Payouts vs. Payment: A Brief Overview

Payouts vs payments – and why it’s important to understand the difference

In the world of FinTech, the terms “payments” and “payouts” are often used interchangeably. However, it is crucial to recognize that these concepts are distinct from each other, and product teams are starting to understand their significance and how to address challenges in these areas.

Differences between the two

While there may be various interpretations among FinTech professionals, at its core, online payments – particularly in the world of digital commerce – primarily refer to the transactional aspect of transfer of funds, for instance, making a purchase or applying a charge. On the other hand, payouts focus on how the funds collected in a payment are actually settled”paid out” to the ultimate beneficiaries. For example, in an online transaction on UberEats for a $15 sandwich, the payment processed could be split into multiple tranches allocated to the restaurant, the delivery partner, and pay fact/payment gateway commissions.

What's special about payouts?

While payments focus on a broad, overall practice that involves moving money, payouts have 3 nuances that are very unique to them.

[1] Multi-party: a payout is almost always associated with a beneficiary who “participates” in a transaction, e.g. a merchant, a logistics partner, an online marketplace, etc. A big part of orchestrating payouts involves onboarding and managing the lifecycle of these participants and applying business rules specific to them.

[2] Scheduling: Payouts can occur instantly, or T+1, or based on a schedule (the 5th of every month). This requires banks to deal with future dated payouts, with the possibility of holding payouts if there are risks (such as a KYC expiration of a merchant, or abnormally high refunds/chargebacks). Future dated payouts enable financial institutions to earn float revenue on otherwise non-interest bearing accounts where the funds are held.

[3] Netting: Multiple payouts are usually grouped or clubbed together into one payout to simplify accounting and reduce load on the core systems. While partners may be paid instantly, imagine Uber earning a $2 commission for every ride; a million rides will typically result in one large end-of-day / end-of-week payout. This creates a reconciliation problem (what are those underlying tranches that represent a full payout?) that needs to be addressed via MIS and dashboards.

Why are payouts so important?

The answer is simple: without the ability to orchestrate payouts, banks and fintechs cannot easily enable earnings in the gig economy. Millions of gig workers strive hard to earn a side-hustle today without owning assets, and that’s primarily possible thanks to the emergence of frictionless payments in a gig economy that enables an unprecedented level of convenience (from delivery and courier to HVAC servicing).

Thanks to the emergence of online payment gateways, acquiring transactions have now reached a level of maturity. However, payouts represent an entirely different global challenge.

I recently came across an intriguing article in PYMNTS discussing the modernization of money movement, where I found a fantastic quote that perfectly encapsulates the essence of payouts:

“Processing the transaction, well, that’s the easy part. The movement of funds — what happens before and after the transaction takes place — that’s the hard part.”

The sheer volume, velocity and versatility of payouts continues to increase. Meanwhile, financial institutions continue to build more complexity to deal with regulatory or business requirements. Stitching it all together to make a risk-free frictionless payout is what most commercial banks are looking for, with an intent to grow their liabilities balance, fees (direct revenue) and float (indirect revenue).

Sophisticated payout workflows necessitate the ability to incorporate regulatory compliance, manage liquidity, and apply payout preferences as rules, which are defined by the aggregator and beneficiary. Enterprises are now solving this globally; Standard Chartered Bank launched an offering in September 2022 called Payouts-as-a-Service to tackle all of this. Click here to read more about this.

Click here to learn all about how your financial institution or enterprise can implement payouts at scale.

FAQs

What are some examples of payouts?

– Online marketplaces: split into payouts for merchants, delivery partners and the aggregator

– e-toll gates: split into payouts for toll operator, road/transport authorities, consortium of lenders who helped fund the infrastructure project

– Food delivery: split into payouts for restaurants, delivery partners and the aggregator

– EV charging: split into payouts for charging operator, automotive manufacturer

– Rideshare: split into payouts for driver/partner and rideshare aggregator

… and many, many more, only limited by human creativity to create alternate, frictionless models in the gig economy.

Are payouts always done instantly?

It depends on the business model: most large B2B payouts in digital commerce happen after T+N days while gig workers, content creators, etc. get paid instantly/in near real-time.

What happens in the case of refunds and chargebacks?

These are handled in different ways. At the time of the payout, it’s not uncommon to reserve certain funds before making a pay out (by setting up a rolling or upfront or capped reserve). In case the money is already paid out and a refund/chargeback occurs, the payout is then partially reversed and/or a contra-payout / money transfer is made to the participant under disputes.

Are merchant collections and payouts the same?

Sometimes. A merchant collection typically refers to a merchant/biller (such as Vodafone) collecting a bill (for instance a broadband service) from a customer – these can be either direct debits (against a mandate) or a credit transfer. Collections too may involve split payouts; if the merchant is relying on a third party technology company (e.g. an ISV or Independent Software Vendor) to facilitate the collection, the “payout” to the merchant would again involve a split to payout the ISV commission separately to the merchant commission.

Who actually configures the payouts?

Ultimately, all money moves out via a bank that’s connected to clearing rails (ACH, NEFT, UPI, SWIFT, etc). The entity responsible for actually constructing the payouts could vary; some banks such as Standard Chartered Bank offer a smart way to configure this. Payouts could also be constructed by the payment provider or the aggregator itself.