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What is a Payment Processor?

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Retail stores, eCommerce merchants, and other sellers and service providers select payment processors. 

Payment processing services get authorization and receive payments from credit card issuers on behalf of customers. Card transactions include online or in-person credit card or debit card transactions. The credit cardholders make credit card payments after later receiving their monthly statements.

Our payment processor definition expands to include U.S. ACH payment processing and international eCheck payment methods like SEPA for paying vendor invoices.  

What is a Payment Processor?

A payment processor is a third-party vendor used by businesses to facilitate the logistics of accepting credit card payments from customers. It’s responsible for verifying authenticity, providing security, completing credit card and debit card transactions, and payments to merchants. A payment processor is also the third-party processor of ACH bank transfers. 

Understanding Payment Processors

Understanding payment processors includes knowing basic terminology:

  • About participants
  • Designated bank accounts for merchants
  • Online payment gateways
  • Requirements for card security, and
  • Credit cards with merchant fraud liability protection.

It’s how a payment processor works on transaction processing as an intermediary. A payment processor’s go-between status could be with:

  • Banks of the merchant and customer and credit card networks, or
  • Payers and member banks of the ACH network or SEPA for international eChecks.

Payment processors earn a service fee. It’s usually a per-transaction percentage amount and a fixed fee per transaction. A different pricing plan is a monthly fee combined with lower per-transaction authorization fees.

Some sellers with high transaction volumes can negotiate better rates with payment processors.

Payment processors also work as intermediaries to process other payment methods. These payment options include ACH bank transfer and eCheck. E-check is a broad term for electronic checks used for ACH and global payments made through a payment processor.

The Acquirer

The acquirer (acquiring bank) is the financial institution providing the merchant account for accepting credit cards and debit cards. The acquirer receives settled payments through the payment processor from the issuer. Batches of card transactions are paid into the merchant account by the acquirer. 

The Issuer

The issuer is the bank issuing the customer their credit card to pay for purchases. Through a payment processor, this issuing bank pays the acquirer responsible for paying the merchant for credit card transactions. The issuer later receives funds from the cardholder paying their credit card statement. The issuer is often the same as the customer’s bank. 

Merchant Account

A merchant account is a designated business bank account into which money from the issuer on behalf of the cardholder is deposited to pay for batches of the merchant’s customer credit card transactions within one to three days of a sale transaction. 

PCI Compliance

PCI compliance means following PCI security standards, applying to:

  • Merchants & service providers (PCI DSS)
  • Software developers of payment applications (PCI PA-DSS)
  • Manufacturers of PIN entry devices (PCI PTS).

PCI DSS stands for Payment Card Industry Data Security Standard.

Payment Gateway

A payment gateway is a fast and secure method for transmitting payment data online. A payment gateway includes card reader devices for point-of-sale (POS) and online portal software technology for eCommerce transactions. It’s used to authorize and enable payments from a customer to a merchant or vendor. 

EMV Chip Credit Cards

EMV chip credit cards include an embedded silicon chip for better security. When merchants accept EMV chip credit cards, the fraud responsibility for transactions goes to the credit card issuer. Chip cards eliminate fraud liability (fraud chargebacks) for the merchant.

What Does a Payment Processor Do?

In a card transaction, a payment processor acts as an intermediary between the credit card networks, the merchant’s bank, known as the acquirer, and the bank that issued the customer’s credit or debit card, known as the issuer. 

The acquiring bank and issuing bank are members of credit card networks. Credit card companies, including VISA, Mastercard, Discover, and American Express, have proprietary credit card networks.

Payment processors are responsible for obtaining authorization for credit and debit card transactions. Payment processors instruct the financial institution as card issuer to pay the acquirer bank on behalf of its cardholder customer, using secure, encrypted information. Then the acquirer pays the merchant through their designated merchant account, which is a bank account.

Payment processors may also offer intermediary services for other types of payment methods, including ACH and global ACH payments (eChecks). 

How Does It Work?

An explanation of how credit card processing/payment processing works is:

A payment gateway through the retail point-of-sale (POS) card reader device or the seller’s website or mobile app is used to securely transmit transaction and card data, including card information, online to credit card networks, acquirers, and card issuers and pay merchants for batches of credit card transactions through their merchant account. A payment processor is an intermediary.

A merchant gets credit card sale authorization through an acquirer that contacts the card issuer to check the customer’s ability to pay for the credit card transaction. The payment processor again acts as the intermediary. The merchant provides batch transaction data for credit card transactions to the acquirer (acquiring bank) to be paid for its sales.

The transaction amount may be put on hold status or pending by the issuer in the customer’s credit card account to reserve credit availability for the transaction. 

The issuer sends the net amount to the acquirer (another bank) to settle credit card transactions and deposit money into the merchant’s bank account within 24 hours to three days.

The issuer, the acquirer, and the payment processor are paid service fees. The credit card issuer (a bank) deducts interchange fees as its compensation in payment processing. The acquirer deducts a discount from the amount as compensation for its services. The payment processor charges merchants fees for its services.

Examples of Payment Processors

Examples of payment processors include:

  • Stripe 
  • PayPal
  • Square
  • 2Checkout
  • Authorize.Net
  • Braintree
  • ChargeBee
  • Wise (formerly Transferwise)
  • Payoneer
  • WePay
  • Secure Payment Systems 
  • QuickBooks Payments (Intuit Merchant Services)

Braintree, acquired by PayPal in 2013, is operated as a separate eCommerce payment processing service and gateway that integrates with PayPal. 

Secure Payment Systems offers products, including its Partner Payments subsidiary for credit and debit card payments and ACH payments through the Automated Clearing House network regulated by Nacha. 

Quick Books Payments, operated through Intuit Merchant Services, is a payment processor for approved QuickBooks users. Payment method choices include credit cards, debit cards, PayPal, Apple Pay, ACH, and wire transfers. 

Although your company can consider these named payment processor alternatives or other payment processing service providers to meet its business needs, we narrow the list to the top three third-party payment processors of 2022. 

Top-Rated Payment Processors of 2022

Top-rated payment processors for 2022 are Stripe, PayPal, and Square. The best payment processor companies can be used in-store and as online payment software for eCommerce and other suppliers’ needs. 


Stripe is a payment processor and software platform for accepting customer payments. Stripe software uses API integration to create eCommerce websites. You can integrate the Stripe payments user interface and Stripe Terminal with your mobile app to accept payments for the business.

Stripe is used by:

  • Retailers with store point-of-sale (POS) and online sales
  • eCommerce companies
  • Subscription businesses
  • Marketplaces. 

Merchants can add Stripe Terminal card readers to point-of-sale equipment. Stripe uses machine learning technology to reduce fraud.


PayPal, which provides a payment gateway called Payflow, is a third-party payment service provider (PSP), considered a merchant aggregator, that doesn’t require a merchant account. Considering its functionality, we rank PayPal as a top-rated payment processor. 


Square is still the brand name for this payment processor owned by renamed parent company, Block. Square lets customers build a free customizable online store and accept payments on their existing website, mobile app, or social media.

Square’s payment solutions include point-of-sale, card reader, and terminal equipment for accepting customer payments in person at checkout. Customers may use square terminals for contactless payments using near-field communication.

Square’s payment processing and hardware pricing are reasonable for startups and small business owners.

How to Pick a Payment Processor for Your Business

Pick a payment processor with a good customer reputation. It should provide security (including data encryption), reasonable pricing, and excellent customer service. Compare per-transaction fees as a percentage of the total amount and fixed fees, chargeback fees, miscellaneous fees, payment gateway fees, and the cost of any monthly plans.

When comparing vendors, businesses with a high volume of transactions can request a quote. The quote may be for lower per-transaction rates. If your business qualifies for a quote, use it to calculate the total cost of using each of the considered payment processing companies. 

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