What is a payment processor?
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What is a payment processor?
As a business owner, it’s important to understand what happens when a customer pays you and how this affects your own costs. The world of payments can appear complex, with lots of confusing sounding terms. But the whole thing is quite simple. We’ve written this guide to prove it.
What is a payment processor?
When your business accepts credit or debit card payments, a payment processor communicates information from the customer’s card to your bank and the customer’s bank. And if there are sufficient funds, the transaction goes through. The payment processor is also known as a “payment service provider” or an “acquirer”. And whilst we are on dual names, the official name for a business bank account that accepts card payments is a “merchant account”.
However, there are a variety of fees associated with payment processors, including startup fees, transaction fees, chargeback fees, termination fees, and lease charges for credit card processing equipment. There simply isn't any other choice, though, if you wish to take credit or debit card payments from your customers.
How a payment processor fits into the payment’s lifecycle
Here’s how the payment process works:
- Whether in-store or online, the customer completes the checkout process and is asked whether they would like to pay with a credit or debit card.
- Once they have submitted their card details, the merchant transfers the financial information, including the cardholder details, to the payment gateway. The payment gateway is a payment processing portal that sends the information to a payment processor.
- The payment processor will transfer the transaction information to the card network, such as Amex, Visa or Mastercard® for approval.
- The card network will take the information to the customer’s bank, check whether there are sufficient funds to complete the transaction and inform the payment processor whether the transaction has been approved or declined.
- The merchant completes the transaction with the customer. The payment processor instructs the bank that issued the customer’s card to send funds to the merchant’s bank.
- Funds from the sale are made available to the merchant. This can happen immediately or after a few business days, depending upon the payment provider and the type of merchant account that the business owner has.
As you can see, the three important players in the payment process are the payment gateway, the payment processor, and the merchant account. All these elements need to work in sync for the payments process to work successfully. The payment gateway takes care of the transfer process, the payment processor authenticates and secures the transaction, and the merchant bank settles the funds before they reach your business account.
Important payment terms
As we mentioned earlier, although the world of payments seems complex, it is pretty simple. It helps if you are prepared to learn a few basic terms. Here’s a list of the important ones:
The Acquirer – The acquirer is also known as the merchant acquirer, acquiring bank or merchant bank. A bank or financial institution such as a credit card company maintains a merchant’s account to accept credit or debit cards. Sometimes the payment processor and the acquirer are the same organisation.
EMV – Europay, Mastercard and Visa created the EMV standard to help safeguard their customers from fraud. You’ll know an EMV card when you see one. It has become standard now. EMV cards have a small, square metallic chip on them. EMV technology helps make card transactions more secure. EMV won’t stop a data breach; that is where PCI comes in, so it is important to ask your payment processor about their EMV and PCI compliance solutions.
MCCs – A Merchant Category Code is a four-digit code that reflects the primary category in which a merchant does business. For example, taxi cabs and limousine services have one code, whereas bus companies have another. Classifying merchants in this way has several uses. Riskier lines of business will pay higher interchange fees. Credit companies can offer cash-back rewards or reward points for spending in specific categories. And rules and restrictions can be defined for card transactions in specific categories. Some domiciles may also have tax implications for specific services or merchandise. The MCC can also determine your interchange fee rate (read on to understand these).
Issuer - The issuer, or issuing bank, is the cardholder’s bank. The issuer is responsible for paying the acquirer and the merchant for approved card transactions. They also collect payment from the cardholder.
Merchant accounts – A bank account that accepts credit and debit card payments. Without it, you won’t be able to accept these types of payments.
Payment gateway – Bridging the gap between the customer’s card and the merchant account, the payment gateway is the technology that handles the technical side of transferring cardholder information. Without it, you won’t be able to receive payment from your customers.
PCI Compliance – Short for “Payment Card Industry Data Security Standard”, PCI is a set of security standards designed to ensure that all companies that accept, process, store or transmit credit card information maintain a secure environment. Any merchant who accepts card payments is required to be PCI compliant.
Tokenisation – This is when a payment gateway securely stores customer card data using a unique token for future or additional use. It enables transactions to be initiated in one channel and recalled in another. And it is the technology that has enabled payment systems to allow consumers to save their payment details for next time so that they can have 'one click' payments. ‘One click’ payments are attractive to retailers because they are known to boost conversion rates and facilitate subscription payments.
Payment processors and transaction fees
As you’ll have seen, choosing a processing services provider that can take multiple forms of payment, keep your customers’ information secure and operate a resilient and reliable payments system is important. However, when choosing a processing provider, it is just as important to understand the component parts of your processing fee. There are four parts:
1. Payment processing fee – Fees paid to the payment processor for facilitating credit or debit card transactions. This fee is normally a pre-set amount charged to the business every time a customer uses their credit or debit card for a transaction. You can reduce your credit card processing fees by setting a minimum transaction amount, minimising chargebacks and increasing in-person transactions.
2. Assessment fees – The Assessment fees go to the credit card network that processes the payment, such as American Express, Mastercard, or Visa. This fee is based on monthly sales and is not calculated per transaction. Because American Express and Discover operate their own payment networks, they collect the assessment and interchange fees, enabling them to make more per transaction than Visa or Mastercard.
3. Interchange fees – Your MCC will normally determine your interchange fee rate. Interchange fees are paid to the bank that issued your customer’s credit card and is designed to cover handling costs, fraud, and bad debt costs, and the risk involved in approving the payment. For example, if your customer pays with a Visa credit card issued by Metro Bank, the interchange fee will go to Metro Bank.
4. Account service fees - There is a wide range of additional fees that you may be charged. Choose a payment services provider who is transparent about these and if you can, negotiate each one to see which can be waived or reduced. They include:
AVS fee - The Address Verification Service is a low fee charged per transaction. Designed as an anti-fraud solution, it verifies your customer’s cardholder’s postcode and address.
Batch fee - Whilst each sale is normally authorised there and then, throughout the day, they are normally sent in one large batch to the processor for settlement at the end of the day.
Chargeback fee - When customers dispute a transaction, the bank will manage the claims process, charging you a (chargeback) fee to cover the cost of managing the claim. If you resolve the dispute, then the chargeback fee is refunded.
Minimum monthly processing fee – This is a minimum transaction processing fee that can be charged regardless of whether you meet their quota requirements.
Monthly statement fee – Also known as a ‘monthly fee’, this is a charge by the payment processor to cover the cost of customer services such as preparing monthly statements. This tends to be a flat-rate subscription fee.
PCI non-compliance fee - A charge incurred for any period when you can’t meet any PCI requirements.
PCI compliance fee – A fee to ensure that you remain PCI compliant.
Terminal lease fee - A monthly cost to lease your credit card machine. As a rule, it can be cost-effective to buy your terminals outright. So, check this option out.
How to choose the right payment processor for you
Payment processors play an important role for any business taking credit or debit card payments from their customers. Customers don’t usually get to choose their payment processor. Customers choose an acquirer or gateway that links with a processor of its choice behind the scenes.
Whilst you may not be able to choose your processor provider, it still makes sense to understand how your preferred payment platform integrates the payment processor into its payment system. To evaluate your provider’s performance, start by evaluating the following areas.
Compatibility – Is there a natural fit between the payment processor and other e-commerce software that you are intending to use?
Fraud – Payment fraud is when payment transactions are made on a credit or debit card without the cardholder’s consent. There are several types of payment fraud including identity theft, refund theft also known as ‘double dipping’ and BIN attacks. Most payment fraud cases occur when card details are stolen and appear on the dark web. Ask your payment provider what their payment fraud prevention strategy is and compare their approach to other providers.
Reach – At Planet, our platform provides the flexibility to deliver solutions tailored to meet the specific needs of Acquirers and Merchants. We operate in over 120 markets, with over 800,000 Merchants, over 100 Acquirers, and over 150 supported currencies. Ours is a global reach. It keeps us on our toes. And ensures that we are constantly looking to provide best-in-class payment systems.
Reliability – Often expressed as a percentage, reliability is the amount of time the system is available to process transactions.
Resilience – It is critical that a payments platform can perform during high-demand periods such as Black Friday. Resilience is a measure of this. Resilience thresholds can be established by looking at data such as the number of requests lost during a disruptive incident and how fast disrupted services can recover.
Systems redundancy – This is when vital parts of the system are duplicated to create a full backup of every component. Adding redundancy increases the cost and complexity of a system design. Still, it can be an attractive option for systems where the cost of failure is high or where system resilience is threatened without it.
PCI Compliance – The PCI security standards have been designed to ensure that cardholder information is maintained in a highly secure environment. Be curious. Ask how they adhere to the PCI security standards and what their development roadmap looks like for future security enhancements.
The advantages of a unified approach
When a payment provider operates as an acquirer, gateway, and processor, they are offering something known as an ‘end-to-end payment solution’. We call it a ‘unified approach’. Choosing a unified provider has multiple advantages. The unified provider controls the entire process, allowing for seamless transactions and a better customer experience, since transactions should, in theory, be processed faster with less downtime and more accuracy. This could help your business increase acceptance rates and drive overall growth. It could also offer you greater visibility of your payments, including a breakdown of fees and chargeback details.
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