Payment Infrastructure Glossary™

Guide to the Payment Industry™

Presented by People who Built it

This Glossary is intended for those new to this industry as a means of common nomenclature and understanding.

Started by our Founder Nick Brown, one of the top Thought Leaders and Technical Experts across the entire breadth of the Payment Infrastructure Industry, and built large portions of it.

With contributions from other top experts in their respective fields.

We will continue expanding this Glossary, as well as adding depth where desired. Feel free to contact us with suggestions or requests.

PDF of this Glossary: Available on request.

Introduction to Nick Brown 1:19

1. Payment Infrastructure

Over the last 50+ years, payment processing here in the West has grown in size, functionality and complexity, all while maintaining staggering performance and availability. In addition, Payment Fraud, the bane of Payment Interoperability, has been kept to a manageable level.

Central to Payment Processing are the Payment “Rails”, which facilitate transactions between financial institutions on behalf of their Account Holders.

Here is a simplified diagram of the two different layers of the Payment Rails here in the West, and how the different types of organizations access these Rails.

This Glossary focusses primarily on the Authorization Layer.

Payment Method Types
At the highest level, when looking at a Payment Method, it is important to understand certain key characteristics.
In this Glossary, we are focussed on Open Systems which will inevitably be structured as a Network with one or more Hubs (Switches).

Closed System
A Closed System is exactly how it sounds - a system in which a User can only transact with someone else who also has an account at the same Financial Institution (FI).
There are huge benefits to Closed Systems:
- Easy to Secure: Being a Closed system, there are few external access points, making it far easier to secure against a breach than an Open system with many high volume access points.
- Smaller Target: A single system is a relatively small target compared to being part of a massive network.
- Control Full Transaction: As a transaction is fully retained within the FI system, the FI would have a record of the full transaction, whereas with a network the FI would only have a record of their part of the transaction. This means, when there is any kind of fraud, it can generally be easily researched, and also easily reversed as the funds would have remained within the FI system.
- Fast, Inexpensive Transactions: As a transaction is fully contained within the Fi system, transfers are little more than a simple internal accounting transfer. This means they are both instant and inexpensive for the FI to accomplish, and therefore can be inexpensive for the Users.
- Tiny Transactions: Because transactions are so inexpensive to process, it is viable for the FI to facilitate transfers as small as 5¢-10¢.
- Free Account: As the cost of security as well as transaction processing is extremely small in comparison to an Open System, there is no reason for the FI to charge for the account.
The Downside:
- Reach: You can only transact easily with someone else who also has an account at the same FI.
- Funds In/Out: It is generally difficult getting cash into or out of an account, or funds transferred from/to an account elsewhere. The whole purpose of a Closed system is to not do these types of transactions. There is likely to be a fee on these, and also likely to take time to complete.
- Limited Use: A User can only use their funds in a manner offered by the FI, using services offered by the FI, with those approved by the FI.
- Tied to the FI: Due to the difficulty of transferring funds out of the FI, your funds in the FI are effectively tied to the FI.
Open System
This is when multiple financial systems connect to each other to transact between them.
While this often starts with direct connections between those financial systems, it invariably results in a Network with Hubs, allowing each system to only manage a single connection to the Hub while the Hub connects all other systems together. As the Network grows, there will likely end up being multiple Hubs connected to each other.
There are huge benefits of Networks:
- Reach: You can now transact with everyone else, regardless of where they have an account. For the biggest Networks, this means you can transact with anyone else anywhere in your country, or even worldwide.
- Multiple FI Accounts: You can now easily move money around to other accounts you may have at other FIs.
- Range of Services: You will have access to anyone and anything on the entire Network, and all the services they offer. In addition, as it is easy to move money to other accounts elsewhere, you will have access to different services those FIs offer.
The Downside:
- Cost: Interoperability is expensive to configure, manage and secure.
- Security: A Network is a far bigger target than a single Closed System. A breach anywhere in the Network might put your system and your Account Holders at risk. See Payment Fraud section below.
These Hubs, in the Payment World, are called a Payment Switch, a Settlement Switch or a combination of them both.
Interoperability
This is the term used for one financial system communicating with another financial system to transact between them.
Basically, a Closed System becoming an Open System.
This is a newer word in the industry, however it excellently describes its meaning.
Pull Vs Push Payment Methods
Pull payment method:
A receiver of funds “Pulls” funds from the sender’s account.
Examples: Credit/Debit Cards, ATM Cards, Checks, Bill Payments, Apple Pay, PayPal, Western Union (credit/debit cards), and ACH Systems.
Push payment method:
A sender of funds “Pushes” funds from his/her account to the receiver
Examples: Wires, Swift, Western Union (cash deposits), Cryptocurrencies, Mobile Wallets & Mobile Money, and obviously Physical Cash.
Important: A Pull Payment Method is far more vulnerable to fraud than a Push Payment Method. See Payment Fraud section below.
If a payment method can facilitate both Push and Pull transactions, then it is classified as being the more dangerous Pull method. For example, ACH Systems where most transactions are Push, however there can be (at least in the USA) some Pull transactions.
From a technology standpoint, ask yourself this question:
Is there ever a time when my system will receive a request message from another system, whereby my system is expected to withdraw funds from my customer’s account and send it to the other company?
If Yes, then it is a "Pull" method.
Push & Pull Payment Methods 0:44
Front End Applications
In this Glossary we are focussed primarily on the Back End Infrastructure/Platform of the payment industry.
However, User Access to payment services and the User Experience are equally important.
- In a Branch of a Financial Institution with an Employee.
- Using an ATM.
- Using a Point of Sale (POS) device at a Merchant.
- Directly with a Financial Institution Representative (outside a Branch).
- Online through a Website.
- Using a Cell Phone via Text Messaging.
- Using a Smartphone with a Mobile App.
The Smartphone

The Smartphone has the most potential of broadening financial services directly to the User in an easy to use interface.
Marc Andreessen recognized the Smartphone as a technology revolution of global proportions: "The smartphone revolution is under-hyped, more people have access to phones than access to running water. We’ve never had anything like this before since the beginning of the planet".
Services Available
When looking at any Financial Institution and/or Payment Method, consider the Services available to Users.
- Send of Funds.
- Payroll.
- Bill Pay: Single / Automatic / Recurring / Variable.
- Bill Presentment.
- Purchase: Real-Time / Pre-Auth / Reversal.
- Purchase Guarantee & Dispute Resolution.
- Currency Exchange.
- Building Credit & Access to Loans.
- Merchant Underwriting.
- Retirement and other Savings Tools.
- Brokerage, Tax Preparation, and other Financial Services.
The Two Layers of the Payment Rails
Authorization Layer
The Authorization Layer of the Payment Rails is where two Users at different FIs transact with each other Real-Time, for example using Credit/Debit cards.
In more generic terms, this is the layer in which two Users at different FIs determine who they wish to transact with, of how much, and include additional characteristics of the transaction.
This layer is massively more complex that the Flow of Funds Layer, as almost all transactions are Real-Time between two Users who often do not know or trust each other.
Payment Switch
A Payment Switch is a Financial Network Hub, with connections to multiple FI systems, and facilitating financial transactions between Users at different FIs.
A Payment Switch is an intermediary.
A Payment Switch processes Real-Time Authorizations between two Users who likely do not know each other, meaning the Users must be able to mutually identify each other across the Network, and then fulfill a mutually agreed upon transaction.
For example, a Customer enters their Card into a POS device at a Merchant:
1. The Merchant knows it’s the Customer’s Card as the Customer provided it, and the Customer knows it’s the Merchant’s POS device as the POS device in at the Merchant.
2. Both parties know this transaction will be processed, and under an established set of rules provided by Visa (for example), as both the Customer’s Card and Merchant’s POS device have the Visa logo on it.
The Payment Switch must establish a level of Trust between Users who do not know each other, in both the transaction processing itself and the ability to raise issues/disputes at a later time.
A Payment Switch operates in the Authorization Layer of the Payment Rails.
Examples: VISA, MasterCard and Clear Purchase.
Note: Card companies like Diners and American Express are not Payment Switches, even though they may have extensive network connections of their own. They issue their own cards and are the authorizers of transactions and are therefore Issuers, whereas a Payment Switch is an intermediary and does not issue cards.
Often called: Financial Network Hub, Payment Hub, Interoperable Payment System, or variations of these.
Within the industry, they are often referred to as Interchanges.
Visa’s Global Debit Card System 0:47
Flow of Funds Layer
The Flow of Funds Layer of the Payment Rails involves the transfer of funds between accounts at different Financial Institutions.
Within each country, this is generally performed by their national Automated Clearing House (ACH) system.
International Transfers generally only happen between two Banks that already have a relationship with each other, which is why international transfers (as well as tendering) can take weeks or even months as a transactions travels through as many as 5 or 6 different FIs.
Currency exchange is often involved in International Transfers.
Newer initiatives, like Ripple, are changing International Transfers.
This process is often called Settlement, however it must not be confused it with Payment Settlement between FI systems, described further down.
Settlement Switch
A Settlement Switch is also a Financial Network Hub. facilitating financial transactions between Users at different FIs.
A Settlement Switch facilitates Transfers of Funds, which are Force Post transactions.
The Sender of funds initiates the transaction at their FI, identifying the intended Receiver. Then follows a step-by-step transaction that works its way through the Network one system after another, each step completing before the next starts, until it finally reaches the appropriate FI and funds are deposited into the Receivers account.
This process has historically been overnight Batch processing, however systems/processes are changing and these transactions are completing faster and faster. Even if transactions were to complete almost instantly, they would be still considered extremely fast Force Post transactions, not Real-Time transactions which have a different meaning.
If transactions are extremely fast, and there is a convenient means of Users accessing the system, then they start also taking on the role of a Payment Switch.
A Settlement Switch operates in the Send of Funds Layer of the Payment Rails.
Examples: Central Bank ACH systems, Swift and Ripple.
The term Payment Switch is often used to encompass both types of Switches, especially by those that do not need to differentiate between the two layers of the Payment Rails. However, the term Settlement Switch is more specific.
Payment Network Players
The core of a Payment Network is a Payment Switch, to which Financial Institutions of all sorts connect, and which processes financial transactions on behalf of FI Account Holders (Users).
While it is almost always useful to focus on the simple network model, the real world is much more complex. There are many other players involved that take on specific roles in a sophisticated transaction network. In addition, there are likely to be multiple Payment Switches all connected together. Even this diagram is simplified.

Financial Institution (FI)
A company that holds funds in accounts on behalf of people, groups and organizations.
In the West the vast majority are referred to as Banks or their equivalent, as well as a few other types of organizations:
- Conventional Banks, Credit Unions, Building Societies, etc…
- Card Issuers, Mobile Card Wallets, Lenders, Stock Brokers, etc…
However, the list is expanding, especially in Developing Countries:
- Mobile Money Providers (MMP) e.g. M-Pesa
- Mobile Wallets e.g. AliPay
- NeoBanks, Micro Lenders (MFI), Hybrids, etc...
By keeping this definition deliberately vague, we can focus more on specific Roles an FI chooses to take on, with associated Transactions and Responsibilities.
Important: When a User communicates with their FI, it is the responsibility of the FI to Authenticate the User is who he/she claims to be.
Acquirer
The Acquirer represents the Receiver of Funds for a transaction. It is the first major system at that end of the transaction chain that consolidates transactions that directly/indirectly link to the Payment Rails.
- FI: The FI that represents the Account Holder that is receiving funds.
- Payment Gateway: When a Gateway is providing services to multiple Merchants, this Gateway would be considered the Acquirer.
- Merchant: Some of the biggest Merchants have their own system connected to the Payment Rails, so they are their own Acquirer.
This term originated with Credit Cards, where all transactions start at a Merchant. The Acquirer “acquires” the Merchant transaction, meaning it was the first to receive/create the transaction within the Network.
For ATM transactions, the Acquirer is the FI that owns/runs the ATM.
Issuer
For a specific transaction, the Issuer is the FI that represents the User that is sending the funds. An Issuer is always an FI.
This term originated with Credit Cards, where the Issuer “issued” a card to the account holder.
Note: American Express, Diners and others that Issue their own branded cards are Issuers.
However: Visa and MasterCard do not Issue their own cards, allowing FIs to Issue cards with their branding on it. Visa and MasterCard are Payment Switches.
User
A User is a generic term, with the only real requirement being a User has an account at an FI. Often called an Account Holder.
- Individuals, Groups
- Business, Merchants, NGOs, Clubs, Organizations
Almost all transactions involve two Users transacting with each other. It is the role of their respective FIs to complete that transaction using the Payment Rails available to them.
Merchant
A Merchant is a specific type of business with a specific Role in Purchase transactions only. For all other transactions, they would be just another User with an account at an FI.
If there is a Purchase Guarantee on any Merchant transactions, there must be a Merchant Bank offering Underwriting services, providing a guarantee on those Merchant sales.
Merchant Bank
A Merchant Bank offers Underwriting services to Merchants for the products/services sold, when there is a Purchase Guarantee on the transaction.
The Purchase Guarantee not only covers delivering a product, and the correct product delivered, it also covers the quality of the product within a certain time period.
In event a Dispute is raised by the Customer, the Merchant Bank will likely take on responsibility for managing the Dispute on the Merchant side, and as a last resort will stand in and honor any Dispute in event the Merchant is unable.
This is referred to as a Merchant Account.
The Merchant Bank need not be involved in the processing of the transaction authorization.
Payment Gateway
A Payment Gateway typically provides easier access to Payment Processing for Merchants, as an intermediary.
If there is a Payment Gateway, the Payment Gateway is the Acquirer in Purchase transactions.
They first became popular in the early days of the internet, making it possible for small merchants to sell goods through their website, as Banks were unwilling to provide these services directly.
Often called Payment Provider or Payment Processor, which are generic terms for the payment services Merchants see as being provided.
Sometimes called Payment Orchestration Hub/Platform.
A Payment Aggregator goes further by processes Merchant transactions under their own Merchant Account, meaning the Merchant does not need to have a Merchant Account.
Financial Service Provider
Many smaller FIs outsource their processing to a Financial Service Provider that manages their systems for them. These companies often manage systems for hundreds if not thousands of small FIs.
One of the biggest here in the USA is Fiserv.
Financial Institution Types
Banking in the West has changed at glacial speeds over the last several hundred years.
However, innovations in Financial Services in Developing Countries over the last few decades has changed everything. This is an exciting time to be in the Payment Industry.
The term Mobile Wallet is often used to encompass all types of accounts accessible through a Mobile device. However, the terms used here are preferable as they differentiate between the different entity types.

Conventional Bank or Bank
Conventional Bank can refer to almost all the Banks, Credit Unions, Building Societies, etc.... here in the West, as well as those in Developing Countries.
While there are differences between these entities, from the perspective of transaction processing they are essentially the same.
Key Characteristic: a Conventional Bank offers a network of Branches available to Account Holders.
If a Bank offers Mobile access to their accounts, they should still be referred to as Banks, with a Bank Mobile App.
Mobile Money
Mobile Money is a service offered by Cell Phone Providers (Mobile Network Operators or MNOs) to their Cell Phone Users.
The MNO manages the User’s account, which is directly linked to the User’s Phone Number, and the User can only access their account through their Cell Phone. A Smartphone is not required.
Users typically access their account using Text messages, allowing them to send money to others or pay bills.
Two additional services are Cash-In and Cash-Out, available directly from MNO Representatives or approved Merchants.
Safaricom in Kenya launched the first Mobile Money in 2007: M-Pesa. It was so incredibly popular that M-Pesa gained almost total dominance in Kenya, so much so that all the other MNOs across Africa and SE Asia copied them, offering the same services.
The biggest drawback of these systems moving forward is they are almost all Closed Systems. This means a User can only easily transact with someone else who also has a phone from the same MNO.
MPesa changed the banking world 0:53
Mobile Card Wallets
This is a Mobile App available to anyone with a Smartphone, in which the Mobile App contains the Credit/Debit Cards of the User.
The User inputs their Card information into the App during setup.
At a Merchant, the User uses the App to pay for a purchase:
Either: the User’s card information is transmitted to the Merchant system in a secure manner. The transaction is sent through the traditional card "Rails" to the Issuing Bank for authorization.
Or: a Token is transmitted to the Merchant system, which sends the transaction to the App Central System. The App Central System unpacks the Token, converting it into the User’s card information. The transaction is then sent through the traditional card "Rails" to the Issuing Bank for authorization.
Apple Pay is one example of a Mobile Card Wallet.
Mobile Wallet
This is a Mobile App available to anyone with a Smartphone, in which the Mobile App contains cash amounts in a specific currency.
Generally, Mobile Wallet accounts are free. In addition, transactions are generally extremely fast and inexpensive. Because anyone can have a free account, anyone can transact with anyone else, avoiding the biggest drawback of Mobile Money.
However, Mobile Wallets are also Closed Systems, meaning a User can only easily transact with someone else who also has an account with the same Mobile Wallet.
Examples: AliPay and WeChat Pay.
Google Pay in the West is a Mobile Card Wallet, while in Developing Countries is a Mobile Wallet.
Facebook (WhatsApp) is currently a Mobile Card Wallet, however they plan to switch to being a Mobile Wallet.

2. Payment Roles

Different Players in the Payment Network fulfill different Roles, each with different priorities. These must all be understood in order to understand the relationships between the Players.

Note: Some Players fulfill multiple Roles.

At the highest level, each Role has two top priorities, one which builds their business and one which can ruin it.

Merchant: Selling Goods & Services / Unable to get Paid
Payment Gateway: Accept All Payment Options / Lack of Availability
Acquirer: Transaction Variety / Lack of Availability
Issuer: Account Security / Lack of Availability
Payment Switch: System Availability / Security Failure

Understanding Key Payment Roles
Merchant
Focus: Selling Goods/Services
A Merchant is in the business of selling Goods/Services, and almost their entire focus should be on meeting their Customer’s needs.
Important: They are NOT in the business of Data Security.
Problem: Unable to get Paid
A Merchant does not want to lose a sale as a result of not accepting a payment method their Customers wants. However, they generally don’t have either time or money to adopt new payment methods.
For Online Merchants, their biggest problem is Payment Fraud. There will be an online purchase where they get paid for the goods/services, and then maybe a month later there is a Chargeback. Generally the Merchant is left with the loss. This is seldom a big issue for smaller ticket items. However large ticket items are more likely to be a target of Payment Fraud, and even a single fraudulent transactions can severely damage a business. As a result, many Merchants that sell large ticket items refuse to accept payments online.
Payment Gateway
Focus: Accept All Payment Options
A Payment Gateway offers Payment services to Merchants, providing the first level of access to the Payment Rails.
This is a massively complex and risky service, taking it off the hands of the Merchant allowing them to focus on their top priorities.
Ideally the Merchant would like to accept all payment methods their Customers would like to use, so a Payment Gateway will attract clients if they offer more Payment Methods than their competitors.
Pricing is generally fairly similar, and so less of a deciding factor for Merchants.
Problem: Lack of Availability
If a Payment Gateway is unavailable, then it is not able to process any payments at all. Therefore none of their Merchant clients can sell anything, except with Cash.
This would be disastrous for the Merchants, and they will switch en-masse to a competitor with better availability numbers.
The Merchant will not care who is at fault.
Acquirer
Typically an FI, a Financial Services Provider or a Payment Gateway. Sometimes a Merchant if they are big enough.
Focus: Transaction Variety
An Acquirer provides a range of transactions/services to their Clients utilizing the Payment Rails. The greater the range the more Clients they will attract.
For example, the goal for a User receiving funds is to receive those funds in any manner the sender wishes to send them.
For Purchase transactions, this is the equivalent of accepting the greatest number of payment options, as described under Payment Gateway.
Problem: Lack of Availability
If an Acquirer is unavailable, then it is not able to process any transactions at all. Therefore none of their clients can transact either, and will switch to a competitor with better availability numbers.
Issuer
Focus: Account Security
An Issuer FI provides an account for Users. These either have balances, or offer credit. Either way, the User must trust the Issuer with their money.
This includes Balances, Transactions and Sensitive Personal Information.
Problem: Lack of Availability
If a User has an account, and transactions are constantly being declined, then there is no point having the account at all. The User will just switch.
The User will not care who is at fault.
Payment Switch
Focus: System Availability
You will notice the biggest concern for Payment Gateway, Acquirer and Issuer is Lack of Availability. This is therefore the top priority of a Payment Switch.
When a Payment Switch is unavailable, then none of the connected Payment Gateways, Acquirers or Issuers are available either.
Problem: Security Failure
If there is a security failure anywhere in a Payment Network relating to Network processing, Users and FIs will start to loose trust in the Network as a whole. This is particularly bad when Users and their FIs have to correct the problem.
If it is major enough or persistent enough, then the Users and/or the FIs will insist this particular Payment Switch be avoided, or even the entire Payment Method.
See below for greater depth.
Financial Institution: Internal Payment Systems
In order to be connected to the Payment Rails, and process millions of transactions per day, it is necessary to have a massively sophisticated and resilient system.
Most FIs in the West have huge ATM Networks, and may also have huge POS Networks.
For decades, Base24 has been the number 1 vendor product in the world for running large ATM networks and heavy duty card processing systems, developed by ACI Worldwide (originally ACI or Applied Communications Inc.) (Nasdaq: ACIW).
Here is a simplified diagram of a typical Bank system using Base24 to process Card transactions.
Base24 Systems 0:51

Typical FI Configuration
A typical FI may have 3000-5000 ATMs of 5-20 different Types in their Network.
Not all Banks run POS networks any more. However, major Merchants that run their own centralized system may have 5000 stores and 60,000 POS registers connected.
There would be Interfaces to 5-20 Payment Switches (Interchanges), which may or may not include VISA or MasterCard. There would typically be a minimum of 4 (maybe as high as 16) parallel Interface connections to each Payment Switch, potentially connecting to different Payment Switch data centers.
Most FIs have 2 entire Data Centers running in parallel.
Interface
An Interface is a piece of code in a system that is responsible for communicating with another system. That other system also has an Interface responsible for communicating with this system. In effect, the two Interfaces talk to each other.
The first job of an Interface is a common language with the other system. Every Interface has different code, with different messaging requirements, or at the very least different versions. An update of communications between the two systems must be synchronized between the two systems.
The second job of an Interface is to ensure Message Integrity. This includes identifying and verifying the source of a message, verifying message content, and encryption/decryption where necessary. This also includes message timers and timeout processing, with Store and Forward (SAF) processing.
The third job of the Interface is to translate a received External message into a standard Internal message, and vice versa.
A typical big Bank may have anywhere from 5 to 20 Interfaces to different Payment Switches. There would typically be from 4 to 12 parallel Interface connections to each Payment Switch from each Data Center, potentially connecting to different Payment Switch data centers.
Importance of Payment Interfaces 1:05
Device Handler
A Device Handler communicates with an ATM or POS device.
Each ATM Type requires a different Device Handler, as an ATM Device Handler is required to manage almost all aspects of an ATM. See next section.
However, a single POS Device Handler can typically be used to communicate with all types of POS devices, as they are required to do little more than processing transactions.
There are also Teller Device Handlers that can connect to and process Teller transactions, however in practice few Banks use this feature.
Base24: Router
The Base24 Router determines the authorization destination of a transaction.
Destination is determined by the card number Prefix, which is defined as a card number length with a specific first x digits of the card number being a specific value. There is a centralized database of all Card Prefixes, and every Card Prefix used by any Issuer of cards must be registered.
If the FI is the Acquirer (originated from an ATM or POS managed by this FI) for Not On-Us transactions, then it will send the transaction to the correct Interface for processing with the correct Interchange.
If the FI is the Issuer (an On-Us transaction), then send to the Host Interface for authorizing at this FI.
Parallel Data Centers
Many FIs have multiple data centers running in parallel, with real-time mirroring of account and transaction data between the systems.
- Preservation of Data: If an entire data center is destroyed, for example a fire, then no account or transaction information will be lost.
- Continuous Availability: If one data center is is down (unavailable), the other data center(s) automatically take over all transaction processing.
When a data center comes back online, it will automatically be brought up to date with mirroring from the other systems.
Some big Banks go as far as to have ATMs divided between data centers, meaning if there is a Bank Branch with more than one ATM, then they will not all be managed by a single data center. This is expensive to do, however it increases ATM Availability.
Parallel Data Centers 0:49
Alternate Interfaces
Not all Interfaces connect to Payment Switches, in other words not all Interfaces are for Payments.
Alternatives include Gift Card activation/charging and Check Authorization.
There is the potential for a huge range of other alternatives.
Gift Cards
Some systems can process Gift Cards used at a POS device.
Activation:
A Gift Card is just a useless piece of plastic until it has been activated. While the card is being purchased, the card is activated for the desired amount. The activation is a real-time transaction sent to the appropriate destination - the sale need not take place at the identified Merchant, in which case the activation is sent out for authorization to the appropriate Interface.
Use:
A Gift Card can only be used at the Merchant displayed on the card, and that Merchant runs their own Gift Card processing. Sometimes a group of Merchants work together to provide a joint Gift Card.
Check Authorization
Some POS systems can also Authorize Checks real-time.
The Check is scanned at the point of sale with a Check Scanner, which reads the Magnetic Ink (or MICR) on the check to get the routing code, account number and check number.
For real-time Check Authorization, these account numbers are compared against a list of known Bad Check Writers, to minimize the potential for repeat bad check writing. This would result in a request being sent to the appropriate Interface for authorization by a Check Authorizer.
Regardless of a check being authorized, the Merchant takes on all liability for a bad check.
Walgreens has such a system.
Check Authorization 1:15
Financial Institution: ATM Networks
ATMs (Automated Teller Machines) were invented over 50 years ago, and are now in almost every Branch of every Bank here in the West. Two of the biggest manufacturers are NCR and Diebold.
While their primary purpose is to allow people to withdraw money any time of day or night, they can provide a surprising range of other services.
ATM Networks are extremely expensive to build and run, and generally only the biggest FIs run their own systems. A typical ATM network for a large FI might be 3000 ATMs, and 1 million transactions per day is considered small in this industry.
There are many companies that run ATM Networks (and other financial services) on behalf of smaller FIs, for example Fiserv here in the USA.

Common ATM Services
- Account Balances
- Withdraw Cash
- Deposit Cash: The only one on this list I am not comfortable doing, in case there is a disagreement about the amount.
- Deposit Checks: With newer machines this can include scanning them and printing a copy on the receipt.
- Paying Bills: This has been possible for at least 35 years.
For Not On-Us cards, transactions are generally limited to Withdrawals.
ATM Connectivity
An ATM can only operate when it is connected to the payment infrastructure, so that transactions can be authorized real-time by the Issuer.
This means ATMs connect to an ATM Network Hub, and shut themselves down if not connected.
The Network Hub initiates the connection to the ATM. However, newer ATMs with greater sophistication may provide alternate methods of connectivity.
ATM Types
There are many different manufacturers of ATMs, and each manufacturer makes (currently and in the past) many different models.
Each ATM Type operates differently to every other type, thought those from the same manufacturer are generally fairly similar.
Older ATMs are little more than a series of screen/button flows and instructions loaded from the Network Hub on ATM initialization. They also tend to have extremely basic screens to work with.
Newer ATMs offer massively more sophistication, though again most, if not all, processing is loaded from the ATM Network Hub.
ATM Admin Mode
A Branch manager has the ability to put an ATM into Admin Mode, by inserting an Admin card into the ATM.
At this point, the Branch manager (or someone else authorized by the FI) has the ability to perform certain actions, including resetting the ATM and even opening the back of the ATM.
Every action taken is recorded and transmitted to the Network Hub.
ATM Security
At a basic level, ATMs hold lots of cash and are built as big safes, making them extremely difficult to move and open.
Most ATMs now have GPS Tracking installed, including in each Cassette.
ATM Cassettes also have Indelible Security Ink to stain the bank notes (and maybe also the individual) if the Cassette is tampered with.
There is also encryption capabilities built into the ATM, used for all PIN numbers.
Most ATMs now have cameras that automatically take pictures of each user as they use the ATM.
ATM Cassette
The cash in the ATM that is to be dispensed to the User is contained in boxes called Cassettes, and each Cassette contains a single denomination of currency.
Most ATMs have 2 or more Cassette, however some small ATMs have only one.
The Branch manager generally has the ability to open an ATM and perform certain tasks, possibly including removing Cassettes, however they do not have the authority or ability to open those Cassettes.
When ATM Cassettes low, they are replaced with new Cassettes. This is NOT done by the Branch manager or anyone at the Branch. The FI central system will know when Cassettes are getting low, and will send security vehicles with security personnel to replace the Cassette with an already filled and secured Cassette.
Also called Hoppers.
ATM Skimming
The most common fraud that takes place with ATMs is Card Skimming.
A Skimmer is attached to the card reader slot, and is unnoticeable. When a card is inserted into the ATM, the Card Skimmer reads the card at the same time. The ATM continues processing as normal, so the customer has no idea something is wrong.
There will also be a means of recording the PIN number for the card, for example a video camera placed discreetly and focussed on the keypad.
ATM Network Hub: Device Handler
A typical FI may have 3000-5000 ATMs of 5-20 different Types in their Network. This scale of network will quickly become unmanageable unless the ATMs are standardized and centrally managed.
Each ATM Type generally requires a separate piece of code at the Network Hub to manage ATMs of that Type (called Device Handlers). The Device Handler communicates with ATMs with message structures specific for that ATM Type.
- ATM Initialization: Standardized configuration is loaded into the ATM at startup. Includes Screen Load Files containing screen/button flows and instructions. These can get quite large, especially if multiple languages are used.
- Card Transactions: Request transaction with encrypted PIN, and responding with approval/decline.
- ATM Errors
- ATM Status: Alerts can be sent, for example when a Cassette is getting low. Also, every action when in Admin Mode.
A certain amount of individualization is often available, generally for things like Welcome Screens, managed by the Branch Manager.
Importance of ATM Device Handlers 1:15
ATM Card Transactions
ATMs send Card Transaction Requests to the FI Network Hub for processing, including encrypted PIN.
The FI Network Hub then sends a Request to the appropriate destination for authorization. The FI that runs the ATM is the Acquirer for these transactions.
For some ATM Types, when an approval is sent to the ATM for the withdrawal of a specific amount, it includes instructions as to how many notes to be dispensed from which Cassettes.
The FI Network Hub tracks note counts in each Cassette, and initiates replacement procedures when reaching a threshold.
As mentioned above, 1 million transactions per day is considered small in this industry. These are the heavy duty systems that connect to the Authorization Layer of the Payment Rails.
ATM Availability
One of the top priorities of the Banks in the West is ensuring ATM availability at all times of the day and night.
They know that if a customer is needing some money at midnight, then they really need that money. If the ATM is not working, then they are likely to be so upset with their bank they will switch everything to another Bank.
For example, when an FI schedules a system upgrade, they generally schedule it between 2am and 4am on a monday morning, the lowest transaction volume time of the week.
In addition, some FIs have developed their system so that a code/database upgrade seldom results in any down time.
ATM Availability 0:59
24 Hour Branch Support
Banks that have ATM Networks must provide 24 hour support to their ATMs.
When an ATM experiences an issue, either generating a message or losing connectivity, the central system generates appropriate warning messages.
In addition, when the central system itself experiences issues, warning/error messages are generated.
It is the responsibility of the Support team to follow procedures in an attempt to resolve any issue. If they are unable, and the severity is sufficient, they can elevate the problem to the next level.
Due to the importance of availability, this group is generally broken into three teams of 4-12 people in 8 hour shifts.
ATM Branch Support 0:56
ATM Fees
As mentioned above, it is expensive running ATM Networks.
As a result, ATM services are generally free to On-Us customers, however there is often a fee for Not On-Us customers. The fee can vary dependent on the location of the ATM, for example ATMs in casinos often have extremely high fees.
Some enterprising people saw an opportunity and created a company consisting of just an ATM Network, placing ATMs in popular locations and generating revenue purely with ATM fees.
Payment Switch: Requirements & Obligations
A Payment Switch is the central player in a Payment Network.
A Payment Switch provides services primarily to FIs, and so the Requirements of a Payment Switch are driven by the needs of the FIs. Basically, what they need to do so that the FIs are confident connecting their system to the Payment Switch.
Important: The FIs are putting their reputation on the line offering services to their Account Holders that are provided by the Payment Switch.
Payment Switch Complexity 0:42
The Payment Switch also has Obligations beyond pure Operating Requirements.
Most, if not all, Requirements and Obligations are defined at the creation of the Payment Switch, and are incredibly difficult, if not impossible, to change later.
For example, when Visa issues a Visa Mandate, which is a change all FIs must adopt, they give FIs 6 years to comply. It takes this long!
Percent of Work 0:23

Transaction Routing
The central job of a Payment Switch is to receive a transaction Request from one system, and determine which is the appropriate destination the Request should be sent to.
This may be directly with the FIs or indirectly through other Payment Switches or intermediaries.
Message Translation
Each connection to a Payment Switch will likely be different to any other connection:
- Different means of communicating, and security measures.
- Different messaging structure, and versions.
- Different encryption types/keys.
Therefore, for transactions between two connected systems A and B, the job of the Payment Switch is to translate the message as it flows through the Payment Switch:
- Request: Receive Request from A in format A’, translate into outgoing Request to B in format B’.
- Response: Receive Response from B in format B’, translate into outgoing Response to A in format A’.
System Availability
The Payment Switch must provide staggering levels of System Availability.
Have a look as what Banks do to ensure availability of their own systems, especially ATM networks. If they require this level of availability on their own systems, they will expect far more of every Payment Switch they connect to.
Think about it, if a Bank system goes down, the Bank is responsible, and their account holders will hold them responsible. They accept this.
However, if a Payment Switch goes down, the Bank is no longer able to offer those services, and their account holders will hold the Bank responsible.
Payment System Availability 0:23
Transaction Integrity
There can NEVER be any lost, changed or duplicated transactions.
In a Payment Network, the Payment Switch is responsible for defining rules and regulations around Transaction Integrity, and then ensuring those rules are met. This includes within their own system.
Important: An FI will be held responsible by their Account Holders for any inaccurate transactions, regardless of where the fault actually lies. The FIs know this and will be scrupulous when looking at a Payment Switch, both with the Rules as well as historic data.
Data Security
The Payment Switch sets up communication message requirements to facilitate transactions.
In every transaction there is likely to be sensitive information about the User. It is the responsibility of the Payment Switch to enforce security standards to minimize the potential of a breach of security relating to User’s sensitive personal information.
Government Regulations and Standards are often applicable here.
In the USA, the Accredited Standards Committee (ASC) is responsible for writing National (ANSI) and International (IS0) data security standards for the Payment Industry - their X9/F6 Working Group. Nick Brown has been a member of that Group.
ASC X9/F6 Working Group 0:47
Regulations & Standards
A Payment Switch must abide by applicable Regulations and Standards, especially around Data Security.
Not only are they responsible for applying them to their own system, they are also by extension responsible for them being met through the entire network.
It is the responsibility of the Payment Switch to ensure all parties involved in the Network understand appropriate Regulations and Standards, including Users and Merchants. In addition, it is their responsibility to enforce those Regulations/Standards on connected systems, and through them to all other parties involved.
These fall under Common Set of Rules.
Common Set of Rules
A Payment Switch, in essence, is providing a level Playing Field for all FIs and their Account Holders to play on. They are responsible to defining the Set of Rules for all to follow.
When an FI agrees to connect to the Payment Switch, they can take comfort in knowing all other companies/systems in the Network have also agreed to abide by the same Set of Rules, and those rules will be enforced equally by the Payment Switch.
Enforcement is essential, with warnings and other consequences, all pre-determined and published publicly beforehand by the Payment Switch.
Certification
It is standard practice for all Payment Switches to require all connecting FIs to go through an extensive Certification process.
This is to test whether the FI system will operate as required, including a range of error scenarios.
This is generally a fairly brutal process, requiring 100% accuracy in order to pass, and the FI cannot go into production until is passes. However, the FIs are generally very happy with this as it means every other FI in the network also meets the same standards.
When there is a Version Update to communication messaging between a specific FI and a Payment Switch, Certification must take place to test this new Version. However, at the decision of the Payment Switch, this may be limited to a specific smaller set of Certification tests.
Dispute Resolution Procedures
This is the big one.
When errors occur (unavoidable), they can be corrected. However, Payment Fraud is massively different, and must be considered and addressed at a foundational level.
The FI (and later their Account Holders), must understand the various types of Disputes that may arise, as well as the steps that must be taken by each player in order to reach resolution.
Some disputes reach an agreement between the two main parties, generally when an error has occurred, or one player has a company policy to offer returns (for example).
However, all parties must consider and accept the worst case scenarios, especially when fraud has taken place. In these cases neither party is likely to agree to a resolution, and so it is the role of the Payment Switch to provide detailed scenarios under which default rulings are to be enforced. Someone is going to be left holding the bag.
This must be agreed-upon by the FIs prior to connecting to the Payment Switch, as well as every Account Holder prior to them utilizing these services.

3. Transaction Processing

Transactions generally involve a pair of Users transacting with each other, with the transaction being facilitated by their respective FIs through the Network.

Force Post, where the transaction is initiated in one FI and will eventually get to the appropriate destination. While these can complete really fast, there is no necessity for them to do so. Generally, the Users are not standing waiting for the transaction to complete.

Real-Time, where the Users are waiting for the transactions to complete. A Request is sent from System A to System B, followed by a Response from System B back to System A. Card transactions are Real-Time.

Real-Time transactions are far more complex to facilitate and secure than Force Post transactions.

The following diagram shows a simplified Credit/Debit Card transaction flow.

Even though the Request may travel through 5 or 6 systems to the Issuer for Authorization, with the Response returning back through those same systems, Card transactions are generally approved in less than 1 or 2 seconds.

Transaction Types
Non-Purchase Transactions
Non-Purchase transactions are generally fairly simple, mostly involving single directional Force Post transactions.
Funds Transfer
Send of Funds from Sender to Receiver.
Payroll
Send of Funds from Employer to Employee.
More complex Payroll may include withholding taxes, retirement payments, and other items.
Bill Payment
Send of Funds from Payer to Biller.
Options:
- One-time, for example a Bill.
- Automatic, payment made on a specific date in the future.
- Recurring Fixed, for example Rent.
- Recurring Variable, for example Utilities.
- Structured with an end date, for example Loan Repayments.
These can be in response to a Bill Presentment from the Biller to the Payer.
Loan & Loan Repayments
Loan: Send of Funds from Lender to Borrower. May includes Loan Terms & Conditions, and Repayment Schedule.
Repayments: Structured Recurring Send of Funds from Borrower to Lender.
ATM Withdrawal & Deposit
This is when someone uses a Card at an ATM, though non-Card capabilities are becoming available.
These are Real-Time transactions.
See above for additional services available at ATMs.
Teller Withdrawal & Deposit
A Teller refers to a Bank Representative inside a Branch of the Bank.
Most Banks only allow their own Account Holders to use these services.
Cash-In & Cash-Out
An FI Representative physically accepts cash from an Account Holder and electronically deposits funds into their account, or withdraws funds from their account giving physical cash to the Account Holder.
These are similar to Teller transactions, except not being inside a Bank Branch.
Currency Exchange
The exchange of one currency to another. This can be a stand-alone transaction on behalf of a User, or integrated into another transaction where Sender sends funds in one currency and Receiver requires a different currency.
Purchase Transactions
Purchases are massively more complex than any of these others, with various types and followup transactions possible.
Purchases are Real-Time transactions.
Purchase
A Purchase involves a Customer and a Merchant transacting with each other, who likely do not know each other, and are standing waiting for the transaction to complete.
Purchases are massively more complex than a simple Send of Funds, with a variety of initial and followup transaction types.
Complexity of a Purchase 1:04
Regular Purchase
A Customer purchases Goods or Services from a Merchant, either in person or remotely (online, mobile or over the phone).
A Purchase consist of a Request Message from Acquirer to Issuer, with a Response Message from the Issuer back to the Acquirer either Approved or Declined.
Pre-Auth & Completion
A Pre-Auth Purchase (Real-Time) transaction is for a ‘guess’ amount, which is then followed by a Completion (Force Post) with the actual amount once known.
Gas (petrol) Stations and Hotels often use this method.
On Authorization, the Issuing FI places a Hold on the account for the amount specified, which is replaced with the actual transaction amount on receipt of the Completion.
Cancel
A Cancelled transaction is one where the Merchant or the Customer cancels a transaction that has already completed, or while waiting for a response.
The Purchase never took place, and should be undone by all concerned, though it will still be recorded (logged).
Reversal
A continuation to a completed Purchase transaction, involving the full/partial return of funds from the Merchant to the Customer.
A Reversal is a voluntary transaction initiated by the Merchant.
Dispute Resolution
This is the process of a Customer raising a Dispute on a previously completed Purchase transaction.
Credit Card transactions include purchase guarantees and dispute resolution, while debit cards generally do not. Below you can see an overview of the dispute resolution process for credit card transactions.
Chargeback
A Chargeback is when funds are pulled from the Merchants account without consent of the merchant, associated with a prior purchase in which the Customer has raised a Dispute.
Transaction Processing Terminology
Real-Time
Transactions are Real-Time when a Response from the Issuer is necessary for the transaction to be complete, generally with people standing around waiting.
Examples: Purchases and ATM Withdrawals.
Force Post
Transactions are Force Post when the approval of the transaction is decided entirely by Acquirer, followed by the completed transaction being sent system by system until it reaches the Issuer.
There must not be any need for urgency in the Issuer receiving the transaction, in other words people are not waiting for the transaction to be processed by the Issuer before they continue with their day.
The timer set on messaging between two systems need not be the same as for Real-Time transactions. In event of a timeout, the transaction is simply placed into the SAF File if not already present.
Examples: Reversals, Completions, Stand-Ins, Send of Funds, Bill Payments, and so on.
Response Codes
The Issuer is responsible for authorizing a transaction, though the transaction does not always reach the Issuer.
There are a huge number of possible Response Codes, that fall into four main categories:
- Approval
- Decline (generally includes reason for decline)
- Timeout (decline)
- Error (identifies the error and where the error happened)
Timeout: Real Time Transactions
A Timeout is necessary between systems for all transactions. There is even a timeout in the entry point for transactions, for example a Merchant POS Device or an ATM.
The time specified for Real-Time transaction timeouts is important, as people are waiting around for the transaction to complete.
For example, while most Card Purchases completed in less than 2 seconds, there is generally a timeout of around 7 seconds set by the Merchant in their POS Device.
All intermediary systems have timeouts configured, and a timeout results in a timeout decline sent back to the Acquirer.
The Acquirer must Stand-In and decide the course of action to take:
- Decline (with timeout as the reason provided)
- Stand-In Approval. This will result in a Force Post Approval being initiated and sent through to the Issuer.
Late Response: Action must be taken on receipt of a Late Response for a transaction previously timed out, dependent on whether approved or declined, and also on the Stand-In action that was taken.
Timeout Processing 0:58
Timeout: Force Post Transactions
A Timeout is necessary between systems for all transactions.
However, for Force Post transactions there is little necessity for quick completion. The only real obligation is the transaction successfully reach the correct destination.
A Request will be sent to the next system in the transaction chain repeatedly until a Response is received.
Stand-In
A Stand-In transaction is one where the Acquirer “stands in” on behalf of the Issuer and Authorizes or Declines a transaction.
This generally only happens when connectivity to the appropriate Payment Switch is down, or the transaction was sent and timed out.
Whether the Acquirer stands in or not is at the discretion of the Acquirer, which takes on the risk in event the transaction would have been declined by the Issuer. There are often criteria and limits placed on a Stand-In Approval, for example Purchases must be under $20.
Store and Forward (SAF)
Store and Forward only really takes place when communication between systems is down or slow, and only applies to Force Post transactions.
A SAF transaction will be sent repeatedly until a Response is received. On a Timeout, reset the SAF to resend the transaction again at a specified later time.
When communication has been down for a while, SAF transactions can build to a huge number. When communication is later re-established, SAF transactions must be sent to the destination interspersed with Real-Time transactions. This may well result in transactions being sent and received out of order, and may sometimes result in conflicts that must be resolved.
There is considerable complexity involved in ensuring clean processing of SAF transactions.
Settlement
Settlement is the process of confirming transactions processed match between two systems.
This is sometimes call End-of-Day Processing, Extract and Settlement, etc…
Settlement generally takes place at a specific time, listing all the transactions that have taken place between two systems, as well as transaction totals.
One system sends the Settlement information to the other, which confirms accuracy.
This is not nearly as simple as it sounds as there are legitimate reasons for inaccuracies, often caused by loss of connectivity, canceled transactions, timeouts or SAF processing. Transactions may appear in one system on one day, and in the other on a different day.
All mismatches have to be resolved.
Identification & Authentication
Identification is declaring who you are, whether with a name, an account number, a phone number, a login ID, or some other manner.
Authentication is verifying you are who you say you are. This can be with an ID card, a password, a PIN, or some other manner.
When a User communicates with their FI, it is the responsibility of the FI to Authenticate the User is who they say they are.
The USA government instituted regulations many years ago that forced Banks to implement Dual Authentication for all online interactions with their account holders.
POS (Point of Sale) Devices
A POS device is the machine used by the Merchant for accepting payment from the Customer.
While these are mainly for Credit/Debit Card transactions, more recently they have been modified to also accept Mobile App based transactions like Apple Pay.
POS devices are generally integrated with the Merchant’s Register, and can therefore be synchronized with Customer receipt, items sold, Merchant’s stock management, and Merchant’s accounting and Return systems.
On-Us & Not On-Us
An On-Us transaction is one where the Acquirer and Issuer is the same FI. On acquiring a transaction, the FI identifies the card as one of theirs, and rather than send it to a Payment Switch (paying the associated fees), they simply redirect it to the processes that authorized the transactions for account holders (often called the Host).
The term Not On-Us is therefore a generic term for an acquired transaction where the account holder is not recognized, therefore necessitating sending the transaction to a Payment Switch for authorization by the Issuer.
Echo Test
An Echo Test is a Request message sent from one Interface to the other system, simply looking for a response that it was received.
This is programmed to happen if there has not been any other messaging for a specified amount of time, to confirm that communication has not been lost.
While this may seem minor, this is a surprisingly important part of ensuring network integrity.
“Card Present” Flag
Buried deep in a Purchase transaction is an unassuming flag of huge importance.
The Card Present flag indicates whether the Customer’s card was physically presented to the Merchant or not at the time of purchase.
All remote transactions are “Card Not Present”: online, mobile and over the phone.
Mobile Card Wallet payments in a store are currently considered “Card Present”, despite the actual card not being physically presented to the Merchant.
Liability Ramifications

Liability in event of disputes or fraud on Credit Card transactions depend heavily on this field, with the following being the default:
“Card Present” - the Card Issuer accepts liability.
“Card Not Present” - the Merchant takes the loss.
Purchase Guarantees & Dispute Resolution
General Principle: When there is money involved, someone out there will try to abuse the system.
A Purchase Guarantee is essential for remote (online/mobile) purchases:
What do you do if you buy something online, and two weeks later receive an empty box?
If there is a Purchase Guarantee, then there must be a means for the Customer to raise an issue with a previously completed Purchase. This process is called Dispute Resolution.
Why Purchase Guarantees? 0:54

Credit Card Purchase Guarantees
All Credit Card transactions include Purchase Guarantees, while Debit Card transactions generally do not.
Types of Disputes raised by the Buyer:
Invalid Transaction: The Buyer claims they did not authorize a transaction on their account. This is the vast bulk of Credit/Debit Card fraud.
Non-Receipt of Product/Service: The Buyer claims they never received the purchased Product/Service.
Not as Promised: Product/Service not what was ordered. Product damaged when arrived. Did not work, or stopped working. Did not meet expectations.
Credit Card Dispute Resolution Process
1. Initial Dispute: The cardholder contacts the card Issuer to challenge a transaction, generally by calling the phone number on the back of the card or on the monthly statement. The cardholder presents their case, and issuing bank representative determines whether there is case for the dispute.
2. Provisional Refund: The issuing bank provides a provisional refund to the cardholder for the disputed transaction.
3. Chargeback: The issuing bank initiates a chargeback, to pull funds back from the Merchant, adding an additional chargeback fee. This chargeback is sent to the Acquiring bank, and funds are automatically pulled from the Merchant Account.
Important: The Merchant has no say in this whatsoever, and neither does their bank.
4. Merchant Review: The Merchant is notified of the chargeback, and provided information and evidence collected from the cardholder. They are then able to review the case and decide whether to challenge the chargeback.
5. Representment: The Merchant can then challenge the chargeback. They gather evidence resubmits the transaction with appropriate evidence.
6. Issuing Bank Review & Decision: The Issuing bank reviews the new information and rule in favor of the Merchant or uphold their original chargeback.
7. Card Network Arbitration: If the banks, Merchant and cardholder cannot come to an agreement, then it can be presented to the card network for arbitration.
Note: Arbitration almost never happens, as it is in the interests of both banks to resolve the dispute quickly.
Notes of Credit Card Dispute Resolution
When in doubt, the assumption is the Customer is telling the truth, and the merchant loses out. However, there are rules to be followed to determine who is going to take the financial hit. For example see Card Present Flag above.
Important: There is considerable cost to the banks as they have to employ teams of people to answer calls from cardholders for disputed transactions, and then manage the dispute process, which often includes repeated calls from cardholders to check on status, provide more information, or challenge a decision.
It is for these reasons that Payment Fraud is so costly. Fraud Management can often be far more than the fraud itself. There is an entire section below dedicated to payment fraud for this reason.
Dispute Resolution from First Principles
Consider what is needed for any Dispute Resolution system to work.
Original Purchase Transaction
a. A dispute arises from an Original Purchase Transaction between a Buyer and a Seller.
b. Funds were sent electronically from the Buyer’s account at their Financial Institution to the Seller’s account at their Financial Institution.
c. The Payment Method selected resulted in the transaction being facilitated between FIs by the appropriate Transaction Facilitator.
There are bad people out there
Most people & businesses are honest, and when there is a legitimate issue will try to reach an amicable solution, though this is not always possible.
However: When there is money involved, someone out there will try to abuse the system. Fraud can be perpetrated on the Buyer side, or the Seller side.
From first principles:
1: Clearly Defined Dispute Resolution Rules & Processes
There must be a clearly detailed Dispute Resolution process, known to all parties involved prior to any transaction taking place.
All parties involved must understand what is considered a valid dispute, and how a dispute is determined to be valid.
2: Resolution Process must be Enforceable
Dispute Resolution is pointless unless it is enforceable on all parties involved.
3: Involves all parties from Original Transaction
In order to identify each step of the original transaction, as well as apply enforcement, every party involved in the original transaction must also be involved in Dispute Resolution.
4: Financial Institutions represent Buyer & Seller
The only party the Buyer can approach relating to the original transaction is the FI from which the funds were sent to the Seller.
Similarly, the primary party for the Seller to respond through is the FI into which the funds were received.
There must be a mechanism for the Buyer be able to raise a dispute with their FI relating to the identified transaction, and for the Seller to respond.
5: Ability to Retrieve Funds from Seller
The only way to guarantee a Seller will participate is to proactively forcibly retrieve appropriate funds from the Seller’s Account.
These funds can be held independently until resolution.
Alternatively, these funds can be transferred to the Buyer until resolution. This would require being able to forcibly retrieve those funds from the Buyer and returned to the Seller if necessary on resolution.
6: Requires a Guarantor of Seller
It is unfortunately a common practice for there to be Fake Sellers. There are also instances where Sellers have insufficient funds in their account, or more challenging going out of business.
In order to accommodate all of these scenarios, there must be an independent third party that will vouch for the Seller, effectively becoming the Guarantor on purchases from this Seller.
7: Transaction Facilitator facilitates Dispute Resolution process
The Transaction Facilitator, having facilitated the original transaction (between FIs), is the only viable entity to facilitate the dispute (between FIs/Guarantor).
This could be as minimal as connecting the FIs and Guarantor together to let them sort it out, all the way up to managing the entire process.
Disagreements between involved parties must be resolved by the Transaction Facilitator.
8: Transaction Facilitator sets the Rules
The common set of rules/processes must be defined and maintained by the Transaction Facilitator, and they must seem fair and impartial.
The different parties involved should be included in any amendments to these rules/processes going forward.
9: Transaction Facilitator enforces the Rules
There must be some means for the Transaction Facilitator to either enforce the rules, or penalize a breaker of rules.
The main tool for enforcement is the threat of removal of a Guarantor or FI from the entire Payment Method.
The FIs and Guarantor are responsible for enforcement of these Rules on the Buyer and Seller.
10: Transaction Facilitator should be International
With the continuing growth of international transactions, the Transaction Facilitator is already likely to be international, and if not should plan on becoming so.
Currency Exchange is a part of international transactions. Managing currency exchange for international disputes is challenging and must be clearly defined to all parties involved.
Understanding Payment Fraud
Payment Fraud is the bane of Payment Interoperability, and by the time it happens it’s already too late.
It is impossible to build a perfect system, so there will always be ‘holes’ that allow for fraud. Unfortunately, it is not until a system is running in production, and people find and start abusing those vulnerabilities, that you become aware of them and can attempt to fix them in some way.
Some vulnerabilities can be fixed easily, while others cannot be fixed at all. In addition, if a fix requires changes in multiple systems, it may be years for a fix to be fully implemented.
Closed Systems are relatively easy to protect, and any fraud once identified can generally be easily reversed.
Interoperability with a Payment Network makes a far bigger target, and is far more vulnerable.
Payment Fraud must be understood before connecting to a new Payment Switch. The consequences of a mistake could be devastating for your company.
Scale of Payment Fraud 1:21

Credit/Debit Card Fraud: $25 Billion/year
Credit/Debit Card fraud is massive and global.
The vast majority of it takes place in two stages:
1. A system is broken into and Card information is stolen. Millions of Cards can be affected in a single breach. Quite often, especially for smaller merchants, the company is not even aware of the intrusion having taken place.
2. Card transactions using stolen information are initiated online, purchasing goods/services. These often take place in a different country, making it almost impossible to stop. Criminal organizations that do this can run millions of transactions per second, and all it takes is 1% succeeding and they have a massive payout.
These are the "I didn’t do that" transactions.
The Weakest Link in the Transaction Chain
Payment Fraud targets the Weakest Link in the Transaction Chain, which is invariably the Merchant.
The reason for this is the Merchant is NOT in the business of data security, while every other company in the transaction chain is.
A breach anywhere in the Network puts every company in the network at risk.
For example: Merchant chain store Target here in the USA had their system hacked in 2013, with information on 70 million credit/debit cards being stolen. While it was the Merchant system that was hacked, it was Customers and their Banks that had to clean up the mess.
Push Systems are Safer
Push systems massively reduce the potential for Payment Fraud.
The main reason for this is ALL transactions are initiated by the User interacting with their Issuer FI. There can never be an "I didn’t do that" transaction, as the FI directly Authenticates the User.
Questions to Ask
Before connecting to a Payment Switch, ask the following questions:
- What types of fraud are there?
- How much fraud can happen of each type?
- What effect will the fraud have on my customers?
- What will my company have to do to manage the fraud?
- What can we do to prevent the fraud from happening in the first place?
- What will other companies do to prevent the fraud?
- Who will take responsibility for the fraud?
And the list goes on.
Look at a Transaction Flow diagram, and ask the following:
- How easy is it to impersonate a customer?
- How easy is it to impersonate a merchant?
- How easy is it to break into each system in the network?
- How secure are the connections between systems?
- What sensitive information does each system have about the customer?
- What sensitive information about the customer is transmitted in communication between systems?
- What other damage can be done to each system?
- How easy is it to imitate a system within the network, for example your company, or the Payment Switch itself?
Opportunistic Fraud
This is where an individual sees an opportunity to abuse a payment method, and does so for a few transactions, generally at the expense of another User.
Examples for Card transactions:
- Receiving a product by mail and claiming the box was empty.
- Accidentally breaking something, and claiming it arrived that way.
- Stealing someone’s Credit Card and using it in a store or online.
- Stealing a package from a delivery truck, or from in front of a house.
- Selling something and sending an empty box.
The individual generally continues until a pattern emerges, and the person is often caught and stopped.
At a network level, the number of these transactions is fairly small initially, grows slowly, and has fairly consistent volume. While important, there are seldom massive spikes in fraud numbers.
Once detected, there is generally time to address that type of fraud, maybe with a fix, or by putting measures in place to minimize volume/damage.
Institutional Fraud
Criminal organizations have been successfully attacking the well-protected systems here in the West for decades, despite the vast amounts spent on protecting these systems.
This is “big business” for them, amounting to most of the $25+ Billion of fraud every year.
When they attack, the numbers are huge, and can happen all at once. This is why they are so dangerous.
Having said that, Credit/Debit Card fraud is kept to a manageable level, and no banks have gone out of business as a result.
Fraud Prevention
Issuers, Acquirers and Card companies have spent huge amounts of money on fraud prevention measures.
The goal is to identify potential fraud while the transaction is taking place. Once a transaction has completed, it is too late.
Some experts have estimated the total cost of fraud prevention measures to be 1⁄2% the value of all credit/debit card transactions.
Despite extensive fraud prevention measures, 8% of sales by online merchants are estimated to be fraudulent.
Fraud Management
The real cost of Payment Fraud is managing the fraud.
The User identifies what they consider a Fraudulent transaction, and initiates a Dispute with their Issuer using standard Dispute Resolution procedures/system, if available for the transaction.
Then follows the long process of communicating between the Issuer, the Acquirer and every party in between in the transaction chain, to determine the outcome based on the Network rules. These companies have to employ large numbers of people to manage these calls.

4. Payment Mega Trends

For years, currencies have been issued by Central Banks for use by the citizens and businesses in their country, including printing/minting of physical notes and coins. Banks have balances in that currency on behalf of account holders, which are obviously in digital form.

Transactions are either completed with physical cash, or are performed electronically through the infrastructure described in this Glossary.

This is an incredibly complex and risky industry. Once systems are working, there is a natural reluctance to change anything. Coordinating a change is also incredibly difficult - even minor Visa mandates take 6 years to implement across the entire network.

The most recent major change to the Card Rails was the EMV or Chip-and-Pin Card, first introduced in France in the 1980s, with EMV standards starting in 1995, however not adopted widespread in the USA until around 2015-2020.

The Internet Changed Everything

With the advent of the Internet it became possible for new methods of transacting that avoid the existing infrastructure, and also made it possible for new types of currencies.

Cue the creation and popularity of Bitcoin.

2 Global Market Opportunities

The race is on for the first/best payment method (or even individual company) that meets the needs of these market opportunities.

- Micro-Purchases: There are around 3 Billion people living in poverty, living on up to $5 per day. While many of these people are starting to get Mobile Money or Mobile Wallet accounts, transactions are limited to funds transfers, and often restricted in who you can transact with. While most organizations/initiatives are currently focussed on providing Micro-Transfers, the real prize is Micro-Purchases.

- International B2B Transfers: These are currently notoriously slow and expensive. There are many companies focussed on speeding up this process, and reducing costs.

Note: Dominance in either of these could easily result in cannibalizing other existing market segments, as users migrate other transaction processing over to the new provider/method for convenience.

All 4 Mega Trends below could partially/fully meet the requirements of these market opportunities. Only time will tell which one or ones end up being adopted.

#1: Financial Infrastructure in Developing Countries
Financial Infrastructure has been working extremely well in the West for the last 50+ years.
Equivalent Infrastructure is slowly being built in Developing Countries, each country building their own often based on and with guidance from the West. This happens one piece at a time, when each country is ready for it.
There are also different types of players involved, suitable for the different demographics and cultures. We discuss some in the Financial institution Types section above.
As there are few legacy systems in Developing Countries to deal with, there is an opportunity to create new rather than blindly accepting the old.
However, this is a time to be careful. There are many reasons why we in the West do things the way we do - some are essential while others are no longer applicable - learn from us. This is the main purpose for Nick Brown writing this Glossary.

Central Bank - ACH - Settlement Switch
Most Central Banks across Developing Countries have already built ACH processing capabilities, and many are continuing improving them.
Most ACH systems here in the West are overnight batch processing, which has worked extremely well for decades. However, many are in the process of speeding up inter-bank funds transfers with the goal of near Real-Time transfers.
By not being tied to legacy systems, Developing Countries will have an easier time achieving near Real-Time transfers.
Settlement - Ease of Access
Payment Switches are incredibly complex and risky, and are mostly absent in Developing Countries for now.
However, there are many projects in Developing Countries focussed on speeding up Settlement Processing, and making them far easier to access for regular people.
They are moving closer to becoming a Payment Switch - what’s missing are Real-Time Purchases.
Pix in Brazil
Pix was built by the Brazilian Central Bank to make it easy for people to send money to each other and to businesses. Launched at the end of 2020, it is becoming extremely popular.
Mowali in Africa
Mowali is being built by Orange and MTN, two of the biggest cell phone providers in Africa, connecting their Mobile Money systems together for Transferring Funds. Based on Mojaloop, developed by the Bill & Melinda Gates Foundation, discussed further down.
Currency Exchange
This is a key discussion for each country.
When electronic infrastructure is in place, more and more people will have the ability to transact electronically with each other, and there will be broader access to currency exchange.
What will be the policy of the government of each country?
With a freely floating currency, managing currency inflation will be paramount to avoid currency volatility, and minimize the potential of the currency destabilizing.
However, a fast freely floating currency would encourage international trade and boost the entire economy.
Important: If a country restricts the free exchange of its currency, or slows the process down, businesses will tend to use a more accommodating one instead for international deals.
Payment Interoperability
The goal is to connect all the different Financial Institution systems together seamlessly for Purchases.
- Conventional Banks
- Mobile Money
- Mobile Wallets
- Neo-Banks
- Micro-Finance Institutions (MFIs)
Major Requirement: Tiny Purchases
For poor people living on less than $5/day, a typical daily transaction might be 50¢, and for those earning around $2/day it might be 10¢. If they are unable to complete all their every-day transactions electronically, then they will continue using physical cash for almost everything.
Not only must it be possible to do every transaction electronically, these transactions must also be viable for all parties concerned. In other words, associated fees must be small enough so that Merchants will not object, preferably with no minimum fee.
Financial Inclusion
As you can see, it is extremely difficult offering even the most basic financial services to the poorest people on the planet.
They are often referred to as the Unbanked or Underbanked, and providing them with a range of financial services is the focus of the global Financial Inclusion challenge.
Dispute Resolution
As mentioned before, Purchase Guarantees are essential when purchases can happen remotely. Therefore, Dispute Resolution processes/procedures must be available to the Customer, with a specific contact entity and means of communication - for Credit Cards it is a phone number to the Issuing Bank.
A Head Start
Unlike any of the other Payment Mega Trends, existing Payment Infrastructure already offers Dispute Resolution on some transactions - Credit Cards.
The Goal: Dispute Resolution on Tiny Purchases
This is where it gets difficult. Credit Cards cannot be used for tiny purchases due to the 20¢-35¢ minimum fee.
However, we have a blueprint for Dispute Resolution working across Interoperable Networks, which can be expanded and modified to accommodate tiny purchases.
Clear Purchase has been specifically designed to facilitate tiny purchases with Integrated Dispute Resolution.
Dispute Resolution in Developing Countries 0:37
Card Rails
Card companies have been making steady inroads into Developing Countries for several years now.
Merchants: Their primary markets are for tourism, and for the more affluent areas of bigger cities.
Issuers: Their obvious focus is the more affluent 5%-20% population, depending on the country.
Limitation - Transaction Sizes
For poor people with income of less than $5/day, a typical every-day transaction might be 50¢ or as low as 10¢.
Unfortunately, there is a 20¢-35¢ minimum fee on all card transactions (for good reasons). This is not a viable option for Merchants.
Cards are unfortunately not suitable for the poorest 50%-90% of the population in most Developing Countries.
Debit Cards - No Dispute Resolution
Credit Card transaction include a Purchase Guarantee with Dispute Resolution available. Debit Card transaction do not.
This is a major issue as few Financial Institutions in Developing Countries offer Credit Cards to their account holders. If a card is available, it would likely be a Debit Card.
Mojaloop - Bill & Melinda Gates Foundation
The Bill & Melinda Gates Foundation has spent considerable time and money on Financial Inclusion, with their Financial Services for the Poor group.
As part of this, they developed Mojaloop (initially called the Level 1 Project), a Financial Interface allowing two financial systems to communicate with each other.
Mojaloop Interface
The Mojaloop Interface is a piece of code located on one Financial system that communicates with a similar Mojaloop Interface on another Financial system, to facilitate a funds transfer between the two Financial Institutions.
Nick Brown has discussed the Mojaloop Interface at length, complimenting the excellent quality of work, especially considering no payment experts were involved.
He has expressed security concerns regarding this Interface primarily due to it being open source.
While initially reluctant to adopt it for use by Financial Institutions connecting to the Clear Purchase Payment Switch, he changed his mind as he sees the benefits outweigh the concerns, and can add sufficient security measures to meet his standards.
Mojaloop Hub
The Mojaloop Hub is a different story. Nick Brown has been extremely critical of their open source Payment Switch code. Not only does it fail to meet even the most basic requirements of a Payment Switch (see above), the fact that it is open source adds massively to security concerns.
When a Payment Switch fails, it will likely take every connected company down with it.
He sees the Mojaloop Hub as a disaster of epic proportions just waiting to happen.
The Real Value of Financial Infrastructure
By its very nature, Financial Infrastructure encourages competition and innovation.
Level Playing Field for All
When comprehensive Payment Rails are in place, thousands of Banks and other Financial Institutions can (almost) equally connect to the Rails offering their blend of services. Through them, regular people and businesses also have (almost) equal access to the Rails.
The Rails are an independent platform on which all can play.
No Threat - Staying in Their Lane
The Rails are prevented from encroaching into the businesses of those they offer services to, as those companies would all revolt if they were to do so. This is good, as it forces the Rails to keep to their lane, and will focus on offering the best/cheapest services they can.
This frees up those companies that connect to them, as they do not have to worry about the Rails taking their business away from them. They can focus on their business offering, and use the Rails as a utility. The same applies the use the Rails indirectly.
Value of Financial Infrastructure in Developing Countries 0:51
Global Mobile Wallets are the opposite, as the Big Tech companies that own them encroach on new industry segments constantly. Most businesses already worry about them, which will increase as their power grows. Businesses may have no choice but to use their services, knowing they are feeding the creature that will eventually destroy them.
#2: Big Tech - Global Mobile Wallets
Mobile Wallets are mentioned above in the Financial Institution Types section above.
They are Closed Systems with a Mobile App front end.
Typical Offering:
- A Free Account.
- Available to Anyone with a Smartphone.
- Fast Inexpensive Transactions.
- Tiny Transactions.
- International Transactions.
Mobile Wallets fantastic for the Poor 0:30
However, here we are talking here those that have the intention and ability to become Global, and dominant. Current Contenders:

Nick Brown has talked/written extensively about the dangers of Global Mobile Wallets if they manage to completely dominate global payments.
Big Tech Global Mobile Wallet concerns 0:53

Free Account
Global Mobile Wallets have little overhead, as there are no Bank Branches or ATM Networks to maintain, and no paper statements to send to Account Holders. It costs them practically nothing to manage an account with little or no balance.
All interaction with their Account Holders are through their Mobile App.
They will make money through other means.
Available to Anyone
There are no limits to who can get an account - anyone with a Smartphone.
This is critically important, as it means anyone can transact with anyone else, anywhere.
There is then no need for costly Interoperability, as all transactions can be completed internally.
Inexpensive Transactions
Transactions are nothing more than an internal accounting transfer.
They can make a profit charging almost nothing.
Again, they will make money through other means.
Tiny Transactions
As transaction processing is so easy and inexpensive for the Global Mobile Wallets, they can offer Tiny Transactions to the poorest people on the planet, charging them almost nothing.
Global Mobile Wallets are the best suited of the Mega Trends discussed here in providing basic financial services to the poor.
International B2B Transfers
Global Mobile Wallets do not care where you are located, and so International Transactions are already almost instant. The only question is whether they accommodate the desired currency.
When you add Currency Exchange (below) they will quickly dominate the International B2B Transfer market.
Global Mobile Wallets are well suited to provide International B2B Transfers.
Currency Exchange
It would be easy for the Global Mobile Wallets to accommodate multiple currencies within their systems, and allow people to have accounts containing multiple currencies.
Currency Exchange could also easily be included as a service, and also near-instant. While they would use existing Currency Exchanges services, they could easily start doing it themselves.
They are extremely well suited to dominant the International B2B Transfer market, as well as International Remittances.
International Remittances
International Remittances are the transfer of funds from a person in one country to a person in another, typically a foreign worker sending money to their family in their home country.
These are typically smaller transaction amounts with currency exchange, which currently have extremely high fees and are inconvenient to both parties.
Global Mobile Wallets are ideally suited to provide instant inexpensive International Remittances.
Inter-System Transfers
There is a mechanism for getting funds into a Mobile Wallet account from an account at a Bank or other Financial Institution, and vice versa. This includes Cash-In and Cash-Out.
This process is a little clunky right now, and has a higher fee than purely internal transfers.
However, it is in the interests of the Mobile Wallets for this to remain the case, as it will discourage funds being sent out of their system and encourage people to create and use their account.
Once funds are in the Mobile Wallet, they are likely to stay there.
Size Matters
Fast inexpensive transactions are only available between two Account Holders. Therefore, the most appealing Mobile Wallet will be the one with the most Account Holders.
When they become truly global, there will be every reason for people and businesses to switch everything over to the biggest one or several.
We know what this will look like - in China the only ones left are AliPay and WeChat Pay. Almost no-one uses cash or anything else.
Big Tech
These Global Mobile Wallets are owned/controlled by Big Tech.
They have the money to make everything free if they wish, in order to grab market share and drive out all competition.
They also have a long history of entering a new market and quickly using their size to dominate that market as quickly as they can, by whatever means available.
Integrated with Other Services
Global Mobile Wallets are owned by Big Tech.
These companies offer a wide range of other services. They will integrate their Global Mobile Wallet services seamlessly with their other services.
To put it another way, they already have the customer, and are now offering easy integrated financial services just when they want it.
Create Their Own Global Currencies
Currency Fluctuation is a risk for most businesses engaging in international trade.
Global Mobile Wallets could easily introduce their own Global Currencies that would alleviate this risk.
While this may sound far fetched, however is has already happening:
Facebook introduced Libra not long ago as a new Global Currency. While not a success, they are now trying again with Diem.
Regulations
How easy is it to regulate Big Tech?
This is a conversation that is happening right now in governments and other oversight bodies around the world, including the UN.
Many believe it is not even possible any more - Big Tech has too much power.
There are plenty of news stories about Big Tech ignoring regulations, and even losing in court and ignoring the decision.
Until now, most concerns and regulations relate to what Big Tech can do with your personal information, for example GDPR regulations in Europe.
Payments Change Everything
Banking is one of the most highly regulated industries, for good reason. They are focussed on protecting the accounts & money of regular people.
Will it even be possible regulate Global Mobile Wallets?
If Big Tech is already ignoring many regulations, why would they abide by Banking Regulations? Again, it is in their best interests to ignore them.
You can only Regulate a company if you have a means of enforcing it.
In other words:
You can only Regulate a company if they have a physical presence in your country or area of authority.
For example, Facebook can be regulated by the US Government. However, if they relocate to Switzerland the US Government would no longer have any power to do so.
Interestingly, Amazon is in the business of selling and delivering goods to their customers. They are perhaps the one company listed above that would be easy to regulate everywhere, as they have a physical presence in every country they operate.
Regulating Big Tech Global Mobile Wallets 0:14
Account Privacy
A Global Mobile Wallet could offer complete privacy to their Account Holders. Their identity, balances and transaction history would be kept from all governments and other authorities.
It is inevitable there will be at least one Global Mobile Wallet that will do this, and there will be little if anything those authorities can do about it.
Money Laundering
Money Laundering is a huge national and global concern, and Global Mobile Wallets would make it incredibly easy.
With the inability to enforce regulations, there would be no reporting to any authority about account balances and transactions.
If the Global Mobile Wallet has its own Global Currency, there is even less that can be done.
However, Global Mobile Wallets would actually make Money Laundering redundant. There would no longer be any need to legitimize money.
Tax Avoidance
Global Mobile Wallets would make Tax Avoidance incredibly easy.
A country can only tax what it is reported to it. There will be at least one Global Mobile Wallet that will protect all your information, balances and transaction history.
With the inability to enforce regulations, there would be no reporting to any authority about account balances and transactions.
If the Global Mobile Wallet has its own Global Currency, there is even less that can be done. If people/companies use the Global Currency created by the Global Mobile Wallet, there is even less that can be done.
#3: Cryptocurrencies
Full name: Decentralized Cryptocurrency.
Decentralized
The defining characteristic of Cryptocurrencies is their lack of centralized governance:
- No central governing body for the currency (Central Bank).
- No centralized payment networks for transaction processing (Payment Rails).
Instead, Cryptocurrencies are governed and validated via the consensus of thousands of computers (Nodes) that operate the Blockchain, each Block containing large numbers of transactions. The result is a public Distributed Ledger of Cryptocurrency Coin ownership and transactions.
The key is consensus.
Each Node has its own copy of the Blockchain and Blockchain software. Any corruption of the Blockchain would require 51% of all Nodes to be corrupted at the same time.
Transaction Block Validation
New Blocks are created by special Nodes called Miners or Validators, which generally compete against each other to create the next Block in the chain.
They select a group of pending transactions and run complex processing including Cryptography on the transactions to get an output. A new Block is formed by combining the selected transactions with this output, which can be easily validated by other Nodes.
Every other Node validates the new Block, and then adds that Block onto their copy of the Blockchain.
The Miner/Validator receives the transaction fees for all processed transaction, as well as a pre-programmed reward in the form of newly issued Coins.

Official Definition
According to Jan Lansky, a Cryptocurrency is a system that meets six conditions:
1. The system does not require a central authority; its state is maintained through distributed consensus.
2. The system keeps an overview of Cryptocurrency units and their ownership.
3. The system defines whether new Cryptocurrency units can be created. If new Cryptocurrency units can be created, the system defines the circumstances of their origin and how to determine the ownership of these new units.
4. Ownership of Cryptocurrency units can be proved exclusively cryptographically.
5. The system allows transactions to be performed in which ownership of the cryptographic units is changed. A transaction statement can only be issued by an entity proving the current ownership of these units.
6. If two different instructions for changing the ownership of the same cryptographic units are simultaneously entered, the system performs at most one of them.
Bitcoin
The first and most well known Cryptocurrency.
Bitcoin, like most Cryptocurrencies, has a value based on the exchange rate that people are currently prepared to buy/sell it at.
Ethereum
The second most well known Cryptocurrency.
Ethereum’s popularity stems from being a more flexible open source platform (Ether), offering greater programmability for smart contracts, and permitting much wider applications beyond value transfer.
Coins Located on User’s Device
A person’s Cryptocurrency Coins generally resides on the person’s computer, in a Cryptocurrency Wallet.
The Coins are protected with public/private encryption, which are used for transactions: sending (private) and receiving (public).
Concern: This means that if anything happens to the Device, the Coins are lost.
Note: If stolen, the thief cannot get access to the Coins due to encryption, unless they are also able to acquire the Private Key.
Stable Rules
All the rules of the Cryptocurrency are set at the creation of the currency.
It is extremely difficult to come back to an existing Cryptocurrency and modify any aspect of the currency at all (see Forks below).
Strength: Everyone knows the rules, how it works, how many Coins there are, and know none of this will change.
Weakness: If an improvement is thought of later, it is extremely difficult to implement. What you have is what you get.
Changing the Rules: Forks
While it is extremely difficult to change the rules of a Cryptocurrency, it is not impossible.
Changes to blockchain protocols are called Forks, and are carried out through the consensus of the Nodes that carry/process the blockchain. When there are disagreements about how/if to change a blockchain, the resultant Hard Fork essentially produces a new Cryptocurrency.
Example: Bitcoin & Bitcoin Cash.
Transaction Fees
A transaction does not take place unless a Node decides to process that transaction in order to collect the fee associated with it.
In general, the fee is decided by the sender of the Coins, and is in the currency of the transaction. If you want to speed up the processing of a transaction, increase the fee you are willing to spend so Nodes will select your transaction for processing. Some transactions with low fees have been pending for months, or even years.
There are sites out there that provide the "Going Rate" for transaction fees. Bitcoin transaction fees are generally in the range of $2-$15, though they reached over $60 earlier this year.
An alternative that reduces transaction fees is Off-Chain transactions.
Off-Chain Transactions
Off-Chain transactions are not immediately recorded to the blockchain, but rather are processed on a separate ledger and then settled, in net, to the main blockchain at a later time.
Exchanges and wallets that allow Off-Chain transactions do so to reduce transaction fees to the User.
Transaction Processing Time
A Bitcoin transaction generally takes 10 minutes to complete.
Other Cryptocurrencies have addressed this issue, and are generally far faster to complete, for example Ripple in 3-5 seconds.
Transaction Volume
Bitcoin peaks at about 5-7 transactions per second.
Fastest Cryptocurrencies can peak at around 1,500 per second.
For reference, Visa processes 65,000 per second.
Scarcity Creates Value
Rewards for Mining/Validating are the only ways new currency is created, and is clearly defined and controlled by the programming.
There is generally an upper limit to the total number of Coins that will ever exist (Bitcoin), or a specified number issued in a given time period (Ethereum).
This results in a known number of issued Coins, as well as at any time in the future. (Does not apply to Stablecoins)
Stablecoin
A Stablecoin is a Cryptocurrency variation.
Stablecoins have a specified value, being tied to another currency or commodity. Gold is a common commodity to choose.
As there is a specific external value for a Coin, they is no need for them to be restricted in quantity issued, so "Scarcity Creates Value" does not apply.
The trouble with Stablecoins is there is no incentive to purchase them early on as a speculative investment. So early on, there is little upside, while having huge downside.
The question to ask: Who is backing this Stablecoin? Do I trust them? Will they stand by their value if it does not take off?
Lack of Privacy
At a basic level, there is no privacy with Cryptocurrencies, as every transaction is available for all to see in the Blockchain.
However, the Blockchain does not necessarily identify the individual. It is therefore not necessarily known who the current owner of a Coin is, or who are involved in a specific transaction.
Having said that, it may be possible to go back through transactions relating to a specific User looking for a means of identifying that User, for example a purchase of Coins from a Bank account.
Note: Some Cryptocurrencies have been specifically designed to preserve the privacy of transacting parties.
International Transactions
One of the biggest benefits of Cryptocurrencies is the ability to transact easily with someone in a different country.
There are huge potential benefits in streamlining International Trade, by eliminating the delays caused by International Funds Transfers. However, the receiver of funds would either have to be able to spend the currency elsewhere, or easily exchange it into local currency.
- Ripple is looking to provide this exact service for their customers.
This is a threat to Central Banks, as the potential is to exclude local currencies completely from B2B transactions, and potentially from business activity entirely, especially for local currencies with high inflation. The Central Bank’s ability to manage their economy by managing their currency will be severely limited.
- Facebook has talked about creating and issuing their own global Cryptocurrency, which might have this result.
Money Laundering
There is huge international concern that Cryptocurrencies can be used for Money Laundering or other illegal purposes.
This is a legitimate concern, as it would be extremely easy to hide your identity and transact globally in large amounts, completely bypassing conventional means of detecting illegal transactions.
This has already happened with Bitcoin.
Lack of Dispute Resolution
As mentioned before, Purchase Guarantees are essential when purchases can happen remotely. Therefore, Dispute Resolution processes/procedures must be available to the Customer, with a specific contact entity and means of communication - for Credit Cards it is a phone number to the Issuing Bank.
As soon as a Cryptocurrency transaction is processed, the Merchant receives the funds. However, there is no Purchase Guarantee on a Cryptocurrency transaction, and it is almost impossible to build this capability into one.
It may be possible to add "Release of Funds on Delivery" capability. This would certainly be of value if it could be made to work well, though it would likely be fairly easy to abuse. However, this is still not a Purchase Guarantee.
This is a huge problem.
The core idea of a Cryptocurrency is it is the electronic equivalent of physical cash. However, being electronic they are clearly intended to be used online/mobile. This is exactly when a Purchase Guarantee is essential.
What do you do if you receive an empty box?
There is no Card Issuer to raise a Dispute with - there is no-one!
Cryptocurrency Dispute Resolution 0:24
#4: Central Bank Digital Currencies (CBDCs)
A CBDC is NOT a Cryptocurrency.
However, they act like Cryptocurrencies to most Users, as they are digital currencies with programmable functionality, including public/private encryption keys.
Examples: the US Dollar and the Chinese Yuan, both of which are in various stages of implementation.
A CBDC generally means:
1. Coins issued by a Central Bank.
2. Transactions managed by the Central Bank.
3. Tied to the conventional currency issued by the Central Bank.
In short, a CBDC is Centralized, where Cryptocurrencies are Decentralized.

Centralized Issuing of Coins
The Central Bank issues all Coins, determining the total volume issued.
The value of a Coin is tied to the conventional currency currently issued by the Central Bank.
Centralized Transaction Processing
All transaction processing is managed by the Central Bank.
While transactions could take place directly between two Users devices, the transaction will be settled and managed by the Central Bank.
The Central Bank is playing the role of a Payment Switch, and so System Availability is essential (see above).
Centralized Tracking of Coin Ownership
The Central Bank would likely maintain a record of all Coins issued, and who owns them.
As all transaction processing is managed by the Central Bank, the Central Bank would then know what each person/business spends their Coins on.
Centralized Control of Functionality
The Central Bank would write the initial rules for the CBDC, including programming any functionality they wish.
Due to centralization, they would easily be able to change that functionality at a later time in any way they want, for example limiting who can buy what.
Transaction Processing Time & Volume
Target numbers will be incredibly challenging, however achieving them should not be an issue as we have decades of Payment Switch experience available.
For reference, a Visa transaction generally completes in less than 1-2 seconds, and Visa processes 65,000 transactions per second.
Note: It is important to minimize programmed functionality that will impact these numbers.
Stability
A CBDC is similar to a Stablecoin in that it is tied to a conventional currency.
This provides stability as it is tied to an existing currency with known value, something the citizens are already comfortable with.
This also means there is no need to directly limit the volume of Issued Coins.
The Central Bank is still responsible for managing the volume of issued underlying currency (to control inflation), and they would include Issued CBDC Coins in their calculations for the underlying currency.
International Transactions
It would be relatively easy to make international CBDC transfers extremely fast. By international, we mean currency exchange between two CBDCs.
This would be a decision by the two Central Banks involved.
Warning: Making it far easier for people to exchange currencies quickly will likely increase currency volatility, and also increases the potential of the currency destabilizing. Other means of stabilizing currency value (managing inflation) should be amplified to prevent this from happening.
Money Laundering
There is no privacy with CBDCs - the Central Bank knows who owns how much, and what they have spent their Coins on. There have a complete history.
As a result, Money Laundering and other illegal uses of the CBDC can easily be investigated and identified.
Early Adopters
Businesses would likely be early adopters for B2B transactions, as currently these transactions are typically slow, and there is also little system integration needed.
This is especially true for international trade, provided international transactions are available.
Financial Institution Adoption
The Central Bank may allows Financial Institutions to hold the CBDC in accounts for their Account Holders, in the same way they currently do with conventional currencies.
This is surprisingly complex for the Financial Institutions to achieve. This Glossary gives an indication of the scale of the challenges involved.
Financial Institutions may be reluctant initially, as they should to anything new, until they have fully assessed risks and liabilities. However, with the backing of the Central Bank, they will likely see value in adopting the new CBDC.
Financial Institutions adopting CBDCs offer all kinds of benefits. For example, they may decide to offer a Credit Card on the account, which would include Purchase Guarantees and Dispute Resolution (see below).
However, care must be taken when defining the rules for the Financial Institutions, especially when it comes to reporting and regulations.
Merchant Adoption
It is one thing for a Central Bank to offer a CBDC to their citizens, it is another for it to be adopted.
In order for a CBDC to become mainstream, it must be usable by regular people to make all their purchases. The important word here is ALL, as someone having money but unable to make a purchase with it means it is useless.
Integrating a new payment method into existing Merchant systems is a far bigger challenge than most people realize. The more sophisticated and integrated Merchant systems are, the more difficult adding a new payment method would be. Without Financial Institution adoption it would be almost impossible.
The first step would be to encourage the bigger Merchant Chains to adopt the new CBDC. They often run their own systems, and are big enough to absorb the expense of a new payment method.
Once it becomes available in all the big chains, Payment Gateways would want to offer the same services to their Merchant clients (see above). At that point, medium and smaller Merchants would slowly start adopting the CBDC.
Cash-based Merchants
Merchants that do most/all of their sales with physical cash have little if any integration between payments and their other internal systems. They may not even have any internal systems.
Ironically, adopting the CBDC would be far easier for these Merchants than it would be for the bigger Merchants with sophisticated systems. However, there it still work for the Merchant, and it will take time to educate and implement.
Examples: Farmers Markets, and smaller Merchants in Developing Countries where Cards are not widespread.
Mandating Merchant Adoption
The Central Bank has the power within their country to Mandate Merchant Adoption of the CBDC as a payment option.
All Merchants would then have no choice but to go through the process of modifying their systems, likely with help from each other as well as Payment Gateways, Banks, and the Central Bank.
It would still take considerable time, and would likely require onerous penalties on those that resist, but it would work.
Mandating its use is different entirely, as that is forcing people to NOT use other means of payment.
Privacy Concerns
The Central Bank knows who own how much, and every transaction people make.
However: Who else has access to this information?
This is a decision for the Central Bank, which should be published publicly so all who use the CBDC are aware of the consequences.
This decision is likely to be based on the expectations of their citizens, and also on any existing laws (e.g. GDPR regulations in Europe).
Lack of Dispute Resolution
As mentioned before, Purchase Guarantees are essential when purchases can happen remotely. Therefore, Dispute Resolution processes/procedures must be available to the Customer, with a specific contact entity and means of communication - for Credit Cards it is a phone number to the Issuing Bank.
The Central Bank would be the logical choice for CBDC Dispute Resolution. However, it is extremely unlikely the Central Bank would want to take on this huge responsibility.
In order for there to be Purchase Guarantees on CBDC purchases, Dispute Resolution functionality must be provided by other means. The easiest would be by utilizing those systems/methods that already offer these services, for example Visa/MasterCard Credit Cards or Clear Purchase.
Dispute Resolution for CBDC Transactions? 0:35

Contributors
Special thanks to the following who contributed to this Glossary:
- Original Suggestion & Structure: G Stearns, Advisor
Cryptocurrencies:
- Technology: Allan Cecil, Security Expert
- Overview/Clarification: Tim Jacklich, Sr. Analyst at Americas Market Intelligence

Payment Infrastructure Glossary™

Guide to the Payment Industry™

Presented by People who Built it

1. Payment Infrastructure

Payment Method Types

Closed System

Open System

Interoperability

Pull Vs Push Payment Methods

Front End Applications

The Smartphone

Services Available

The Two Layers of the Payment Rails

Authorization Layer

Payment Switch

Flow of Funds Layer

Settlement Switch

Payment Network Players

Financial Institution (FI)

Acquirer

Issuer

User

Merchant

Merchant Bank

Payment Gateway

Financial Service Provider

Financial Institution Types

Conventional Bank or Bank

Mobile Money

Mobile Card Wallets

Mobile Wallet

2. Payment Roles

Understanding Key Payment Roles

Merchant

Payment Gateway

Acquirer

Issuer

Payment Switch

Financial Institution: Internal Payment Systems

Typical FI Configuration

Interface

Device Handler

Base24: Router

Parallel Data Centers

Alternate Interfaces

Gift Cards

Check Authorization

Financial Institution: ATM Networks

Common ATM Services

ATM Connectivity

ATM Types

ATM Admin Mode

ATM Security

ATM Cassette

ATM Skimming

ATM Network Hub: Device Handler

ATM Card Transactions

ATM Availability

24 Hour Branch Support

ATM Fees

Payment Switch: Requirements & Obligations

Transaction Routing

Message Translation

System Availability

Transaction Integrity

Data Security

Regulations & Standards

Common Set of Rules

Certification

Dispute Resolution Procedures

3. Transaction Processing

Transaction Types

Non-Purchase Transactions

Funds Transfer

Payroll

Bill Payment

Loan & Loan Repayments

ATM Withdrawal & Deposit

Teller Withdrawal & Deposit

Cash-In & Cash-Out