Payment Processors

Table of Contents

1. What Is a Payment Processor?
2. What's the Difference Between a Payment Processor, a Payment Gateway, and an Acquirer?
3. How Does Payment Processing Actually Work?
4. What Should Merchants Look for in a Payment Processor?

The world of e-commerce is a vast, interconnected network with countless people and businesses playing a variety of roles. Most online transactions involve half a dozen different parties before all is said and done. The fact that the vast majority of customers will never know all the different players involved in the purchases they make is a testament to how smoothly the whole operation runs.

One of the most important roles in the world of e-commerce is that of the payment processor. While that role may be played by a bank, an online platform, or another kind of merchant services provider, every merchant needs a payment processor in order to accept credit card payments. What do merchants need to know about payment processors, and how can they choose the best one for their business?

In both card-present and card-not-present environments, making a credit card payment has become a swift and seamless process. The customer provides their card information, the transaction is authorized, and payment is complete. It all transpires within a matter of seconds, despite the fact that quite a lot of behind-the-scenes communication is happening to make sure everything is carried out properly.

While there are many entities involved in every credit card transaction, the payment processor does a lot of the heavy lifting. Payment processors make their money by charging fees for the transaction activity they handle. That includes both the positive transactions from purchases made by customers as well as the negative ones, like chargebacks.

If the issuer cannot authorize the transaction based on the data provided (for example, if the card is expired, the billing address is incorrect, or the account doesn’t have sufficient funds to cover the transaction), the payment processor will communicate this to the merchant.

Otherwise, the transaction will go through, and when the merchant settles their transactions for the day, the payment processor will facilitate the transfer of funds from the issuing bank to the merchant's account.

Payment processors will often furnish the merchant with the hardware (payment terminals, card readers, and the like) and software they need to process card transactions.

Every time the payment processor processes a transaction, they will charge a transaction fee, which includes the fees that are paid to the issuer and the card network as well as the payment processor’s own per-transaction fee. This is in addition to any fixed service fees the payment processor may charge on a monthly or annual basis.

The roles and terminology for the service providers who assist merchants with credit card payments are not rigidly defined, so it is not uncommon to see some terms used in interchangeable or overlapping ways.

Payment gateways are the software interfaces that handle communications between the cardholder, the payment processor, and the issuing bank. All-in-one payment platforms like Square and PayPal may combine gateway and processing services in a single package.

An acquirer or acquiring bank is the financial institution that provides merchants with a merchant account, a special kind of bank account that's allowed to receive deposits from credit card transactions. Some acquirers also provide payment processing services, so it's possible for your acquirer and your payment processor to be the same company.

There’s a lot going on in even the simplest credit card purchase. To break it down a bit further, here's the entire process step by step.

1. The cardholder pays for their purchase by providing a credit card. They either scan it at a payment terminal (for brick-and-mortar stores) or enter the payment credentials at the checkout page (for e-commerce).
2. The payment gateway securely transmits the transaction data to the payment processor.
3. Through the card network (Visa, Mastercard, etc.) the payment processor connects to the issuer to authorize the transaction.
4. The issuer sends an “approve” or “decline” response back through the card network.
5. The processor transmits the response to the payment gateway, which indicates whether the transaction has been approved or declined.
6. If the transaction is approved, the processor will contact the issuer again to finalize the transaction and facilitate the actual transfer of funds. Depending on the specific setup, this can happen either immediately after the transaction or later on when the merchant submits the day's transactions all at once.
7. The funds are transferred to the acquirer by the card network.
8. The acquirer deposits the funds into the merchant's account, completing the payment process. 

The thing that should be at the top of every merchant’s list of requirements for their payment processor is reliability. A payment processor that experiences frequent network outages can end up costing you a lot of money in lost sales.

Price is another big concern for many merchants. Unfortunately, merchants with high chargeback rates may not have any good options in that regard. Card networks will sanction acquirers and payment processors whose clients are responsible for putting excessive amounts of chargebacks into the payments ecosystem, so payment processors may terminate the accounts of merchants who carry a chargeback rate of 0.9% or higher for very long.

Merchants who suffer this fate may find that the only payment processors willing to work with them are so-called “high-risk” processors, who charge high rates and may not be as reliable.

The fees charged by these processors can cut deeply into a merchant’s revenue, so it’s very important for merchants to keep an eye on their chargeback rates and do everything they can to keep them well below that 0.9% threshold.

Merchants need to be able to count on trusted partners and vendors to support the tasks and business operations that can't be handled in-house. Payment processing is one of the most vital outsourced operations for any merchant, especially in e-commerce, where nearly every transaction involves a payment card. A reputable, affordable, and reliable payment processor can give you the peace of mind of knowing that you won't miss out on sales due to processing errors or unexpected downtime.

Preserving a good relationship with your payment processor means keeping your chargeback rates low. When chargebacks become difficult to manage, it can help to enlist the services of another trusted partner—a chargeback management firm that can provide expert analytics and advice to help you uncover the root causes of your chargebacks and develop strategies for preventing them.

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