When it comes to payment systems around the world, the landscape keeps changing fast. Every year, established fintech companies and startups introduce technologies that constantly challenge the current payment process.
Millenniums ago, precious metals – gold and silver – successfully replaced the barter system with all the problems it presented. However, the limitations of precious metals slowed down the rate at which economies could grow, as such commerce needed a different payment method.
The first banks and banknotes came into existence in the 17th century from the English banking system. Paper money, cheques and wire transfers became the norm, the perfect tools for the exchange of goods and services for as long as world economies relied on them. However, as with the previous payment methods, cash transactions have their limitations – notably its cumbersomeness in very large transactions to its physicality – and cheques and wire transfers consume processing time.
Today’s global business and payment sophistication can not rely on manual processing or tracking. This is because a single transaction can involve more than four parties with different payment or acceptance methods operating in different countries where different international payment regulations apply.
While banks globally are still coming to terms with advanced and integrated systems like blockchain, biometrics identity, cross-border payments, big data and the likes – payments in future would be a lot more sophisticated than what it is today. We could take a cue from the rapid evolution of Africa’s payment systems. Sub-Saharan Africa leads the world in regard to mobile money transactions, both in volume as well as in the value of transactions. In 2020 alone, mobile money transaction value in the region amounted to US$490 billion while the volume stood at 27.4 million accounting for close to 63.9% and 66.7% of the world’s amounts, respectively. The UN already predicted that by 2025, 25% of Africa’s remittance would be done digitally. That is huge.
While certain underlying factors are responsible for the facilitation of payments systems worldwide, payment switches are often ignored even though they are crucial mechanisms embedded within payment systems, without which modern payment methods would be close to impossible.
Understanding Payment Switch
A payment switch is a resilient, intelligent software that sits at the centre of a payment system tasked with the core function of processing payments across multiple channels. A payment switch receives payment instructions from one Payment Service Providers (PSP) endpoint (i.e a bank, service provider, biller, etc), identifies to whom such payment is routed to, routes payment, receives a response, formats and sends feedback to the instructing payment point. Payment Switch simply facilitates payments and settlements among service providers.
Payment switches play crucial roles in how modern banking and payment systems operate today. Although it is an ‘under the hood’ technology, the payment switch is what makes it possible for you to send money anywhere in the world from one payment point almost instantly. This is the same technology that makes it possible for cardholders of bank ‘A’ to withdraw money from any other banks’ ATM even though they don’t bank with the paying bank. It is also what allows different debit cards to make payments through one Point-of-Sales (POS) terminal. The settlement function comes into play in the background with high accuracy across all banks and channels involved in the payment process.
Future importance of Payment Switch
Before the advent of payment switches, merchants had to use several applications or middlemen in processing payments which often drove up the cost of money transfers and delayed payment delivery time. By connecting merchants directly to Payment Service Providers (PSP) endpoints, payment switches drastically reduce transaction time, eliminate the need for costly processors in between and accurately reconcile accounts faster than manually possible.
Due to the high resilience of switches, multiple, omnichannel transactions can be performed all at once and consolidated at one point. This feature cuts away the need for payments to pass through several solutions while moving from one PSP to another.
Payment switches can be developed internally by a source for externally and integrated within an organisation’s payment system. Great switches like Songhai Exchange (SHE) which facilitates remittance and bills payments from all parts of the world into Africa are easy to set up and integrate at a minimal cost.
Banks and the B2B payments market are not the only sectors within finance relying on payment switches. International and domestic remittance equally depends on switches to work. With the rate at which business globalization is rising, the demand for more dynamism and flexibility in payments only prompts leading Fintech companies to keep improving the capability of payment switches. If the race to advanced digitization of payments is ever going to be a reality, then superior payment switches with cutting-edge capabilities must come into play to meet the possibilities of payments in the future.