It is very easy for us to misunderstand the difference between payment processing services like PayPal, Stripe, etc. and financial institutions like banks. This is because of people having various payment options available to them which were not the case previously. To understand the difference between these two systems, we need to take a look at what each one stands for.
Payment processing services: This is the service that connects the merchant’s bank to the cardholder’s bank, making sure that the money is transferred correctly and that it reaches the right place. Payment processors are categorized into two types: Front-end and Back-end. Money transactions are always taking place in the payment processing services, and there is a constant flow of money from one place to another. However, no investments are made here as there is no collection of money in the system. But there are cases when some payment processors also function as a digital wallet.
A bank, on the other hand, is an institution that generates money by lending to borrowers while charging interest. They also invest the money deposited by the customers, paying it out on request. Banks also help in exchanging currency. Banks store the money securely, allowing them to be invested in the right way, also allowing money to flow from one entity to the next, charging a fee for every transaction.
Now that we can comprehend the basic difference between payment processing services and banks, the next thing that we would wonder about is ‘why can’t payment processors also become banks?’ Banks are restrained by restrictions, whereas a payment processing service operates under a ‘frictionless’ structure, thereby allowing a merchant to create an account anonymously. The merchant requires only an Email ID to get started. The rules are fewer for free-flowing money than there are for money that is secured and invested.
It is necessary for us to understand the fundamental differences between banks and payment processing services. Keep these information handy!