also say that BDDK (now TCMB) has very good measures against risks in this sector.
In general, a payment institution performs the following activities:
Providing online payment service (core activity) Web-based credit card payment services Mobile-based credit card payment services OTP/TOTP, auth, getting authorization, cancellation, chargeback B2B collection services (dealer/sub-dealer collection flow) (Example: https://onlineodemesistemi.com) Money transfer (Wire/EFT) (subject to operating license scope) Bill collection (subject to operating license scope) Establishing payment points (subject to operating license scope) Providing fraud protection service Providing card storage service (subject to having technical standards) Providing reporting, accounting auxiliary tools Providing easy integration tools (Example: https://www.slideshare.net/MahmutGLERCE/payment-facilitator-opensource-pitch-deck )
When a declaration (law/regulation/communique) similar to PSD-2 (Payment Service Directive), which we estimate is about to be completed in our country, is published, this activity list will expand a bit more. Meanwhile, since many payment institutions also have an “electronic money institution” operating license, they can provide almost all banking activities, including individual demand deposit accounts and physical cards (plastic cards).
In addition to payment institutions’ basic claim of facilitating collections made in electronic environment, another distinguishing feature is that setup costs are very low or zero. This strategy aims for e-commerce businesses to choose these payment institutions instead of classic bank payment services. Confirming the correctness of the strategy, both the number and total turnover of payment institutions are in a rapid increasing trend. We can see that the majority of e-commerce stores now want to work with payment institutions instead of banks. (Statistical sources: Payment and Electronic Money Association, BDDK data, Sanal pos pro annual reports)
Speaking of facilitating collection; In our other articles, we touched on PF/PSP concepts. “PF” (Payment Facilitator) I think translates quite well into Turkish as “Ödeme Kolaylaştırıcı”. Let me first explain why “payment” should be facilitated: There are many banks and credit card types in our country and the world. If a seller wants to receive electronic collections from all these cards, they need to make technical developments for dozens of different integration methods and hundreds of scenarios and sign contracts with many banks and card networks. For example, there are about 20 banks with payment services in our country. There are also nearly a hundred different card types and four card networks. When calculating the number of payment scenarios, there are many more multipliers such as installment limits, campaigns, installment postponement. You need to make many integrations and contracts to receive payments from all of these. Payment institutions provide all of this in a single contract and single integration.
Payment institutions can generally provide installment shopping for 6-7 card types. Of course, this is not the only facilitated process. The establishment process is also shorter and generally easier. In addition, there is access to many other advantages from fraud protection service to recurring payments and campaign services.
According to our professional experience, the main reasons why people choose to work with payment institutions are, in order of importance:
Low (often zero) setup cost, Low collection cost, Easy integration, Simple structure, Low term, Payment tools (mobile applications, ready-to-use payment pages, payment links, etc.)
It’s worth underlining that this list is for general trends. Not every payment institution can always provide these advantages. Also, calculating cost is a bit complex. It’s an issue that needs to be calculated well with other parameters such as per transaction fee, long-term repayments, total turnover, average amount. In one of my ventures, my team members calculate for many stores almost every day and direct them to the best payment institution or bank. While on this point, as our friends in payment institutions have always experienced, there are quite a few businesses where “cost” is not the first reason for preference. Trust and security are important factors.
In our country, some payment institutions were established as initiatives of older and well-established corporate groups. These institutions generally use the collections of their affiliated corporate group as their primary source. There are also startups waiting to be valued with a startup business model. 4-5 of the active payment institutions have become distinctively more popular than others.
You can easily access figures showing the income and expenses of payment institutions. However, when calculating the total value of institutions, their strategic values, customer numbers (traction), and the prestige of their operating license are taken into account more than their profitability. For this reason, some have received investments of tens of millions of Liras and have changed hands at values expressed in billions.
Payment institutions must show that they have established an impeccable structure from top to bottom before their first operating license. During this setup process, which often takes months, many audits, examinations, and tests are conducted by different institutions. It is hardly possible to obtain this operating license without showing that everything from personal data protection to risk management, from security tests to accounting reports, will work perfectly.
Payment institutions are periodically audited. This audit is performed by an independent audit institution. Sometimes, in special cases, the authorized institution (BDDK/TCMB) can also conduct special audits. Some of the audit reports are generally published publicly. These audit mechanisms are similar for banks as well.
Payment institutions transfer the payments they collect to a protection account. This money belonging to the merchant waits in protected accounts for a while. These periods are determined by legal texts. When they are going to make repayment to the merchant, they are taken back from this account. The purpose here is to protect the merchant’s receivables.
In our country specifically, payment institutions generally have a “local” and “isolated from the World” market. Locality is actually a familiar situation for the banking sector. However, Fin-tech initiatives generally target the whole World market by using the accessibility of technology. Although our country is technically very good in the Fin-tech field (we are quite good technologically in this area), the reasons why we cannot create World brands could be the subject of another article. Both legislation and the horizons of capital can be written among the possible reasons. Despite this, we have institutions that spread their services to wide areas through international collaborations.
Payment institutions operate in a highly innovative field that is fundamentally Fin-tech and operates almost entirely with technology. For this reason, payment institutions generally employ a team with a young average age and good technical infrastructure. Since they work based on regulations similar to banks, the process awaiting businesses that decide to work with payment institutions is similar. This process, called KYC, begins with sending a wet-signed contract and its attachments, just like banks do. BDDK (now TCMB) determines the framework of these official procedures.
After the paperwork process, the account definition and integration part begins. In our sector jargon, this process is called boarding. If e-commerce websites use an open-source application, there is generally a plugin/module software for the integration process, and its installation usually ends with a few clicks. Again, this plugin/module is usually free. Rental e-commerce packages also generally have a ready integration application. In this area, I think we can show our product sanal pos pro as one of the best examples. We cooperate with many payment companies within the framework of this integration product.
Payment institutions generally offer “next day payment” or “weekly payment” options for making repayments to stores. These options can expand according to some risk and sector differences. Transaction fee rates can also vary for stores in the same way. High turnover low transaction fee is known as the fee policy offered by almost every payment institution. As the number of installments increases, the fee for the transaction also increases. This is because this is the pricing tariff of the intermediary bank.
Payment institutions do not charge any fees from end users, namely credit card holders. For end users, costs proceed in exactly the same framework as physical POS devices or bank payment gateway. The reason why the amount to be withdrawn from cards varies according to the installment selection is that the merchant reflects the transaction fee to the buyer. Some stores never reflect this fee and pay the cost themselves. Like 9 installments at cash price. Generally, when banks or payment institutions make such installment campaigns, stores do too.
This is what we wanted to share in this article about payment companies in our country for now. You can use the comments for anything you want to add or correct. Thank you in advance.