What is a payment processor?

A payment processor is just one of the vital components that businesses rely on in order to accept card payments from their customers.

In simple terms, payment processing facilitates the transmission of card information between the merchant, the card networks, and the banks in order to authorize transactions. 

But no two payment processors are the same, and you should take the time to find one that offers functionality and fees that are compatible with your business. 

In this article, we explain how payment processing works, payment processor fees, and what factors you should consider when choosing a provider.

Payment processor explained

The definition of a payment processor is as broad as the scope of the activity. At a high level, a payment processor’s role is to transmit data between various parties in the payment chain.

A payment processor connects the merchant’s acquirer and issuers to the card networks. It also connects acquirers with banks to settle merchant funds, and issuers with banks to take payment for credit card transactions.

Is Checkout.com a payment processor?

Yes, Checkout.com is a payment processor, payment gateway and acquirer. Checkout.com offers these in an end-to-end solution. Transactions can be processed faster with less downtime and more accuracy, helping merchants increase acceptance rates and drive overall growth.

A payment processor also applies fraud rules throughout the payment flow to ensure that the transaction is legitimate.

Find out how Checkout.com help businesses optimize their payments.

How does payment processing work?

Here’s how payment processing works in 5 steps:

1. The customer initiates a transaction by entering their card details at checkout
2. Their card details are sent from the merchant via a payment gateway - which encrypts and transmits payment data - to the payment processor 
3. The payment processor sends the card information to the card network - such as Visa or Mastercard - which checks with the issuing bank that the customer has sufficient funds in their account to cover the purchase. If so, the transaction can be authorized
4. The card network then informs the payment processor that the payment can be approved, and the processor communicates the decision back to the merchant via the payment gateway
5. The merchant accepts the payment and the funds are debited from the customer’s account and credited to the merchant within one to three business days

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

Payment processors and transaction fees

Merchant’s have to pay fees for every transaction, which cover the costs of maintaining vital infrastructure and processing payments. The total cost of each transaction consists of a number of fees charged by each party involved in processing the payment. The main fees are:

• Interchange fees - merchants pay interchange fees to issuing banks for every transaction. They cover the costs and risks associated with processing the payment. The card networks set the interchange rates, which can vary depending on the network, the card used, and the merchant’s category 
• Acquirer fees - the merchant’s bank, also known as the acquiring bank, also charges a fee to process the transaction
• Processor fees - processor fees are paid to compensate the payment processor for providing its services. This fee usually consists of a percentage of the purchase amount plus a flat rate

Is Checkout.com a payment processor?

Yes, Checkout.com is a payment processor, payment gateway and acquirer. Checkout.com offers these in an end-to-end solution. Transactions can be processed faster with less downtime and more accuracy, helping merchants increase acceptance rates and drive overall growth.

A payment processor also applies fraud rules throughout the payment flow to ensure that the transaction is legitimate.

Find out how Checkout.com help businesses optimize their payments.