Digital payments have become the most preferred and used payment method. And, it has led to the rise of payment aggregators. Whether you are a business owner or a consumer, it is crucial to understand what a payment aggregator is and how it functions.
This blog breaks down all the details about payment aggregators, how they work, their features, types and examples, risks involved and how they are different from payment gateways. Read on!
A payment aggregator acts as a middleman between consumers and businesses. It is a third-party provisioner that allows consumers to make payments quickly in a hassle-free manager, thereby empowering merchants to manage their transactions efficiently.
A payment aggregator enables merchants to accept transactions in different forms from various bank accounts or financial institutions without having to create a merchant account in each bank (where they may receive payments). They are integrated into the merchants’ websites or apps to accept payments through card transactions, e-wallets, or account transfers, among others.
Payment aggregators, as mentioned above, work as an interface between two users, a customer and a merchant.
To understand how a payment aggregator works, consider a transaction between a customer and a merchant.
After choosing the required products, the customer initiates the payment by entering card details or selecting the pre-saved cards. This is where the payment aggregator steps in. The card details are tokenised, and the integrated payment gateway performs a verification process or a fraud check.
Then the customer’s data is sent to the acquiring bank, which in this case is the merchant’s bank. This data is sent to the acquirer via a payment processor. In turn, the merchant’s bank sends the card details to the concerned card company to run a fraud check.
After this verification run is completed, the details are sent to the customer’s bank, which is the issuing bank. The customer’s bank verifies the details and checks if the account has sufficient balance to make the payment. The transaction is denied if there are no adequate funds in the account. An approval note is sent if there is enough balance and all the data is verified.
After receiving the approval message, the merchant’s bank requests the receiver’s bank to transfer the funds. These funds are then transferred to the merchant account that the payment aggregator provides.
There are several unique features of payment aggregators in India that make them an essential part of digital transactions across the world:
There are several examples of payment aggregators in India, such as CCAvenue, Billdesk, PayUMoney, RazorPay and Instamojo, PayUBiz and Citrus Pay among others.
To understand payment aggregators better, consider a hypothetical situation. Assume you are a cosmetic company owner looking to take your business abroad. You zero in on three locations on different continents. Now, it is always cheaper and easier to manufacture your cosmetics locally. But this means you will need a separate laboratory in each country that will require its own set of raw materials, packaging goods, and transportation rosters.
The easiest way is to outsource the manufacturing by providing them with all details of your company and the standard operating procedures you follow. In other words, you are hiring a cosmetic lab/ factory on rent.
This factory on rent you have engaged can be compared to the payment aggregator, which acts as a third-party service provider, bringing various payment channels under one roof.
In India, payment aggregators can be broadly divided into two types – bank payment aggregators and third-party payment aggregators. Let’s take a look at each type in detail.
Bank payment aggregators were the first type of payment aggregators to grace the Indian market. They are more traditional in their design, making their integration process slightly tricky. They are also expensive to set up, making it difficult for new businesses and small companies to engage their services. As a result, they are typically employed by large companies.
Third-party payment aggregators entered the market after bank payment aggregators and have gained massive popularity over the years. This is because these third-party payment aggregators are more flexible and provide payment solutions that are innovative, user-friendly, and business-oriented, making them a preferred choice for merchants and business owners.
There are several benefits associated with payment aggregators. Some of them are listed below:
Payment aggregators, as mentioned above, are easy to use and get onboard. As a customer or a merchant, one can skip the long queues in a bank and tedious paperwork and engage with a payment aggregator within minutes.
Payment aggregators offer a safe and secure channel to initiate transactions. These aggregators come under the ambit of RBI guidelines and function under an RBI licence and, therefore, have strict background checks and provide quality money management services. Additionally, payment aggregators have security infrastructures that help prevent and track fraudulent cyber attacks.
Most payment aggregators have a reasonable fee structure. Depending on the size of the business and transaction volume, merchants can choose a payment aggregator that suits their requirements.
Payment aggregators bring multiple payment options under one roof.
The idea is to transfer payments from customers in a hassle-free manner. After deducting the payment aggregators’ charges, the prices are transferred within two days (standard settlements) or within 15 minutes of fund capture (instant settlements).
While there are several advantages of a payment aggregator, there are a fair bit of drawbacks to keep in mind as well.
Given that payment aggregation works in a system that supports instant payments, there are chances that merchants’ accounts could get on hold on the slightest sign of irregularity and trouble. Being locked out of one’s account for long intervals can hurt business momentum.
Most payment aggregators provide a standard settlement option that transfers funds to merchants within 24-48 days. Instant settlements can even be paid within 15 minutes. However, any irregularity in the fund capture can also postpone the payment for long intervals, such as a month.
Payment aggregators set transaction limits after which settlements are not allowed. While these limits may be acceptable for smaller businesses with a low transaction volume, bigger companies may find this a roadblock.
Payment aggregators can pass limits on to merchants and participants, which means you will have lower processing limits than other methods. Many small businesses won’t have this issue, but it may be a barrier for larger companies that need a hefty limit.
For all its popularity and advantages, there is a fair bit of risk associated with payment aggregation.
By acting as an intermediary, the payment aggregator is absorbing the risks that come with digital payments. In a major fraud investigation, the payment aggregator can choose to lock a merchant out of their account or, even worse, disable it.
As mentioned above, payment aggregators set a transaction limit, preventing businesses from expanding. Moreover, the charges levied by payment aggregators usually tend to increase as the business grows. This can eat into your costs if you have engaged a bank payment aggregator that is expensive and difficult to integrate. If the transaction charges are overshadowing the benefits of engaging the aggregator, it may be time to revisit your plan.
It is easy to get confused between a payment aggregator and a payment gateway. While they may appear to have the same functionality, there are some key aspects to understand when concerning payment aggregator vs payment gateway.
Here are a few differences between payment aggregator and payment gateway:
|Payment Aggregator||Payment Gateway|
|It can perform the duties of a payment aggregator and a payment gateway.||It cannot perform the duties of a payment aggregator.|
|It allows onboarding of various payment channels (UPI, EMI payments, wallets, cards) onto one interface.||It is a software service that allows the transfer of funds.|
|Payment aggregators provide merchant accounts.||Payment merchants act as a payment medium.|
|Payment aggregators need RBI authorisation as well as PA-DSS and PCI-DSS compliance.||Payment gateways must comply with the RBI regulations|
|Allows both online and offline transactions.||Allows only online transactions.|
Both payment aggregators and payment gateways have strict onboarding rules for legitimacy. Taking things one step forward, payment aggregators also need to comply with specific standards such as PA-DSS and PCI-DSS compliance. Not to mention, non-bank entities need authorisation from the Reserve Bank of India (RBI).
Meanwhile, payment gateways must comply with the RBI regulations as they are considered technology providers.
Payment aggregators are an essential part of the digital payment ecosystem. They act as an intermediary between customers and merchants, enabling an easy transfer of funds. While payment aggregators offer easy access, flexibility in transaction modes, and secure payment channels, they can also be rigid regarding transaction limits and account holds. The key is to find a payment aggregator that suits your business needs.
Ans: Non-bank payment aggregators in India need an RBI licence to operate and fall under the ambit of RBI guidelines.
Ans: There are two payment aggregators in India: bank payment aggregators and third-party payment aggregators. Third-party payment aggregators are suitable for smaller businesses as they are cheaper and more flexible.
Ans: Payment aggregators are extremely safe and incorporate digital and data security infrastructure to prevent fraudulent activities.
Ans: In the event of fraudulent activity or even suspicion of fraud, payment aggregators can either place a merchant account on hold or delete it permanently, as per the scenario.
Ans: For a payment aggregator to function in a country, it requires a permit from the body that monitors financial institutions. In India, payment aggregators need authorisation and licensing from the Reserve Bank of India.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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