What Is a Payment Processor?

Meow Technologies, Inc.

Meow Technologies, Inc.

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.


Meow Technologies is a financial technology company, not a bank or FDIC-depository insured institution. Likewise, Meow Technologies is not an investment adviser and none of the information presented herein should be relied upon as financial advice or a recommendation to make any financial decision nor should it be considered to be tax or legal advice. The information is the opinion of Meow Technologies for educational purposes and may not be suitable for all companies. Products, like the one described herein, are offered through Meow Technologies and are not advisory services which are only offered through Meow Advisory, LLC.** The FDICs deposit insurance coverage only protects against the failure of an FDIC-insured bank.**

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**Disclaimer: Meow Technologies is a financial technology company, not a depository, bank or credit union, and your account at Meow is not, itself, an FDIC-insured product.

Meow currently partners with three banking providers. Banking services are provided by Third Coast Bank SSB; Member FDIC, Grasshopper Bank, N.A; Member FDIC, and FirstBank, a Tennessee corporation; Member FDIC.

By opening a Maximum Checking account through Meow and if you choose to receive banking services provided by Grasshopper Bank, N.A, you deposit your funds into a deposit account at Grasshopper Bank, N.A. which sweeps those funds into deposit accounts across a network of Federal Deposit Insurance Corporation (“FDIC”)-insured banks, for up to the current standard maximum deposit insurance amount (“SMDIA”) of $250,000 per eligible depositor, per destination institution, for each ownership capacity or category, subject to applicable terms and conditions, including Grasshopper's ICS Deposit Placement Agreement. Grasshopper Bank, N.A. uses a third-party vendor and agent to help administer this sweep process. Visit https://www.intrafi.com/network-banks/ for a list of the banks and savings associations with which we/Grasshopper, N.A. have a business relationship for the placement of deposits at destination institutions, and into which your deposits may be placed (subject to applicable terms with you, and any opt-outs by Grasshopper, N.A. or you). The current maximum deposit insurance amount for your funds is up to $125 million in FDIC insurance through the sweep network of Grasshopper Bank, N.A, subject to change at any time with notice from Meow and/or pursuant to applicable law. Terms and restrictions apply. Subject to applicable rate sheet. Interest rate on checking products quoted in Annual Percentage Yield (APY). Interest rates and yields are effective as per the date on the applicable rate sheet. See applicable terms and restrictions and refer to the applicable rate sheets for additional information.

By opening a Maximum Checking account through Meow and if you choose to receive banking services provided by Third Coast Bank SSB, you deposit your funds into a deposit account at Third Coast Bank SSB. If you also hold funds in a sweep program with Third Coast Bank SSB, Third Coast Bank SSB sweeps those funds into deposit accounts across a network of FDIC-insured banks, for up to the current SMDIA of $250,000 per eligible depositor, per receiving bank, for each ownership capacity or category, including any other balances you may hold at that receiving bank directly or indirectly through other intermediaries, including broker-dealers. Third Coast Bank SSB uses a third-party vendor and agent to help administer this sweep process. Visit Third Coast Bank SSB for a list of the banks and savings associations with which we/Third Coast Bank SSB have a business relationship for the placement of deposits at receiving banks, and into which your deposits may be placed (subject to applicable terms with you, and any opt-outs by Third Coast Bank or you). The current maximum deposit insurance amount for your funds is up to $50 Million in FDIC insurance through the sweep network of Third Coast Bank, subject to change at any time with notice from Meow and/or pursuant to applicable law. Terms and restrictions apply. Subject to applicable rate sheet. Interest rate on checking products quoted in Annual Percentage Yield (APY). Interest rates and yields are effective as per the date on the applicable rate sheet. See applicable terms and conditions and refer to the applicable rate sheet for additional information.

By opening a Maximum Checking account through Meow and if you choose to receive banking services provided by FirstBank, a Tennessee corporation, you deposit your funds into a deposit account at FirstBank, which sweeps those funds into deposit accounts across a network of FDIC-insured banks, for up to the current SMDIA of $250,000 per eligible depositor, per destination institution, for each ownership capacity or category, subject to applicable terms and conditions, including FirstBank's ICS Deposit Placement Agreement. FirstBank uses a third-party vendor and agent to help administer this sweep process. Visit IntraFi for a list of the banks and savings associations with which FirstBank has a business relationship for the placement of deposits at destination institutions, and into which your deposits may be placed (subject to applicable terms with you, and any opt-outs by FirstBank or you). The current maximum deposit insurance amount for your funds is up to $125 million in FDIC insurance through the sweep network of FirstBank, subject to change at any time with notice from Meow and/or pursuant to applicable law. Terms and restrictions apply. Subject to applicable rate sheet. Interest rate on checking products quoted in Annual Percentage Yield (APY). Interest rates and yields are effective as per the date on the applicable rate sheet. See applicable terms and restrictions and refer to the applicable rate sheet for additional information.

***FDIC insurance coverage is only available to protect you against the failure of an FDIC-insured bank that holds your deposits (and does not protect you against the failure of Meow or other third party). Your account with Meow and all services provided to you are subject to the Meow Terms of Service (“Account Agreements”) and other applicable terms and no other representations or warranties, express or implied, are provided to you except as expressly set forth in those written Account Agreements. If you have any questions regarding your account, please contact team@meow.com.

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FirstBanks general policy is to allow you to withdraw funds deposited in your account on the first business day after the day we receive your deposit. Funds from electronic deposits will be available on the day we receive the deposit. In some cases, we may delay your ability to withdraw funds beyond the first business day. Then, the funds will generally be available by the SECOND business day after the day of deposit.