Processors may also offer a range of additional specialised support, including extra fraud and security protections or assistance with regulatory compliance.
As with other parts of the payment ecosystem, they incur charges for their services, which we will explain in more detail later.
Payment processors are a single but indispensable piece of the total transaction puzzle – if a business is unable to securely secure processed funds from customers, it cannot function. Let’s explore the other vital parts of the transaction process.
The payment processor manages card transactions by transferring payment information (i.e. if the cardholder has sufficient funds in their account), validating the card number and approving the transaction if all conditions are met. They are in essence the middlemen between the customer’s payment and the business’s account, transmitting information between the business, the merchant acquirer and the issuing bank.
Payment gateways are in turn the middlemen between the payment processor and the credit card company. These are software applications that allow merchants to accept any debit or credit payment, encrypting payment data and transmitting this information between card issuer, processor and merchant acquirer.
The key function is to provide security that protects sensitive cardholder information during the online payment process.
The merchant acquirer maintains the business recipient’s account to accept payments, and directly interacts with payment processors rather than the vendor themselves. Funds from the merchant account are automatically transferred to the business bank account within one to two business days.
The acquirer relays approval or decline of payment to the business’s bank or through the payment gateway. It performs the role of confirming the customer account validity, and whether they have available balance sufficient to complete the transaction.
Consumer or merchant banks issue credit or debit cards to consumers via a card network – the most notable being Visa or Mastercard. These networks facilitate the entire payment processing activity, ensuring settlement and sales clearing as well as regulating them in accordance with network compliance policies.
This works differently for distinct card types: a credit card company transfers payment to the merchant acquirer on behalf of the consumer, making them liable if the consumer cannot repay these funds. When a debit card is used, the liability belongs to the bank, as the transaction can only take place if there are sufficient funds available at present. Networks charge the issuing and acquiring companies for each transaction.
Banks or fintech companies are home to actual customer funds. They issue credit or debit cards to their customers through card networks, and payment to the merchant’s bank (the acquiring bank) on behalf of the consumer, meaning they assume liability for the money if the consumer cannot pay the money back.