Grokking Modern System Design Interview/

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Introduction to the Payment System

Introduction to the Payment System

Understand the payment system, its requirements, and the estimated resources required for its design.

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In today’s digital age, financial technology (fintech) is reshaping the landscape of e-commerce and digital marketing. Seamlessly connecting merchants and consumers, fintech enables transactions to happen with just a few clicks, making purchases faster, more convenient, and increasingly secure. Innovations like integrated payment platforms, digital wallets, and fintech-driven gateways are not only enhancing the customer experience but also streamlining business operations.

In this lesson, we’ll explore how digital payment systems work and their pivotal role in powering modern commerce.

What is a digital payment system?

A payment system is a mechanism or process that enables individuals, businesses, and organizations to transfer money or make transactions for the purpose of making a purchase. It encompasses various methods and technologies, both digital and traditional, that facilitate the exchange of money or goods. Payment systems encompass a wide range of transactions, including credit and debit card transactions, bank transfers, electronic funds transfers (EFTs), mobile payments, digital wallets, and cryptocurrencies. These systems ensure secure and efficient financial transactions between parties, supporting commerce and economic activities on various scales.

In this design problem, we’ll focus on payments made through credit and debit cards.

Let’s first understand the payment process in detail before moving to any aspect of the payment System Design.

The payment process

Multiple entities are involved in the payment process. Assume that a customer wants to pay for goods or services using a credit or debit card. First, they have to enter their credit or debit card details to pay online. However, this complex process entails multiple steps and interacting entities, including cardholder verification, payment processing and validation, and merchant registration.

The following figure illustrates the flow of a payment processing system:

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

The role of different entities involved in the payment processing system is mentioned in the following table:

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

In a payment system, especially for credit card transactions, the process typically involves two key phases: authorization and settlement. These phases ensure that a transaction is authorized and then completed by transferring funds from the customer’s account to the merchant’s account. The following is an overview of each phase:

The authorization phase

The authorization phase is the initial step in a payment transaction. Its primary purpose is to verify whether the customer’s payment method (e.g., credit card) ...