Businesses that accept electronic payments through multiple channels—in-person, online, and mobile—need to work through various complexities. This includes selecting a suitable payment processor, an important decision that can affect long-term success and impact multiple parts of the business.
As more businesses expand globally, there is a growing need for multi-currency and localized payment options. To address these evolving demands, business owners and entrepreneurs should be well-informed about the key factors to consider when choosing a payment processor.
What is a payment processor?
A payment processor is a company or service that facilitates electronic transactions—such as payments made with credit cards, debit cards, or digital wallets—between businesses and their customers. Payment processors enable businesses to accept various forms of payment securely and quickly and facilitate the transfer of funds from the customer's account to the business's account.
What do payment processors do?
Payment processors play an important role in the electronic payment ecosystem, enabling businesses to accept and process various forms of payment from customers. Here's an overview of the primary functions of a payment processor:
Transaction facilitation
When a customer makes a purchase, the payment processor receives the transaction details and securely transmits this information to the appropriate parties, including the issuing bank (customer's bank) and acquiring bank (business's bank), via the card network.
Authorization and authentication
The payment processor requests authorization from the issuing bank to ensure the customer has sufficient funds or credit available. It also verifies the customer's identity and the validity of the payment method to minimize fraud and unauthorized transactions.
Encryption and security
To protect sensitive financial data, payment processors use encryption and tokenization to securely transmit transaction data between the customer, business, and banks. They also need to comply with the Payment Card Industry Data Security Standard (PCI DSS) to maintain a secure environment for handling cardholder information.
Settlement and funding
Once a transaction is authorized, the payment processor coordinates the transfer of funds from the issuing bank to the acquiring bank. The merchant account is then credited with the transaction amount, minus any applicable fees.
Data for reporting and analytics
Payment processors produce data about customer payments that can be used to generate transaction reports, analytics, and insights to help businesses track sales, identify trends, and manage their businesses more effectively.
Fraud detection and chargeback management
Payment processors use advanced algorithms and tools to monitor transactions for fraudulent activity, helping businesses minimize their exposure to fraud. They may also provide support and assistance in handling chargebacks and disputes.
Support for multiple currencies and payment methods
To help businesses expand globally, many payment processors offer support for multiple currencies and popular local payment methods. For example, Stripe supports more than 135 currencies, allowing businesses to do business globally and receive payouts in local currencies.
How do payment processors work?
Payment processors facilitate electronic transactions between customers and businesses—but businesses may not be aware of the details of this process. To understand how payment processors work, let's describe a typical payment processing flow in detail:
Customer initiates payment
When a customer makes a purchase, they provide their payment information—such as a credit card or digital wallet—to the business. This can occur in-person at a point-of-sale (POS) terminal, online through an e-commerce website, via a mobile app, or through payment links.
Transaction data encryption
The business's payment system encrypts the transaction data, ensuring it is securely transmitted to the payment processor. This encryption helps prevent fraudulent actors from intercepting and misusing sensitive customer information.
Transaction data transmission
The encrypted transaction data is sent from the business to the payment processor, which then forwards the information to the acquiring bank.
Acquiring bank to issuing bank
The acquiring bank forwards the transaction details to the issuing bank through the appropriate card network (e.g., Visa, Mastercard, or American Express) for authorization.
Authorization request
The issuing bank reviews the transaction details and checks if the customer has sufficient funds or credit available. It also confirms the authenticity of the payment method and the customer's identity, to mitigate the risk of fraud.
Authorization response
If the issuing bank approves the transaction, it sends an authorization code back to the acquiring bank through the card network. If the transaction is declined, the issuing bank sends a decline message with a decline code that explains why the translation was not approved.
Processor receives response
The payment processor receives the response from the acquiring bank and forwards it to the business. If the transaction is authorized, the business can proceed with the sale. If it's declined, the business must request an alternative payment method from the customer.
Transaction completion
Once the transaction is authorized, the business delivers the goods or services to the customer. At this point, the transaction is considered complete, although the actual transfer of funds is still yet to occur.
Capture and settlement
“Capture” refers to the transferring of funds from a customer's account to a merchant account for a particular transaction. Typically, at the end of the day, the business sends a batch of authorized transactions to the payment processor for settlement. The payment processor then submits this batch to the acquiring bank, which initiates the process of transferring funds from the issuing bank to the merchant account. This transfer usually takes 1–3 business days, depending on the specific processor and bank involved. Source
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