A payment processor is an intermediary that facilitates credit and debit card transactions for businesses.
By Allison Eilhardt, Director of Content, PaymentCloud
Most companies are set up to accept credit cards, but many business owners still find themselves asking: What is a payment processor? How do they relate to my merchant account? Or, do I have the right payment processor for my business?
In this article, we’re going to explore the answers to these questions and more: we’ll define what a payment processor does, what a merchant account is, and how to find the best one to help you run your business safely. From getting you paid faster to reducing your risk of fraud, a good processor can become a serious asset to your business if you know what to look for.
What Is a Payment Processor?
You may have heard of a payment processor or know that you have one, but beyond that, it usually gets a little hazy. Whether you’re just getting your business set up or have been running for a while, understanding what a payment processor is and what they do is important.
On a high level, your payment processor is the company that routes money from your customers’ bank account into yours. But their role goes quite a bit deeper than that.
Note: The term “payment processor” is often used interchangeably with the term “merchant services provider”.
How Payment Processors Transfer Funds
On a detailed level, there’s quite a bit more involved with processing payments than initially meets the eye.
Within milliseconds of initiating a transaction, your payment processor does a few things.
- They first check your customer’s card against the verification information provided (as applicable). Things like their zip code, PIN, CVV code, etc. This is to ensure both that the card is legitimate and/or that your customer is authorized to use it.
- Next, they check your customer’s bank account balance to ensure they have the amount of money needed to complete the transaction available for use.
- Once both pieces of information have been collected, your payment processor will either give you an “approved” or “denied” response as a result.
This entire process (the time between the card being read and the approval/denial message coming through) happens so fast it is often overlooked as insignificant.
Note: This approval is an authorization that places the customer’s money on hold for you. The transaction isn’t completed (the funds aren’t moved) until you close your batch later that night.
Finally, usually at the end of the day, you ‘batch out’ your point of sale terminal. This is the point in time when your customer’s money is securely sent to your business bank account. Your payment processor is the entity that securely routes the money from your customer’s bank account into yours and ensures that you get paid.
To summarize, a payment processor is an intermediary: the manager of the exchange between your business and your customer’s financial institutions.
What Is a Merchant Account?
Another important term to quickly define here is a merchant account.
A merchant account is an account you open when you sign up with a payment processor. It connects your business and banking details to your processor, allowing them to help you process customer cards and ultimately get paid.
This is the first step in accepting non-cash payments. Your business information will be codified into a merchant account and identification number (or MID) that will be the key to unlocking credit card processing for your business.
Now that we understand what a payment processor does and how you can connect with them through a merchant account, how do you know that you have the right one for your business?
5 Steps to Finding the Best Payment Processor for Your Business
Payment processors are not all created equal. Each processor will have unique advantages, compatibilities, and specialties.
For example, if your business is considered high risk, your options for processors will be limited.
In any case, it’s important to find a processor who understands your business type, does its job of facilitating payments securely, and works with you to reduce your risk. Here are some helpful tips to steer you in the right direction when choosing (or changing) your payment processor.
- Evaluate Your Business Model
The first step in finding the right payment processor is to look at your business structure and understand how you ideally operate. For example, a business operating as an LLC will have different needs, risk-aversion tendencies, and liabilities than a Sole Proprietorship.
- Decide How You Want to Accept Payments
Are you going to primarily accept payments in person through a mobile device, on a POS system, or online through an eCommerce store? Is your business going to accept tips? These types of questions will be some of the most impactful for choosing the right processor.
- Anticipate Your Growth
If you plan to primarily accept cards through an eCommerce store now but have plans to open a retail front in the next few years, you’ll want to pick a processor that can grow with your business and its changing needs.
- Prioritize Security
As we have all seen, credit card processing security breaches can happen to anyone. A data breach and the associated fines and fall out can be devastating for any business, but even more so for small businesses.
When it comes to accepting non-cash payments, there are ever-increasing security regulations and concerns for business owners to keep up with as fraudsters get increasingly sophisticated over time. A good processor will make it clear how they can reduce your risks for accepting card payments.
A processor should be compliant with the latest Payment Card Industry Data Security Standards (PCI-DSS compliance) and offer anti-fraud protection services to the businesses it serves.
- Find a Reliable Partner
This evaluation process is mutual: a good processor will also review your business for the best solution custom fit to your business environment.
A true partner will have no problem taking the time to help you understand payment processing best practices, walk you through setup, help you manage your ongoing account, and give you risk reduction tips and tricks.
For example, they will take the time to explain how to reduce your chargeback exposure or offer ideas to help prevent fraud and/or chargebacks (transaction disputes) altogether based on your business model.
A business owner who wants to accept credit and debit card (non-cash) payments has a lot of research to complete and big decisions to make.
No matter what your business looks like today, it’s worth taking time to find the payment processor most compatible with your business structure, setup, and goals. Prioritize security and find a true partner to ensure you find success for your business now and into the future.