What Is a Payment Processor?
Accepting payments is an essential part of running any business. But the process behind these transactions is complex, involving multiple parties to securely facilitate the transfer of funds. Understanding payment processors is key to navigating this process smoothly. This guide will explain what payment processors are, how they work, and tips for choosing the right one.
What is a Payment Processor and Why Do Businesses Need One?
A payment processor is a company that handles credit card or digital wallet transactions between a customer and merchant. The payment processor authorizes payments, ensures sufficient funds, safeguards financial data, and transfers money between banks. Without a processor, businesses cannot accept card or digital wallet payments.
Payment processors provide several critical functions:
- Securely facilitate electronic payments across parties
- Validate customer identity and available funds/credit
- Encrypt sensitive financial data during transmission
- Comply with industry security standards like PCI DSS
- Settle transactions by coordinating money transfers between financial institutions
- Offer reporting/analytics on transaction data
Ultimately, processors enable businesses to conveniently accept electronic payments both online and offline. Their services relieve merchants from handling lengthy payment procedures themselves.
How Payment Processors Work: The Behind-the-Scenes Process
Though the checkout experience seems simple for customers, behind the scenes payment processors are hard at work communicating with various institutions to finalize sales.
Here is the step-by-step process:
- Customer initiates payment by providing card/wallet details to merchant
- Merchant securely sends this data to their payment processor
- Processor routes information to the card network (Visa, Mastercard, etc)
- Network confirms customer identity and available funds with issuing bank
- Assuming approval, network gives processor authorization code
- Processor forwards approval to merchant to complete transaction with customer
- Issuing bank pulls funds from customer account and sends to acquiring bank
- Processors settle the transaction by depositing payment (minus fees) into merchant’s account
This all happens in seconds behind the scenes without friction for customers. But as you can see, processors play an indispensable role in each transaction.
Types of Fees Charged by Payment Processors
Payment processors earn revenue through various transaction-based, subscription, or incidental fees including:
- Interchange fees – The largest share of processing fees passed to card issuing banks
- Assessment fees – Charged by the card network
- Processing fees – The processor’s cut for facilitating transactions
- Chargeback fees – Levied when a customer disputes a sale
- Monthly minimums – Minimum monthly volumes to qualify for pricing
- Gateway fees – For providing checkout portals and integrations
- PCI compliance fees – For adherence checks to this industry regulation
- Early termination fees – For breaking contracts prematurely
These costs are factored into the overall payment processing rates offered by providers.
Choosing the Right Payment Processor for Your Business
With so many processors available, selecting the best solution takes some savvy comparison shopping across a few key criteria:
Pricing Structure and Models
Consider transaction volume, average order size, and business growth trajectory when evaluating pricing. Explore interchange-plus plans from high volume processors for possible cost savings.
Accepted Payment Methods
Choose a processor supporting all payment types your customers use – credit cards, mobile wallets, COD etc.
Security and Compliance
Prioritize processors with robust security protections against fraud and breaches. All providers should be fully PCI DSS compliant to handle sensitive data properly.
Ease of Use and Integration
Opt for simple, intuitive reporting interfaces and check for readymade integrations or APIs linking the processor with current business software.
Customer Support and Services
Excellent customer service is crucial for resolving transaction issues promptly. Evaluate available support channels and response times.
In Closing
As critical intermediaries between consumers and businesses, payment processors empower businesses to securely accept electronic payments in-store, online, and increasingly through mobile channels. By understanding processors, pricing models, and important evaluation criteria before deciding on a platform, merchants can conveniently accept payments anywhere while saving on costs and friction.