What is a Payment Processor?Everything You Need to Know Before You Start Accepting Payments

What is a Payment Processor? Processing Explained, How it Works, & How to Choose a Provider

Credit cards were used to conduct 625 billion transactions in 2022. For merchants, that’s a glaring incentive to accept credit and debit cards.

You can’t accept card payments all on your own, though. You need a payment processor to take credit card payments.

So, what does a payment processor do? And, how do they help you and your bank manage transactions? Let’s take a look.

What is a Payment Processor?

Payment Processor

[noun]/pā • mənt • prä • se • sər/

A payment processor is a company that facilitates credit card payments on behalf of a merchant by receiving, communicating, and relaying the cardholder’s information between issuing and acquiring banks.

A payment processor manages transactions between the payer and the payee’s bank in a financial transaction. This system primarily facilitates the transfer of funds from customers’ accounts to merchants’ accounts when purchases are made using debit cards, credit cards, or other electronic payment methods.

Payment processors ensure secure and efficient transaction processing. This is done by verifying the details involved in a payment, such as a cardholder’s information and the availability of funds. They facilitate and communicate transaction details between the bank, the merchant, and the customer. Thus, they act as an essential bridge in the financial ecosystem.

Payment Processors, Gateways, & Acquirers: What’s the Difference?

Three parties — processors, gateways, and acquirers — are integral to the transaction process. While they often work closely together, each has a distinct role. Let's hammer out each party’s role before we get too deep into the weeds.

The processor works on your behalf as a merchant. It confirms the validity of a transaction, checks the availability of funds, and enables the transfer from the customer's account to the merchant's account. In contrast:

What Do Payment Processors Do?

Payment processors allow merchants to accept credit and debit card payments by relaying transaction data between the merchant’s acquiring bank and the cardholder’s issuing bank. 

Payment processors also:

Types of Payment Processors

Payment processors aren’t monolithic. Depending on your business stage and volume, you will likely choose between a traditional direct account, a payment facilitator, or a hybrid provider:

For established businesses with high processing volumes, a traditional processor like Chase Paymentech, Worldpay, or Fiserv is probably the most suitable option.

This model gives you a direct relationship with an acquiring bank via a dedicated merchant account. While the setup involves stricter underwriting and more paperwork, the trade-off is account stability and direct support. Also, because you’re not pooled with other merchants, you have greater leverage when it comes to negotiating credit card processing fees, a move that can save you thousands of dollars per year.

If you need to start selling immediately, payment facilitators (also known as payfacs or aggregators) like Stripe, Square, or Shopify can be a convenient, low-hassle solution.

When you sign up for an account, you’re onboarded as a sub-merchant under their master account. The biggest advantage of using an aggregator is speed: approval is often automated and takes just several minutes, and there aren’t any upfront costs or complex integrations to worry about. However, this convenience comes with higher, non-negotiable per-transaction fees and a higher risk of account suspension or closure if your chargeback ratio spikes.

Payment service providers (PSPs) like Adyen or Braintree take a hybrid, all-in-one approach by combining the gateway, processor, and merchant account into a single platform. These sophisticated solutions feature a diverse suite of enterprise-level integrations and are best suited for large, multinational businesses with multi-currency needs.

Settlement Timelines: When You’ll Get Your Money From Your Processor

Standard settlement timelines typically range from 1 to 3 business days. That said, exact timelines vary. For example, merchants with direct accounts may be able to negotiate next-day funding, while some aggregators may offer instant transfers as a service for an additional fee (e.g. 1% of the amount you want to transfer).

Settlement timelines also depend on when you submit your payments for capture. If you miss your processor’s daily cutoff time (e.g. 5:00 PM Eastern time), your request won’t be processed until the following day. Additionally, weekends and holidays don’t count as business days, so you’ll have to wait longer for your funds to arrive if you submit a request on Friday afternoon.

Getting Set Up with a Payment Processor

The payment processing set-up process involves a trade-off between speed and scrutiny.

For instance, if you sign up with an aggregator, you can get approved in as little as 15 minutes at any time of the day. This means you can potentially apply and start accepting card payments same-day.

By contrast, a traditional processor will want to take a deeper look into your financials. You can expect to spend 30–60 minutes on an initial application, followed by an underwriting process that lasts up to 7 business days. So, budget between 3 and 14 days to go from start to finish.

No matter the type of payment processor you opt for, you’ll need to have the following documentation ready before you apply:

• Business license or registration
• Employer Identification Number (EIN) or Tax ID
• Business bank account information
• Previous processing history (if applicable)
• Personal guarantee (usually requiring a credit check)
• A clear business description 

Chargeback Management Can Help

If you’re on the fence about payment processors because you are experiencing a high number of chargebacks, effective chargeback management could be your solution.

Chargebacks911® enables sellers in all MCCs, sales models, and product verticals to increase profitability. We help standard merchants avoid excess chargebacks and help high-risk merchants recoup revenue that would otherwise be lost to fraudulent chargebacks.

Next Chapter

How Payment Processing Works

Read More