Payment processor – what is it? | Everything you should know

In the world of online business, as a merchant, you need to be prepared for all the payments terminology that’s out there so that you can keep abreast of recent developments and have a finer understanding of your enterprise and how it accepts payments. 

One term you might have heard being thrown around is a “payment processor”. But what is this and what role does this player have in the payments acceptance process? Let’s find out!

What is a payment processor?

The payment processor is the party of the transaction process, which actually communicates the cardholder information to the remaining parties to determine whether there are sufficient funds in the customer’s account and, if so, to transfer these to the merchant’s account.

Or, in other words, a payment processor is one of the parties involved in the online payment acceptance process. If you have a website, your customer will pay you with a credit or debit card and they’ll first be taken to a secure payment gateway.

However, keep in mind that a payment gateway and a payment processor are different. Read on to find out why!

How does it work? 

So, how does the payment process work from the moment the customer chooses to pay you with their debit or credit card? Here it is in a nutshell:

1. The customer goes to the checkout and provides their cardholder details.
2. The cardholder’s information and the payment are then transferred to the payment gateway.
3. The payment gateway then communicates this information to the merchant’s payment processor.
4. The payment processor then transfers the details to the card scheme, for example, Mastercard or Visa.
5. The card network then communicates with the customer’s bank. 
6. The bank checks if there are sufficient funds for the transaction to be processed.
7. It communicates with the card network, indicating whether the transaction has been declined or approved.
8. The card network communicates this information to the payment processor.
9. The payment processor communicates this back to the payment gateway. 
10. The merchant and customer receive the response – the transaction was either approved or declined.
11. The funds are then transferred from the customer’s bank into the merchant’s account. 

Difference between a payment processor and payment gateway

Whereas a payment gateway is a sort of “middleman” or a special type of software for entering and processing cardholder information, a payment processor is more of the communication tool that works in tandem with the merchant account and the payment gateway to see the purchase process through to the finish line. 

How to choose a payment processor

In order to choose a payment processor, you need to take several factors into consideration. These include:

• Safety, security, and anti-fraud measures
• Compatibility
• PCI compliance

Conclusion

The world of payment processing is not as hard as it appears. You just need to be aware of all the actors involved and the steps in the process to ensure a smooth transaction experience for your customers every time.

When you think of a payment processor the next time, you’ll know that it’s a type of communication loop that brings in all four parties in the process together – the customer, the merchant, the card network, and the issuing bank.

The communication process starts when the cardholder enters their card details into your website’s checkout. From there, the “talking” begins. Although it takes just a few seconds to finalise, this is a complex process that involves several parties.

Now that you know what a payment processor is, you can make more informed decisions about your payment services provider in the future. 

Disclaimer: Please be aware that the contents of this article and the myPOS Blog, in general, should not be interpreted as legal, monetary, tax, or any other kind of professional advice. You should always seek to consult with a professional before taking action, since the particulars of your situation may materially differ from other cases.