Payment Gateway Business Model

Payment Gateway Business Model: Analysis by Unicornomy

Payment Gateway Business Model

All this halla-boo around E-Commerce and Internet StartUps would not have been possible without quality FinTech StartUps called Payment Gateways.  A Payment Gateway or a Payments Aggregator is an infrastructure company which is essentially a software and is marketed as a service (SAAS).  The infrastructure of the payment company is embedded into the core of the e-commerce or payment accepting company via an API.  Every transaction that is successfully routed through their infrastructure is charged with a transaction processing fee called TDR in Payment Gateway (TDR – Transaction Discounting Rate expressed as a Percentage of the transaction value).  Here we present a detailed overview of their business model.

Payment Gateway Business Model

The Payment Gateway Business Model is pretty complicated from the source itself.  For understanding how these aggregators of payment methods make money, it is essential to understand the business model of the Big Daddy’s of payment World i.e. The Cards either Master Card or Visa or the Likes.

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How Card Issuers Make Money

The Largest card Issuers are Master Card and Visa.  Any Banks that issue either of these cards to its customers are called “Network Participating Banks“.  Both these Giants sell their cards to banks and financial institutions for a fixed fee called Network Participation Fee (One Time Per Card), then an ongoing transaction fee linked to every transaction.  This fee is ultimately passed on by the bank to the vendor who use the “Point of Sale” for swiping customer provided cards, thus you must have seen small merchants accepting cards are generally reluctant to process cards because bank charges them anywhere between 1% to 3% to process that transaction.

This is how a Transaction looks like:  Customer Purchases 1000 INR worth of goods from a seller who sells from a physical store.  The customer pays via Master Card (assume).  The bank processes the transaction.  The merchant keeps a receipt for his counter check while receiving payment from bank into his linked account.  Assume in the week, the merchant does 9 more of such similar transactions.  Total Transactions worth 10,000 (1000 * 10 Transactions), the bank charges 2% on card payments + service tax, thus the merchant would receive 9,771 INR (10,000 * (1 – 2%*(1+14.5%))) i.e. 2.29% Less = This 2.29% levied by the bank is called Transaction Discounting Rate – TDR (The bank has reduced the value of the transaction by 2.29% i.e. Discounted by 2.29%).

The Card Issuer will ultimately charge the bank for processing this Transaction i.e. Master Card will further levy a charge of 1% (assume).  Thus the bank will have to pay about 100 INR to the Card Issuer and in the whole process makes about 1% of the transaction value.

Interesting to Read as Well : How do  Banks Make Money

How Payment Gateways Make Money

Now continuing the above transaction to a level down assume the physical store owner closes shop and starts an online venture.  This online venture will not be able to physically carry point of sale (POS) machine to swipe the card at every location.  Thus Payment Gateway comes to the rescue, The payment gateway acts as a virtual POS on the webpage to accept money.

Lets assume the same customer made a purchase of 1000 INR on the website of the merchant, the merchant did some 9 similar transactions in the week i.e. Total Value of Weekly sale is 10,000 INR, now at the time of settlement from the payment gateway (PG) to the seller the PG will get a discounted amount from the bank, since the PG has a higher bargaining power with the bank on account of its large transaction volume the bank agrees to cut down TDR from 2% to 1.5% (assume).  Thus the PG will receive (10,000 * (1-1.5%*(1+14.5%))) = 9828.25 INR and will further discount it by 1% (assume) to pass it on to the merchant i.e. the merchant will finally get about 9715 INR (9828.25 * (1-1% * (1+14.5%))).

Thus in the whole process – The Card Issuer made the same amount of money, the bank made slightly lesser money on account of customer acquisition and the payment gateway made some money.  The merchant lost about 285 INR on account of bank charges, payment gateway charges and government taxes.

Charges on Different Modes of Transactions

Customers may use different modes of payment while making payment online, it may be a credit or a debit card issued by either master card of visa or maestro or it may be an American Express Card, or they may simply choose to pay via Internet Banking.  The TDR for each of these modes is different.  Here is a screen shot of the charges of one of the leading payment gateways CC Avenue (Picture Source: CC Avenue Website > Pricing Tab).

Payment Gateway Business Model

Charges on International Transactions

Some payment gateway charge higher TDR on transactions involving multiple currencies.

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Insta Pay Option

Some Payment Gateways like InstaMojo, PayNimo, PayU give option to offline retailers to collect payment via credit card and other internet pay options by generating a real time link which is sent over to the buyer via message, mail etc and the buyer can simply click and pay.  The same TDR may be applicable in such cases.

How Payment Wallets make Money

The Business model of Mobile Wallet companies is the exact same as Payment Gateway Business Model.  Thus Payment Wallets make money the exact same way as payment gateways do with an additional stream of income by keeping money stored on a unique customer ID (i.e. phone number, email id etc) and earning interest on that.

Assume the exact same transaction happening as in the above examples with the difference that the customer will pay using a mobile wallet which is prefilled with 2000 INR using his credit card.

The customer purchases 1000 INR worth of goods, the seller does 10,000 INR worth of business in a week and gets 9715 INR at the end of the week (see above example of TDR of payment gateways).  The customers have paid using a mobile wallet.

The wallet company has about 1,00,000 customers (lets assume) filled with average wallet balance at any given moment of 2000 INR i.e. total wallet size of the wallet company is 2,00,00,00,000 i.e. 200 Crore INR (phew) and this money is not just lying in the wallet and the company’s bank account – This money is stored in high value deposits with high interest rates with option of flexing it any time there is a withdrawal – consider this as a flexi deposit you can withdraw any amount upto the value of the FD.  This money earns interest of upto 7.5% PA.  This also adds up to the revenue of a wallet.

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This was all about Payment Gateway Business Model.   Hope you have enjoyed reading the same.  Please subscribe for more interesting stuff and do drop in comments in the section below.

Disclaimer: The analysis of the Payment Gateway Business Model or How do Payment Gateways Make Money is of the Author’s himself, neither the company (Any Payment Gateway mentioned in the post) or its affiliates have confirmed the same to the author and the descriptions, stats, facts and figures are either obtained through secondary web research or interrogation of the users / sellers or other resources on the web. Please use your own discretion to use this info when required and by continuing to read you agree to indemnify the author from all liability arising out of using this info on your own. 

18 Comments

  1. Fantastic web site. Plenty of useful info here. I am sending it to a few
    pals ans additionally sharing in delicious. And certainly,
    thanks to your effort!

  2. When a consumer adds money to his/her wallets using the credit card or debit card or net banking, I believe TDR applied on transfering the money from cards to wallets. But still full amount is credited to the consumer’s wallet. Who does the wallet companies ( like PayTM, freecharge, etc.,) still show the full amount in the wallet? who takes the hit of TDR cost?

  3. When a consumer adds money to his/her wallet using the credit card or debit card or net banking, I believe TDR is applied on transferring the money from cards to wallet. But still the full amount is credited to the consumer’s wallet. How does the wallet companies ( like PayTM, freecharge, etc.,) still credit (or show) the full amount in the wallet? who takes the hit of TDR cost?

  4. Hi, if I transfer money from my PayTM wallet to another PayTM user, the TDR will be applied to the end user is it? (this is an amount transfer between two individuals with a PayTM wallet IDs)

  5. Useful information, really appreciate.
    You missed to respond to Paninder’s question asked twice above- when transferring monies from card (Debit or Credit card, Visa/master/ maestro) to wallet like Paytm, there must be a TDR charged by issuing bank to Paytm (is this correct or no?) but the user account (wallet) gets credited with full value. So, who takes the TDR hit?

  6. Hi,

    Very useful article with crisp information.

    Thank you.

    Can we also have some articles on sector analysis ?

    Also, I didnot find InMobi among Indian start ups.

    Can you please write an article on InMobi’s business model ?

    Thanks ,
    Hiyashree

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