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Grokking Modern System Design Interview

Introduction to the Payment System

Understand the core mechanics of a payment system, focusing on the authorization and settlement process. Define the strict functional and non-functional requirements for security, reliability, and scalability. Estimate the necessary resources, including storage and bandwidth, to support 50 million daily transactions before starting the System Design.

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Financial technology (fintech) platforms connect merchants and consumers to process transactions quickly and securely. Integrated payment platforms and digital wallets simplify payment processing and operational workflows. This lesson explains how digital payment systems work and their role in modern commerce.

What is a digital payment system?

A payment system handles the transfer of funds for purchases. It supports multiple methods, including credit cards, bank transfers, digital wallets, and cryptocurrencies. These systems ensure the secure transfer of funds between parties. This design focuses on payments made through credit and debit cards. Before defining the architecture, it is important to understand the payment flow.

The payment process

The payment process involves multiple entities. When a customer pays with a card, the system must verify the cardholder, process the payment, and validate the transaction.

The figure below illustrates the payment processing flow:

Payment processing system and the entities involved in it
Payment processing system and the entities involved in it

The table below details the roles of different entities in the system:

Entities

Description

Customer

  • A cardholder who wants to purchase goods or services.

Merchant

  • A company or person who provides goods or services.

Issuer bank

  • The bank that holds the customer’s account and provides credit or debit cards.

Acquiring bank

  • The bank holding the merchant’s account.

Merchant's online store

  • The online website where the customer purchases goods or services by providing credit card details.


Payment gateway

  • A network that facilitates and authorizes transactions of funds to merchants’ accounts.
  • Requests and receives payment from the customer’s account.


Cards network

  • Validates the credit or debit card information.
  • Facilitates payments via credit and debit cards.
  • Sets the terms for credit or debit card transactions.

Credit card transactions typically involve two phases: authorization and settlement. These phases verify the transaction and transfer funds from the customer to the merchant. The following is an overview of each phase:

The authorization phase

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