Payment Processor

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21 Aug, 2024

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A Payment Processor refers to a third-party vendor managing debit card payments and logistics of credit card payments from customers. It enables merchants to accept debit plus credit card payments safely, quickly, and efficiently with detailed sales and transaction reports without a merchant account.

It thwarts frauds from transactions of customers and merchants. A payment processor enables online retailers to accept customer payments on their websites and mobile apps. It also allows retail stores to accept physical cards for payment transactions. Some service providers and restaurants use it to accept in-person payments from customers.

What Is A Payment Processor?

A payment processor is a third-party vendor that enables merchants to accept debit and credit card payments safely, quickly, and efficiently, with detailed sales and transaction reports, without a merchant account.
It handles the financial side of transactions, while payment gateways handle the technical side.
It manages transactions for merchants, while merchant acquirers are financial entities that authorize card transactions and settle funds on behalf of merchants.
To become a processor, one must choose a niche, obtain licenses, build a fraud-proof platform, collaborate with banks, market services, set competitive prices, and maintain technology like UpToDate.

How Does A Payment Processor Work?

A payment processor is a third-party financial institution facilitating transactions between buyers and sellers while acting as an intermediary concerning customer and merchant banks. It facilitates the fund transfer from a customer account to a merchant account smoothly, quickly and safely. Thus, they are crucial for online and offline electronic payment for merchants.

It comes into play when a customer purchases a product. They offer their credit or debit card details to the merchant. After this, the merchant sends these data to the payment processor for verification and authorization. Meanwhile, the processor verifies the validity of the transaction through a funds check of the customer account. After that, the payment processor sends the data to the customer bank for the initiation and completion of the transaction securely.

Hence, after the bank allows the transaction, the money from the customer account gets transferred to the merchant account through the bridge called the payment processor. Moreover, the previous procedure can be summarized as authorization, settlement, batching, and funding. It is of two types:

Front-end processors: They execute data collection and encryption of payment information obtained from customers. They also perform tasks like data validation, user authentication and fraud detection.
Back-end processors: These focus mainly on the transfer of funds between customer and merchant banks, settling of funds and deposit of funds into the merchant accounts.

A payment processor has certain benefits, including enhanced customer satisfaction, increased sales and reduced fraud. Customers have become more comfortable with online transactions with increased safety, speed and reliability. Hence, they prefer paying in this mode given the ease it offers.

In addition, it allows merchants to easily sign up for merchant accounts, install payment gateway on their website and app, plus immediately accept debit and credit card payments from customers. Merchants have benefited from its real-time transaction settlement, reduced administrative costs and setup, payment management, and reports of sales and transactions.

Examples

Let us use a few real-life sources to understand payment processors.

Example #1

Amazon Pay simplifies online shopping by allowing customers to use their Amazon accounts for purchases across various web stores. It enhances convenience by streamlining the checkout process and provides a secure option, benefiting both businesses and consumers with Amazon's advanced security measures. Amazon payment processor for small businesses supports transactions on websites and apps, ensuring a hassle-free shopping experience. Although it charges 2.9 % more than payment firm Square, including a 30% fee, it is challenging other payment systems.

Moreover, Amazon Pay's broad acceptance makes it easier for users to complete transactions, leveraging the trust associated with the Amazon brand. As a result, it is a preferred choice for both customers and businesses.

Example #2

PayPal, a widely recognized online payment processor, enables secure online payments. It acts as an intermediary, offering an uncomplicated platform for transactions with a strong focus on customer and seller protection. It charges 3.49% + $0.49 for every transaction for transaction using its business account.

Accepted by numerous online stores and capable of handling various currencies, PayPal is a versatile choice. Its user-friendly mobile app further simplifies payments on the go and makes it efficient as a mobile payment processor. PayPal remains a popular option for online payments and credit card payment processors due to its extensive reach and strong reputation for security.

How To Become?

It is not easy to become a payment processor. For that, one has to follow the following steps:

Choose a niche under the selected industry, like retail, restaurants or e-commerce.
Then, obtain the required licenses comprising Payment Card Industry Data Security Standard (PCI DSS) certification.
Build a safe, fraud-proof online platform or partner with a third party to process credit and debit card transactions of merchants. The platform must comply with the regulatory requirements of PCI DSS.
Next, one has to collaborate with banks and financial institutions to get their approval for the payment processing business.
One has to market their services to merchants using advertisement and social media platforms.
Now, they have to set the prices at a competitive range to provide value for money and attract customers. A dedicated customer service department must be put in place to assist and solve payment queries immediately.

However, one has to keep the technology used up to date to remain in this business. Furthermore, it has contributed heavily to taking businesses to a global scale, making electronic fund transfers faster and purchasing from any part of the world. Many digital currencies have come into existence as a result.

Payment Processor vs Payment Gateway

Both help in business transactions of merchants and customers. However, there are certain differences between the two, as shown in the table below:

Payment Processor	Payment Gateway
A third party managed transactions for merchants.	A technology transferring customer card data to a merchant's bank for payments.
Handles the complete process of card transactions, including funds transfer, settlement and verification.	A third-party managed transactions for merchants.
Has back-end and front-end processors.	It works as a front-end interface capturing plus sending card data to the receiver bank.
Works behind the sights for processing and settling transactions.	It is the customer-facing interface for data collection.

Payment Processor vs Merchant Acquirer

As their name suggests, they have different functionalities from each other. Hence, let us use the table below to understand the difference between the two:

Payment Processor	Merchant Acquirer
A third-party entity oversaw transactions on behalf of merchants.	A financial company dealing in authorization of card transactions and funds settlement on behalf of merchants.
Manages the entire card transaction process, encompassing the transfer of funds, settlement, and verification.	It acts as a finance intermediary focusing on settling and authorizing funds with the card issuing bank.
Comprises both back-end and front-end processors.	Different types are present, like financial service providers and banks.
Operates behind the scenes to process and settle transactions.	Its functions are depositing the funds into a merchant account, authorizing transactions and clearing the funds.

Frequently Asked Questions (FAQs)

1. What are third-party payment processors?

Third-party payment processors are financial companies that help businesses take credit and debit card payments without needing their merchant accounts. They act as intermediaries between businesses and banks, handling payments and transferring the funds to the business's bank account.

2. What payment processor does Shopify use?

Shopify offers various third-party payment processors, including Stripe, PayPal, and Amazon Pay. Merchants have the flexibility to select the payment processor that best suits their needs and preferences.

3. Is Visa a payment processor?

Visa isn't a payment processor; it functions as a credit card network. It doesn't directly manage payment processing. Instead, it provides the essential infrastructure for banks and businesses to receive payments made with Visa credit cards.

4. Is Stripe a payment processor?

Stripe serves as an example of a third-party payment processor. It empowers businesses to receive payments through debit and credit cards, in addition to popular online methods like PayPal and Apple Pay.