A payment processor is the vendor that facilitates the credit or debit card payment from a customer or a business to the seller’s bank or financial institution. A payment processor is responsible for authorizing the payment, including making any verifications and channeling information and communication between any payment gateways, where relevant.
How does a payment processor work?
When a customer makes an online transaction, the company who is handling payment processing will be responsible for relaying all information back and forth between the seller’s bank account, and the account that issued the credit or debit card. If the customer is using a third-party payment gateway, for example PayPal, the payment processor will also communicate with the third party. The processor checks:
- Is the card valid?
- Does the account have the funds to make this transaction?
If these two questions are answered in the affirmative, the payment can be made extremely quickly, in a matter of seconds.
How should businesses choose a payment processor?
When a business needs to accept card payments, they will need to choose a payment processor. As standard, this payment processor should be able to handle compliance requirements with PCI-DSS. Important terms to know, include:
- The acquirer: This is the body that holds a merchant account so that they can accept credit cards. Sometimes the acquirer and the payment processor are one and the same, and other times the acquirer will settle the transactions for the merchant independently.
- The issuer: Also known as the issuing bank, the issuer is the bank of the cardholder. They will be responsible for paying the acquirer and then the merchant when credit card transactions are approved.
- Merchant Account: This is a type of bank account which is able to accept credit and debit card transactions. Without this specific kind of bank account, businesses will be unable to process credit and debit cards as a form of payment.
Other questions that a business might ask when working with a payment processor are,
What types of payments does the processor accept?
Online-only merchants may want to opt for a payment processor which is intended for eCommerce, such as Stripe or PayPal. In contrast, if a business has a hybrid presence or a bricks and mortar model, they may want a payment processor such as Square, that offers point of sale systems and other hardware as well as global payment processing services.
Industry might also impact the kinds of payment processors you can partner with. Some processors are wary about working with high-risk industries where there is a greater chance of fraudulent transactions or chargebacks.
What are the fees associated with payments?
There are a few different kinds of pricing that payment processors use. Interchange-plus pricing means there will be an interchange rate, and then a markup placed on top of each transaction. Speak to your processor about whether this will be a fixed amount per transaction, or a percentage of the transaction itself.
You could also ask for a flat rate, which will be the same regardless of the interchange rate. This would usually be anywhere between 2-3%. In some cases, payment processors will offer tiered pricing, which changes depending on the type of card, offering one price for debit cards and another for credit cards, for example.
Are there any added costs?
As well as the per transaction fees, businesses should be aware of any additional costs, such as monthly fees, compliance-related costs, or setup fees, chargeback costs and other indirect fees. Are there volume minimums to keep to, and what is the cost if these are not reached?
It’s also worth thinking about operational costs. How easy is it to integrate your payment processor with accounting software for example, and how long will funds take to clear once a payment has been made? Support is also a critical element to consider, as a business needs to know that they can get support in their moment of need.