Wallets and other checkout methods

Modern e-commerce checkout flows rarely display a single form asking for card numbers. Instead, consumers encounter a cluster of branded payment buttons: Apple Pay, Google Pay, PayPal, Klarna, or "Pay by Bank".

To the customer, these buttons look like interchangeable payment options. Behind the user interface, however, each button connects to a fundamentally different technical architecture, legal structure, and risk model. Some simply wrap traditional card numbers in cryptographic hardware tokens; others operate closed-loop settlement ledgers, issue instant point-of-sale consumer credit, or initiate direct bank transfers.

Understanding which architecture sits behind each button determines who serves as the merchant of record, who arbitrates customer disputes, and how quickly funds settle into your bank account.

Pass-Through Wallets

Apple Pay and Google Pay are pass-through wallets. They do not hold customer funds, manage merchant ledgers, or settle money across proprietary accounts. Instead, they provide a secure, frictionless conduit for passing card credentials down the conventional card rails.

When a customer loads a credit or debit card into a mobile wallet, the wallet software contacts the card network to generate a device-specific network token (a Device Primary Account Number, or DPAN) stored in the phone's hardware Secure Element.

During checkout:

1. The customer authenticates locally on their personal device via biometrics (FaceID, fingerprint) or passcode.
2. The Secure Element generates a dynamic, one-time cryptographic cryptogram.
3. The merchant receives the network token and cryptogram, passing them directly to its standard acquirer and payment gateway.
4. The card network validates the cryptogram against the token vault and routes the authorization message to the issuing bank as a standard card transaction.

Because pass-through wallets transmit genuine card transactions, nothing changes about the commercial acquiring relationship. The merchant remains the merchant of record, pays standard card processing interchange, and settles through its existing merchant account. However, two operational advantages emerge:

• Zero Raw PAN Exposure: The merchant handles only tokens, drastically reducing PCI DSS compliance scope.
• Superior Authorization Rates: Because biometrics authenticate the cardholder on hardware, issuing banks experience lower counterfeit fraud and approve transactions at noticeably higher rates.

Staged Wallets

Services like PayPal, Venmo, and Cash App operate as staged wallets. Rather than passing tokenized card data directly through to the merchant's acquirer, a staged wallet decouples checkout into two completely separate financial transactions:

• Stage 1 (Funding Stage): The customer pays the wallet provider. The customer may fund this stage by drawing down an existing wallet cash balance, initiating a bank transfer, or charging a linked card.
• Stage 2 (Settlement Stage): The wallet provider transfers money from its own central corporate account into the merchant's business wallet balance.

This two-stage separation has profound legal and operational consequences:

• Merchant of Record: For any card used to fund Stage 1, the staged wallet provider is the legal merchant of record on the card network, not you. The card networks see only an internal top-up to the wallet.
• Dispute Jurisdiction: If a customer objects to an order, they do not file a Visa or Mastercard chargeback against the merchant. Instead, they file a complaint through the wallet provider's proprietary resolution center. The wallet evaluates the claim under its own buyer protection policies, sets its own evidence submission deadlines, and unilaterally decides whether to debit the merchant's account.
• Fund Sweeping: Funds do not automatically deposit into your corporate bank account via nightly acquirer settlements. They accumulate inside the wallet's digital balance, requiring automated or manual sweep transfers into your operating bank accounts.

Buy Now, Pay Later (BNPL)

Providers like Klarna, Affirm, and Afterpay operate as buy now, pay later (BNPL) platforms, offering point-of-sale micro-financing:

• The consumer splits a purchase into interest-free instalments (most commonly "Pay in 4", requiring 25% down at checkout and three bi-weekly repayments).
• The BNPL provider immediately pays the merchant the full gross order amount upfront upon fulfillment, minus a transaction discount fee.
• The consumer makes future instalment payments directly to the BNPL provider.

Operationally, BNPL mirrors a staged wallet: the provider assumes 100% of consumer credit and fraud default risk. If the consumer stops making instalment payments or default on their loan, the merchant keeps the initial payout.

However, the merchant pays a substantial premium for this risk transfer. While traditional card interchange ranges between 1.5% and 2.5%, BNPL provider fees typically range from 3.0% to 6.0% plus a fixed transaction fee. Merchants absorb this higher cost because BNPL materially lifts checkout conversion rates and average order values for discretionary consumer goods. When merchandise disputes arise (such as missing deliveries or damaged goods), the BNPL platform adjudicates the dispute under its merchant services agreement.

Account-to-Account (A2A) Payments

The newest generation of checkout options, frequently labeled "Pay by Bank", bypasses the card networks entirely. These are account-to-account (A2A) payments, moving money directly from the customer's checking account into the merchant's operating account.

Architecturally, A2A checkouts rely on modern bank API aggregators or statutory open banking frameworks:

• In Europe and the UK, open banking regulations (PSD2/PSD3) mandate that banks provide standardized Payment Initiation Services (PIS). When a customer clicks "Pay by Bank", they are redirected to their banking app to authorize an irrevocable push transfer over Faster Payments or SEPA Instant.
• In the United States, aggregators link consumer bank accounts via credential verification and initiate either Same Day ACH debits or real-time push payments over FedNow or RTP.

A2A payments offer compelling merchant economics: because transactions bypass card network interchange and scheme assessments, payment processing costs drop to nominal flat fees (frequently pennies per transaction). Furthermore, real-time push transfers settle with immediate finality, eliminating chargebacks.

The consumer trade-off centers on protection: paying directly from a bank account removes the robust fraud shielding, chargeback mechanisms, and loyalty rewards provided by major card issuers. Consequently, A2A adoption thrives primarily in high-trust categories: utility bill payments, tax obligations, account wallet top-ups, and business-to-business wholesale invoices.

Comparing Checkout Methods

Attribute	Pass-Through Wallet	Staged Wallet	Buy Now, Pay Later	Account-to-Account
Underlying Rail	Traditional Card Rail (Tokenized)	Proprietary Ledger / Interbank Transfer	POS Micro-lending Facility	Direct Bank Rail (ACH / Faster Payments / SEPA)
Merchant of Record	The Merchant	The Wallet Provider	The BNPL Provider	The Merchant
Typical Pricing Model	Standard Card Interchange + Gateway Fee	Flat Percentage (typically 2.9% - 3.5%)	Higher Percentage (typically 3.5% - 6.0%)	Low Flat Fee per transaction
Dispute Framework	Network Chargeback Rules (Visa / Mastercard)	Proprietary Platform Resolution Center	Proprietary Provider Protection Policy	Bank Rail Dispute Rules (if any)
Settlement Destination	Merchant Operating Account via Acquirer	Provider Wallet Balance (Swept to Bank)	Merchant Operating Account (Net of Fee)	Direct Interbank Deposit

When integrating alternative checkout buttons, review the table before writing application code. Each button changes the party responsible for dispute resolution, dictates how funds are reconciled, and defines whether transactions can be clawed back weeks after fulfillment.

Terms introduced

• Pass-through wallet: a digital wallet (such as Apple Pay or Google Pay) that securely stores and transmits tokenized card credentials across standard card networks.
• Staged wallet: a two-stage payment platform (such as PayPal or Venmo) where the provider collects funds from the customer and separately settles with the merchant from its own accounts.
• Buy now, pay later: an instalment financing provider (such as Klarna or Affirm) that pays the merchant upfront and collects deferred micro-loan payments from the customer.
• Account-to-account: a direct bank-to-bank payment method (frequently marketed as "Pay by Bank") moving funds without routing across card networks.

Check your understanding

0 of 4 answered

1. A customer pays with Apple Pay. From the merchant's point of view, what kind of transaction is it?

   A card transaction using a network token. Fees, capture, settlement, and disputes all work as for any card.A transfer from Apple's own account, with Apple as merchant of record.An account-to-account payment from the customer's bank.A staged wallet payment settled on Apple's schedule.
2. A merchant adds a pay-by-bank button. Which statements are true? Select all that apply.

   There is no chargeback, because the customer pushes the money.The customer gets none of the protection a card gives them, so it sells best where they already trust the merchant.Whether the money can come back depends on the rail underneath; ACH can still return, an instant rail cannot.The merchant must be PCI compliant for these payments.
3. A customer who paid through PayPal disputes the purchase. Where does the dispute arrive, and whose rules apply?

   It arrives through PayPal's own dispute process, under PayPal's rules. PayPal is the merchant of record on the card networks, not you.It arrives as a card chargeback through your acquirer, under network rules.It cannot be disputed, because wallet payments are final.It arrives from the customer's issuer as a fraud reason code.
4. What does a merchant get from a buy-now-pay-later provider, and what does it pay for?

   The full amount up front, less a fee higher than card acceptance, with the provider taking the risk that the customer stops paying.Instalments as the customer pays them, at no fee.A card authorization that captures monthly.A settled bank transfer with the merchant carrying the credit risk.