What Is a Payment Processor & How to choose a payment processor?

 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.

How payment processing works:

When a business accepts card payments, a payment processor works in the background to finalize those transactions and move money from the customer's card account to the merchant's account. Here's what the process looks like: A customer gives the merchant their card information. This can be at a terminal in a store, a payment page online or through another method. The information is submitted through the payment gateway, which is a payment processing portal that sometimes comes bundled with payment processing services.

The payment gateway sends the information to a payment processor, which initiates the transaction by sending the information to the card network, such as Mastercard or Visa, for approval. The card network informs the payment processor whether the payment request is approved. The merchant completes the transaction with the customer.

Once the transaction is complete, the payment processor informs the bank that issued the customer’s card (the issuing bank) to send funds to the merchant’s bank (the acquiring bank). The merchant gets access to the funds from the sale. This can happen immediately or within a few business days, depending on the payment provider and the type of account where the funds are sent.

How to choose a payment processor:

While the right payment processor can help your business thrive, the wrong one could negatively impact your acceptance rates and stymie your growth. That’s why it’s important to consider the following factors when choosing a payment processor:

Compatibility: choose a processor that’s compatible with the way your business operates. Some of these factors might be down to preference, and some might be down to necessity. For example, if you trade internationally, you should choose a payment processor that supports expansion into new markets by processing in a variety of currencies and helping you navigate local regulations .

PCI compliance: PCI DSS requires businesses to meet a set of security standards that keep their systems safe from data breaches and criminal activity. Any business that accepts card payments must ensure card data is stored, transmitted and processed securely. A reputable payment processor makes it easy for you to meet these requirements by integrating compliance standards into its systems. Your payment processor should have information about their PCI compliance readily available on their website.

Fraud: a payment processor that comes with an integrated fraud detection solution is a big bonus for merchants. Fighting fraud is a daily necessity, so you should choose a processor that offers advanced capabilities like machine learning and custom rules. These systems can automatically detect and block suspicious transactions while increasing your acceptance of legitimate transactions.

Industry: your choice of processor might be limited by the industry you work in. For most sectors, this isn’t an issue, but if the nature of your business puts you at a higher risk of experiencing chargebacks (travel, telemarketing) fraudulent transactions (gambling, real estate), or if you’re heavily regulated (firearms, CBD) you might have to find a specialist payment processor .

Pricing: payment processor pricing can be complex as fees and structures vary considerably. Nevertheless, it’s important to understand how a particular processor’s rates will affect your takings based on your business model and sales volume. For example, if you have consistently high sales, an interchange-plus structure, which has a variable rate, might be more cost-effective than a flat-rate structure, which is the same for all transactions regardless of the interchange rate.