What is a Payment Processor?

Jul 20, 2022 by Julia Duarte

In any business, it’s crucial to understand the process of receiving payments from your customers. As payments have adapted from cash to digital methods, there’s been an increase in the use of payment processors that accept card payments, ACH, and wire transfers. Understand what a payment processor is before you run into future financial problems as a business and with your customers.

What is a Payment Processor?

A payment processor helps to manage the credit card transaction process by serving as the middleman between the bank and the merchant. It’s a company that authorizes payments by verifying your customers' billing information, confirms the funds available in their account, and finally, transfers the money to your own merchant account. This entire process occurs in a matter of seconds.

Understanding the Payments Ecosystem

In the digital payments process, there are other players besides the payment processor: payment gateways and merchant accounts.

Payment Gateways

Similarly, how payment processors are the middleman between banks and merchants, payment gateways are the middlemen between payment processors – and in some cases, merchant accounts – and credit or debit card companies. These companies connect your customers’ financial accounts to your own merchant account. Without payment gateways, you would not be able to charge a purchase amount to your customers’ credit cards.

Merchant Accounts

Merchant accounts are bank accounts that allow merchants to accept credit and debit card payments from their customers. Simply put, it’s the place where you accept the money after it goes through the payment processor.

To successfully manage payments, all three entities are required to participate. The payment gateway handles the money transfer process, the payment processor authenticates and provides a secure transaction process, and the merchant account handles the funds before they are paid into your business account.

Looking at Your Payment Processor Options

Now that you understand the different components of the payment process, you can look for the payment processor that works best for your business. There are several different elements that you should consider as you search for the most appropriate payment processor.

1. Ability of the Processor

Make sure that your processor can handle many different payment methods, or at least the payment methods which have historically been used in your payments process. Some of the most common payment methods are credit cards, electronic bank transfers via ACH, and wire transfers. If your payment processor can exclusively handle all common payment methods, your accounts receivable department will have an easier time managing payments.

2. Overall Cost

Fees are everywhere when it comes to payment processor services. Here is a list of the most common payment processor fees:

  1. Transaction fees
  2. Annual start-up fee
  3. Monthly statement fee
  4. Chargeback fees
  5. Minimum monthly fee

Remember to look at the entire cost of a processing service. Instead of looking at each fee, figure out how much it would cost your business to operate with a particular payment processor on a monthly basis when comparing services.

The typical pricing structures of payment processors include interchange-plus pricing, flat-rate pricing, and tiered pricing. Each option has its pros and cons, and it’s up to you to look at the overall cost per month to evaluate the best option for your business.

3. Integrations with Software

Save your AR team time by finding a solution that easily integrates with your business’ accounting software. Without manually entering data, your business can save time and preserve the accuracy of the data.

Other Options

Sometimes, the existing options for payment processors may not be the best fit for your business. Even if you choose the lowest cost solution, you may experience unpredictability in your overall costs because most pricing structures depend on the number of your business transactions. If you find yourself in this situation, look into Paystand, a payment processor which operates on a Payments-as-a-Service model. By charging a monthly fixed fee, Paystand saves you transaction fees in the future and offers a more predictable solution for your business.