We’ve had over 35,000 professionals complete a Glenbrook workshop, and we constantly hear from participants that they were surprised by how something in the industry works or a specific data point. How people think about payment systems is largely driven by how they use them as an individual consumer, and also influenced by where they sit in their career.

One of the goals of our payments workshops is to add clarity to ambiguous industry terminology. We also allow ample time for interactive Q&A, and whether the workshop is in-person or virtual, we hear some questions over and over.

In this episode, Debbie Bartoo surfaces some of our most frequently asked workshop questions and lets Russ Jones guide us through the answers.

Episode Transcript

Russ Jones: I’m Russ Jones, a partner at Glenbrook, and your host for this episode of Payments on Fire. Joining me today as co-host of this conversation is Debbie Bartoo, Engagement Manager at Glenbrook. Welcome, Debbie

Debbie Bartoo: It’s great to be here, Russ.

Russ Jones: So, you and I manage the payments practice here at Glenbrook, which has been around for 20-plus years now. And we started the workshop series, our education practice, as a way to level set our consulting clients on the payments industry. And it’s evolved into a series of public workshops, private workshops, self-paced on-demand learning. And I think we’ve gotten pretty good at explaining how the payments industry works.

So our next workshop is a Payments Boot Camp Intensive coming up December 8th, and it’s currently open for registration. This intensive session will be a half-day virtual session, and it hits on all the key topics from our full Payments Boot Camp and provides a strong grounding in payments without the two to three-day commitment necessary to attend a full Payments Boot Camp. Sign up today, and Debbie and I will see you there.

We’ve had over 35,000 professionals complete one of our workshops, and we constantly hear from participants that they were surprised by how something in the industry works, or they were surprised by a specific data point. People think they know the industry because they’re first and foremost consumers, so they come into the workshop with that sort of perspective a lot of times. But it’s a lot more complicated than that and it’s always a great experience to help people get smart about payments.

Debbie Bartoo: So Russ, I am gonna tell you, you are absolutely right. And there’s a lot of ambiguity in the payments industry, especially when it comes to all this terminology. One thing that is so important in our workshops is the interactive Q&A that happens in our sessions. It’s also why we try to limit the public workshops to a limited number of participants, so that we can answer all the questions. So we want to share some questions today, questions that we’ve often heard, and also some of the answers to them.

Russ Jones: So frequently asked questions

Debbie Bartoo: Frequently asked questions, yes, with the answers.

Russ Jones: All right. All right.

Debbie Bartoo: So the first question is: what is the difference between networks, rails, and schemes?

Russ Jones: Right off the bat, we’re co-mingling industry terminology and street lingo. And, one of the things we try to do in the workshop is we try to add an enormous amount of clarity to the terminology of the industry by being crisp about what the industry terminology is, where it is confusing, where it is duplicative, where the same term means multiple things in different categories. And we try to point out where, it’s not the way people talk when they’re talking at a cocktail party, right? So rails is a good example of street lingo.

So the fundamental building blocks here of the payments industry, if you think about it from a payment system point of view, the highest level of abstraction is a payment system, and it is typically made up of multiple payment networks. So in the US, we have the card system made up of 14 card networks in the US, 80 card networks around the world. We have the wire system made up of two wire networks, the ACH system made up of two ACH networks. So you have that terminology right off the bat, the system versus the network.

And then not so much in the United States, but outside the United States, we have the term scheme. And scheme is used in other markets to refer to the network rules and the network brand. So in the US, when we talk about Visa, we call it Visa. When we talk about Mastercard, we call it Mastercard. In other countries, they would be referred to as the scheme. The Visa scheme or the Mastercard scheme. And when they say that, they’re talking about the Visa rules or the Visa brand and the Mastercard rules and the Mastercard brand.

It’s not, the terminology of those is not specific to the card system. And in many countries, just a set of rules and an associated brand with those rules is referred to as the scheme. And scheme here is not a, doesn’t mean devious like it does in the US when somebody’s scheming to do something. Scheme is short for schematic, and it’s effectively the blueprint for how a payment network works.

So when you hear the term rails, what people are talking about is the infrastructure. So I’m sending this transaction over blah, blah, blah rails. So when we think about network, you could break it down into the scheme, which is the rules and the brand, and the rails, which is the technical infrastructure and the processing mechanisms. So systems, networks, schemes, and rails.

Debbie Bartoo: Scheme, the operating rules, network, the connections and services linking all the participants. And rails, to me, I always think about a train, a train track, and it’s almost like an informal name for all the payment infrastructure.

Russ Jones: And people will co-mingle these things and they’ll blur them together. Like sometimes they’ll say, “we’re gonna take this transaction, we’re gonna drive it over MasterCard rails.”

Debbie Bartoo: Yes.

Russ Jones: What they’re really saying is, “We’re going to take this, we’re gonna take this card credential, and we’re going to authorize it and clear it over the MasterCard network.” So, a lot of different usages, but I think the important thing is the distinction between system and network, and then between industry terminology and street lingo.

Debbie Bartoo: Absolutely. That’s what gets confusing, so it’s good to straighten us out.

So another good question happens to be, people are always shocked when we show the US payments volume slide,

it’s showing debit cards as a count of US transactions, and that they’re almost double that of credit cards. So what’s your thoughts on why that is?

Russ Jones: I hate to be blunt. It’s because people like to use debit cards more than credit cards. That’s why the count is more than double. It’s used twice as much. And in fact, the average transaction is a debit card transaction, and that’s surprising to people as you point out, because it might be counterintuitive to how they’ve managed their own personal use of payments in their life.

But the confusion goes to the point where people assume that these cards are used for the same thing, they just have different funding sources. And I think that’s a little bit oversimplistic. Cards and credit cards are, in fact, not in competition. They’re very complementary to one another, and generically, people carry both a debit card and carry a credit card.

So they serve two different purposes. One is you’re paying, the case of the debit card, you’re drawing on money you already have, and with the credit card, you’re borrowing money to buy something. And that abstraction of money you have or money you don’t have, and you’re borrowing it, is a bigger abstraction than just the card system.

So you’re view is that someone’s going to buy something. They’re going to make a purchase. They’re going to pay for something. And at a very, very high macro level, they’re like, “I need to get to the money I have to pay for this,” or, “I don’t have the money to pay for this, and I need to borrow it, effectively, to pay for it.”

If you’re paying for something with money you already have, you’re making a decision. Do I want to take my checkbook? Do I want to use a debit card? Do I want to swing by an ATM machine and get some cash? So the debit card is really competing against checks and competing against cash. It’s not competing against credit cards. And it’s won out big time cash and credit cards, largely for convenience.

So in the world of borrowing money, you’re going to buy something, you really want it, and you know you can’t afford it, so you’re gonna buy it on credit. What are you gonna do? Are you gonna use a credit card with revolving credit, or are you gonna to use a buy now, pay later solution and take out an installment loan? And different people make different choices there. But the credit card is competing against buy now, pay later solutions. It’s not competing against debit cards.

So you have that macro distinction between these two ways to pay. And all over the world, a truism in payments industry, you can, as they say, take this to the bank. A truism in the payments industry across all countries is that by and large, across all use cases, by and large, people and companies prefer to pay for things with money they have.

Debbie Bartoo: So two things to think about there. We should never think that other people have the same habits that we do as far as payment. We have to watch that. And those graphics are really important because they show transaction count, the number of payments, and they also show the payment value, the actual total dollars paid, which from an industry perspective, we’re always watching.

Russ Jones: Yeah, but count is, count and amount are, the two key metrics as you’re pointing out. But count shows usage patterns and is directly comparable across markets. When you look at amounts, they get skewed by exchange rates. So one year Visa’s bigger than UnionPay, the next year UnionPay is bigger than Visa. That doesn’t reflect some wild swing in usage. It reflects a change in the exchange rate between different currencies. So I always sort of go to count. I, always, when I look at volume, I look at count before amount, because count is more representative of actual usage patterns.

Debbie Bartoo: Sure. So then we move to the stakeholder section when we walk through the workshop, and we walk through different types of providers, such as banks and networks, processors, PSPs. Inevitably, when we do that, one of the next questions are, “Well, what’s the difference between a PSP and a gateway?”

Russ Jones: Well, of the reasons people ask that is because we barely mention the term gateway in the workshop, in a Payments Boot Camp. So this will be an in-person Payments Boot Camp, two solid days of payments industry discussion, and the term gateway never comes up. And that’s because the gateway plays an important role, but an isolated role.

A gateway’s a technical thing. It would be like, why don’t we talk about cables? It’s because cables are important, the cable that might connect a store to a central hub over a fiber link underneath the street. Why don’t we talk about that? It’s important to that company that needs fiber connectivity to a hub, but in the greater scheme of the payments industry, it’s just a technical connectivity thing.

So banks, networks, payment service providers, we talk a lot about the chain of liability in the Payments Boot Camp, and those types of providers are all inside the chain of liability, meaning that they’re taking responsibility for risk, for credit exposures. They can have losses tied to what decisions they make, so they’re at risk in the world of payment processing.

Gateways provide technical connectivity between two endpoints, and there’s all sorts of gateways, right? There’s payment gateways. There’s sort of like open banking gateways, like a firm like Plaid is fundamentally a gateway company helping a fintech connect to bank accounts across thousands of different banks. That’s a gateway sort of company. Stripe is a gateway sort of company that helps a merchant accept payments across multiple types of payment networks. You also have token gateways.

So there’s lots of different types of gateways, but the gateway itself is a technical connectivity type of thing. So a lot of PSPs provide gateway functionality. They don’t have to, but they usually do. I sometimes think of that as just an aspect of what a PSP does.

Debbie Bartoo: So we should think about the gateway as the technology connection passing payment information as its basic root.

Russ Jones: A payment gateway, yeah. But an open banking gateway passes something different, a token gateway passes something different.

Debbie Bartoo: Sure.

Russ Jones: So gateways are, they’re extremely valuable because they’ll do a one-to-many connectivity thing. So one thing in, multiple ways out. So do I wanna, Oh, it’s a card. Do I wanna route it to American Express? Do I wanna route it to Discover? Do I wanna route it to Visa? Do I wanna route it to Mastercard? You have a gateway help you with that sort of connectivity type of thing.

By the way, before we had the internet, we had the same functionality that used to run in a data center, and it was called a switch. So you put it in the cloud, it’s called a gateway. You put it in your data center, it’s called a switch.

Debbie Bartoo: So we’re starting to date ourself, Russ. Maybe it’s just that we’ve read that’s what it was.

Russ Jones: Well, I got news for you, Debbie. Data centers are back in the news.

Debbie Bartoo: Oh, very much so. Very much so. So another question that often comes up, because it can be a very confusing topic, is all about payfacs and payment facilitators, and are they the same thing as a payment service provider?

Russ Jones: A payment service provider, the bigger of the two concepts there is the payment service provider. It’s a type of stakeholder in the payments industry who works for a business, so works for a biller or works for a merchant, works for an enterprise and helps them do the heavy lifting of accepting payments and making payments. Money in and money out, funds in and funds out, all, enabled through a payment service provider.

Inevitably, the payment service provider is, because businesses accept payments in multiple forms, multiple methods, and they make payments in multiple methods, the payment service provider always is working in multiple methods, and each method equals a payment system. So, payment method equals payment system. Don’t lose track of that.

So when a PSP helps a merchant accept an ACH payment, they have to work under the rules of the ACH system to do that. When they help a merchant accept a card payment, they have to work under the rules of the card system. And the specific rules that apply to PSPs helping businesses accept cards are referred to as the payments facilitation rules. So every payments facilitator is, by definition, a payment service provider, but not all payment service providers are payfacs.

Debbie Bartoo: Great. So then we continue on into our section about cards, and we spend a lot of time on cards, and part of it is because it’s such a big part of the way people pay today. So one of the questions here, and we spend a lot of time talking about the roles of banks and settlements and fees and fraud and all of that in that particular section.

So a lot of meaty information. One of the questions that we hear is, when you tap with an Apple Wallet at point of sale, is it card present or card not present?

Russ Jones: Well, it’s card present. And the giveaway in that question is tap. An Apple Pay, Google Pay transaction at the point of sale where you’re tapping the device on the terminal is treated, is categorized as a card-present transaction, and that’s just subjectively how the card networks treat that. If that exact same card and the exact same wallet was used to make an online purchase or make an in-app purchase, it would be treated as a card-not-present transaction.

So you’re standing inside, you’re standing inside the consumer electronics store. They have the cable you want. You pay for it at the point of sale. That’s card present. You’re standing inside the consumer electronics store. They don’t have the cable you want, but they have it on their website, and you order it and have it shipped to your house. That’s card not present.

It doesn’t matter where you’re standing. It’s whether or not the transaction enters the card network through point of sale entry point or enters through a web, an internet-based entry point.

Debbie Bartoo: Good example. And I think the examples are always helpful to help people to understand some of these differences. We continue on, and one of the questions tends to be, what is the difference between a digital card and a virtual card?

Russ Jones: That’s one of, very typical question, and a lot of confusion surrounding these card product types effectively. When you apply for a card, you’re really applying for an account. And against that account, you can attach different instruments to that account. One of the instruments is a physical card. And we’re all familiar with that.

I apply for a Capital One card, and they send it to me in the mail. You applied for a Capital One account, and to that account, they attached a physical card and mailed the physical card to your house. You could also, against that same Capital One account, you could attach a virtual card, and they would give you a different account number, associated with that virtual card, but it’s attached to the same account.

So you use your Capital One card in the store, it has one account number. Use it, the virtual card somewhere else, and it has a different account number. And it doesn’t matter if that account is a bank account or a credit line, that’s sort of lost in the background is the idea is the instrument’s attached to account.

So a digital card is another type of instrument that’s also attached to an account. The digital card is what gets inserted into an Apple Wallet or a Google Pay Wallet. And it has yet another account number. So you could have one account, and you could have five or six different account numbers that all map back to that same account. The ones that attach to consumer devices are data-rich, highly secure, have artwork associated with them, those are digital cards. The ones that just have an account number and an expiration date, those are virtual card numbers.

So the two are very different. The confusion factor comes in because, in street lingo, the digital card is sometimes referred to as the virtual card, by virtue of the fact it’s not a physical card. So if it’s not physical, it’s gotta be virtual. That’s the thinking, right? But really, if it’s not physical, it could be digital. If it’s not physical, it could be virtual. So the industry confuses itself by referring to digital cards as virtual cards.

But if it’s sitting inside the Google Wallet, it’s a digital card. If it’s sitting inside the Apple Wallet, it’s a digital card. And Google can call it a virtual card, but it’s technically a digital card. And when you look at the data elements associated with those instruments, they’re radically different. Data-rich versus data-poor.

Debbie Bartoo: So just to follow on a little bit more about card networks, one of the questions that we tend to be asked is how can card networks be both a network and a processor? How can they have two roles?

Russ Jones: How can Kroger’s sell gasoline, right? How is it possible that one company can do two things? That’s kind of a quippy answer, but that’s the essence of it. These companies like Visa, Mastercard, and others, they’re gigantic payment corporations that do multiple things.

Visa owns and operates three different card networks, one of which is called Visa. It competes as a processor. It competes as a gateway. Both a payments gateway, it also competes as an open banking gateway. It has multiple business units, and they perform different types of functions. So Visa Inc. does lots of different things.

But when you think about Visa the processor, that’s not Visa the network. That’s Visa the processor. What they’re doing, they’re competing as other processors for debit card authorization processing, and I think they support like 24 different types of debit cards, only three of which, only two of which are Visa branded.

Debbie Bartoo: I know, it’s incredible all the different roles that they end up holding.

Russ Jones: And people, I think, historically they’re used to referring to companies as card networks, but they’re a lot bigger than that, and that’s not an accident. They’re diversifying into other segments of the payments industry and other forms of payment. They’re active in all sorts of different aspects of the payments industry. So cards are, I’ll go out on a limb. Cards are important to Visa, but so are a lot of other things.

Debbie Bartoo: Yeah, which really makes it important to listen to some of the quarterly investment reports to just find out and hear how expansive these companies are and how they continue to change.

Russ Jones: Right. They’re, Visa and Mastercard both, they’re heavily involved in stablecoins and tokenized deposits, and that’s completely unrelated to cards, right?

Debbie Bartoo: Right, which 10 years ago we probably wouldn’t have even seen.

Russ Jones: Yeah. When their executives talk about this, they talk about it as like, it’s good to get back to basics, where basics are just like, we were established by the banking industry to help facilitate the electronic movement of money from point to point.

Debbie Bartoo: And that can mean growing in a lot of different ways.

Russ Jones: Right.

Debbie Bartoo: We go into the topic of fast payments. It’s been a hot topic now for many years. There’s a lot changing in this environment. In the US, we have three different networks that are supported, but one of the popular questions happens to be why do we, as Glenbrook, think of Zelle as a fast payment system when it uses other forms of settlement?

Russ Jones: Well, it’s the same reason we think of Mastercard as a payment system even though it uses other settlement mechanisms. Same reason we think of Visa as a payment network even though it uses other networks to settle transactions. People who look at integrated processing and settlement from the same entity, that’s just, they’re trying to differentiate what they offer in the marketplace. It’s not in any way a requirement that the mechanism used to settle transactions is operated by the same company that handles authorization and clearing. So I would say the Zelle approach has a lot of historical basis. To be clear here, the Zelle network, it’s an open loop network. The Zelle network uses the ACH system and uses the RTP network for settlement, I should just say.

Debbie Bartoo: Of course, I just have to stop for a minute and also give a shout-out to one of our other Payments on Fire episodes, and it happened to be episode 294, and we ended up chatting with Preston McCaskill from Early Warning Services about Zelle’s network growth and the settlement process and alias directory and expanding use cases. So another important episode to take a couple minutes and listen to.

Before we end, we’re just gonna do one more question on cash and digital currency Why do we categorize digital currency in the cash system?

Russ Jones: Well, we get that question a lot. We’ll be 10 minutes into a two-day workshop and somebody wants to ask, “How do I think about digital currency?” And the way we think, and this is at Glenbrook, the way we think about it is, it’s a lot like cash. And there was a time when all this was called digital cash, right? And if we go back to bitcoin and sort of like the creation of the whole cryptocurrency phenomena, cryptocurrency was modeled after cash. And it has a distinct set of attributes that are unlike other payment systems, right? And we’re talking about cash the payment system.

So you have a big distinction right off the bat for all payment systems. Is the payment system notational or is it token-based? And what is meant by that is when you think about a payment system being notational, is the value you have in an account, is it written down on a piece of paper? And when you make a payment, you subtract from that number, and when you get paid, you add to that number. So those are called notational systems.

So the banking system, when we think about your bank account, it’s notational. You have a balance, and it goes up and it goes down. So the credit card systems, debit cards, ACH, wires, fast payments, Buy now, pay later systems, digital wallets, they’re by and large notational systems where the act of making a payment is debiting the sender’s account and crediting the receiver’s account.

In the world of cash, the value is not held in an account. It’s not written down on a piece of paper. It’s physically in the bill or the coin that you’re holding in your hand, what is referred to as the token. So in token-based systems, you don’t make payments by debiting and crediting. You make payments by exchanging ownership. So Bitcoin, the grandfather of all cryptocurrencies systems, is built to mimic cash. When you send a Bitcoin payment from one person to another, it’s really an exchange of ownership. The bitcoin was owned by me, now it’s owned by you. It’s not any different than saying the $20 bill in my hand is now in your hand. So it’s the exchange of ownership that defines the transaction.

The other thing about handling, the handling from a payments point of view, is in these token-based systems, the value is in the token. You’ll oftentimes combine multiple tokens. I’m gonna buy something that costs $18.25. I have a $20 bill. I give them one $20 bill, one $20 token, and they give me back a $1 token and three 25 cent tokens. That’s called change.

Bitcoin works the same way. You wanna send someone a specific amount of Bitcoin. You don’t have that specific amount. You have different units, and you send them something that meets or exceeds the number of units, and they send you back Bitcoin change. So the handling characteristics are very similar to cash.

That’s why we sort of group digital currency into that cash category. And I’ve always told people that it’d be, this part of the payments industry would be a lot easier to understand if you really thought about it as cash, digital cash instead of physical cash. Now to, in the sense of there’s an exception to every rule, it’s not as clear when you’re working in stablecoins and tokenized deposits that that model holds. Those could be viewed to some degree as having an arm back into the notational systems. But that’s not, that’s sort of an isolated thing. But in the world of cryptocurrencies, for sure, modeled to work just like cash.

Debbie Bartoo: So Russ, it is time to wrap this up, and it’s hard to believe. I hope we get to do another one of these sessions. There are lots more questions we can answer.

Russ Jones: And the questions we get in our workshops are great. Truly great. Very thought-provoking. We always love hearing perspectives from other people. And it’s not unusual to go through a two-day Payments Boot Camp and have 60, 80, 100 questions come up during the workshop. And we’re always delighted to talk about the payments industry.

Debbie Bartoo: On December 8th, we have the Payments Boot Camp Intensive coming up. So we invite everybody to register or enroll also in a self-paced course or module, and also think about attending the session we have coming up on the Payments Boot Camp Intensive.

So for all of you listening, thanks for joining us, and until next time, keep up the good work, and bye for now.