What is a Payment Processor?

A payment processor is a vendor or service provider that facilitates credit or debit card payments, ensuring the secure transfer of funds from a customer or business to the seller's bank or financial institution. Payment processors play a crucial role in authorizing payments and handling communication between payment gateways, if applicable.

How does a Payment Processor work?

When a customer makes an online transaction, the payment processor is responsible for transmitting information between the seller's bank account, the customer's card-issuing bank, and, if relevant, third-party payment gateways like PayPal. The processor verifies the card's validity and checks if the account has sufficient funds for the transaction. If these criteria are met, the payment is processed within seconds.

How should businesses choose a Payment Processor?

Businesses selecting a payment processor should consider factors such as PCI-DSS compliance, transaction fees, and the type of payments accepted.

Key terms to understand include:

• Acquirer: The entity holding the merchant account to accept credit cards. It may be the same as the payment processor or a separate entity.
• Issuer: The cardholder's bank is responsible for paying the acquirer and merchant when credit card transactions are approved.
• Merchant Account: A specialized bank account allowing businesses to accept credit and debit card payments. Consider industry-specific needs and the processor's willingness to work with high-risk sectors.

What types of payments do Payment Processors accept?

Payment processors vary in their focus. Some are ideal for eCommerce businesses (online-only), while others like Square offer point-of-sale systems for hybrid or physical stores. Choose a processor aligned with your business model.

What are the fees associated with Payment Processors?

Payment processors may employ different pricing models, including:

• Interchange-plus pricing: Combines an interchange rate with a markup per transaction, either fixed or percentage-based.
• Flat rate: A consistent fee, typically 2-3% per transaction.
• Tiered pricing: Rates vary depending on the card type (debit or credit).
• Additionally, consider monthly fees, compliance-related costs, setup fees, chargeback fees, volume minimums, and operational integration costs.

Are there any added costs with Payment Processors?

Beyond transaction fees, businesses should be aware of supplementary costs like monthly fees, compliance expenses, setup fees, chargeback fees, and indirect charges. Check if there are volume requirements and the implications of not meeting them. Evaluate the ease of integration with accounting software and the duration for funds to clear post-transaction. Reliable customer support is also a critical consideration.