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It is very natural for us to misconstrue 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 was not the case previously. In order to understand the difference between these two systems, we need to first take a look at what each one stands for.

Payment processing services
This is the service that joins the merchant’s bank to the cardholder’s bank, ensuring that the money is transferred accurately and that it reaches the right place. Generally, payment processors are categorized into two types: Front-end and Back-end. There are constant money transactions taking place in the payment processing services and there is a continuous flow of money from one place to another. However, there are no investments made here as there is no collection of money in the system. But there some payment processors also function as a digital wallet.

A bank, on the other hand, is an institution that basically generates money by lending to borrowers while charging an interest. They also invest the money deposited by the customers, paying it out on request. Banks also help in exchanging currency. Banks deposit the money securely, allowing them to be invested in the right way, also enabling money to flow from one entity to the next, imposing a fee for every transaction.

Now that we are able to 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 a lot of restrictions because of the power that they wield. Whereas a payment processing service operates under a ‘frictionless’ arrangement, thereby allowing a merchant to create an account anonymously. The merchant needs an Email ID to get started. The rules are generally fewer for free-flowing money than there are for money that is secured and invested.

Even with all their differences, both these systems are necessary for us to lead a normal life.