What is a Payment Processor, and How Does Payment Processing Work?

In this simple yet beneficial guide, we’ll tell you everything you need to know about Payment Processors payment processing!

Businesses take payments from customers every day, but how familiar are you with the ins and outs of what is actually happening? As a business owner, it’s essential to take an interest in every aspect of your business, including payments. Doing so will ensure that you are better equipped to deal with payment errors or other issues. Think about it, every time you receive a payment, you are handling your customers’ sensitive financial information, so it pays to be as knowledgeable as possible about the subject.

What are payment processors?

Payment processors are companies that manage and oversee customer debit and credit card transaction processes for businesses. So they essentially act as a middle man between a business and their bank. In simple terms, payment processing is where a company communicates financial information from customer cards to both your bank and theirs. Therefore, providing efficiency, peace of mind and taking some responsibility off a business owner’s plate.

These days, many people opt for card payments over cash, especially with the introduction of quick and easy contactless payments. So, if you’re taking an abundance of card payments every day, a third-party payment processing expert can prove to be a huge advantage. However, there are various fees associated with payment processing, which will vary from company to company. Examples of payment processing fees include start-up fees, transaction fees, and lease charges for card processing equipment (card machines).

While the range of fees may put some people off, it’s essential to recognise the value of third-party payment processing. Because without it, you may find yourself unable to take card payments and have to rely on other methods such as cash and cheque. And as we mentioned above, these methods simply aren’t as popular now.

Gateways, payment processors and merchant accounts

So, now you have a clearer idea of what a payment processor is, but that’s not all there is to it. To fully understand payment processing and the various stages it consists of, you need to know about payment gateways and merchant accounts. Fortunately for you, we’re a thorough bunch!

Payment gateways: Payment gateways are a type of software designed to take care of the technical aspects of transferring cardholder information. It’s essentially an intermediary between merchant accounts/payment processors and credit card companies. But what if you don’t have a payment gateway? Well, you won’t be able to take payments from your customers, even if you do have every other required factor in place.

Merchant accounts: A merchant account is a type of bank account that allows you to accept both credit and debit card payments. Without one, you won’t be able to accept these types of payments and therefore could see yourself missing out on a lot of business. Therefore when starting a business it’s vital to set up a merchant account when creating a business bank account.

As you can see, payment processors, payment gateways, and merchant accounts all play a critical role in payment processing. Now that you are aware of all three, and have gained a better understanding of how they work, it’s time to learn about the individual steps of payment processing from start to finish.

How does payment processing work?

The financial sector and the vast and complex processes it consists of can be… well, pretty daunting, especially if you’re a business owner who requires a service such as payment processing. However, there’s no need to worry too much, as the process itself is actually very simple once it’s broken down into easy-to-consume steps. So that’s precisely what we have done!

Below you’ll find a seven-step run through of payment processing to show you how processors, payment gateways, and merchant accounts all come into play.

1. Customers complete the checkout process and submit their details to pay by card.
2. Next, the merchant transfers all the necessary financial information to the payment gateway.
3. The payment gateway transfers information to the merchant’s third-party payment processor.
4. The payment processor submits the transaction information to a card network such as Mastercard or Visa.
5. The card network transfers transaction information to the customer’s bank, which checks if there is enough money in the account to complete the sale. Depending on the outcome, the transaction will be approved or declined, and the response is passed onto the payment processor.
6. They relay the response to the payment gateway, notifying the merchant and the customer of the success or failure of the transaction.
7. The customer’s funds are deposited into your merchant account before being paid into your business bank account.

Are you a business owner in need of an expert payment processor? RSM 2000 works closely with a wide range of companies, providing a variety of excellent financial services as well as specialist advice and guidance for improving the way you do business. 

We hope this blog post has helped to provide you with vital insight and understanding of payment processing, but if you have any questions or want to pick our brains about how we can help you — please don’t hesitate to get in touch!