What is A Payment Processor?

A payment processor is a company that manages the credit card transaction process, acting as a kind of mediator between the bank and the merchant. Put simply, the payment processor communicates information from your customer’s card to your bank and the customer’s bank. Assuming there are enough funds, the transaction goes through.

There are a broad range of fees associated with payment processors, including start-up fees, transaction fees, chargeback fees, termination fees, and lease charges for credit card processing equipment (generally, the third-party payment processor provides the equipment you use to accept card payments, including the credit card machines). However, if you want to accept credit or debit card payments from your customers, there’s really no other option. Bear in mind that “payment processor” isn’t a universal legal term, and in some cases, it’s used interchangeably with terms like “payment service provider” or “acquirer”. 

How does the payments process work?

The payments ecosystem is confusing, with many different terms and nomenclature to get used to. But the whole thing is relatively simple. If you’re still not totally sure what happens when your customers pay using credit or debit cards, here’s a simple step by step guide:

1.) The customer completes the checkout process and chooses to pay by credit or debit card, submitting their cardholder details.

2.) Then, the merchant transfers the financial information, including the cardholder details, to the payment gateway.

3.) After receiving the transaction details, the payment gateway transfers the information to the third-party payment processor used by the merchant.

4.) Next, the payment processor will transfer the transaction information to the card network (i.e. Visa or MasterCard).

5.) The card network will transfer the transaction information to the customer’s bank, which checks whether there are enough funds in the account to complete the transaction.

6.) A response is then submitted to the card network, detailing whether the transaction has been approved or declined.

7.) The response is then relayed by the card network to the payment processor. The payment processor relays the response to the payment gateway, informing the merchant and the customer of the response.

8.) Finally, the funds are deposited by the customer’s bank into your merchant account, where they will sit for an agreed period before they are paid into your business bank account.

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