What is a payment processor? How does it work, and how to choose one for your business

Key takeaways: 

• Payment processing allows businesses to quickly, easily, and securely accept payments from customers. 

• An ideal payment processor will accept various payment methods, be easy to set up and use, and offer accounting management features to keep track of pay ins.

• Payment processors like Airwallex can help businesses of any size grow globally with added features that help manage cross-border transactions.

Cashless transactions could increase to 1.9 trillion USD in 2025. By 2030, this figure could nearly triple.¹ As the world becomes more and more cashless, investing in a good payment processor for your business becomes more important than ever.

A payment processor can make it quick and easy for businesses to accept digital payments from customers, whether it’s via credit cards or mobile wallets.

Read on to learn more about how payment processing works and get tips on how to choose the right payment processor for your business. 

What is a payment processor? 

A payment processor is a company that acts as a middleman between a business and the financial institutions involved in a transaction. When a customer makes a purchase using a credit card, debit card, or digital wallet, the payment processor ensures the transaction is authorised, funds are transferred securely, and the payment is completed.

Learn more about how payment processors work below.

How payment processors work

Payment processing facilitates the exchange of payment details between your bank, the customer's payment method, and their bank, ensuring the transaction is authorised and completed smoothly.

Here’s a breakdown of how payment processors process work:

1. The customer initiates a payment: First, the payment gateway collects customer's payment details.

2. Payment is sent for authorisation: The payment gateway encrypts the data and sends it to the payment processor for authorisation. 

3. The customer’s card is verified: The payment processor communicates with the customer’s bank to verify the customer’s card information and determines if there are enough funds to complete the purchase. 

4. The transaction is approved or denied: If the transaction is approved, the bank will respond to the payment processor and the funds will be released into your merchant account. If there are insufficient funds, the payment gateway will decline the purchase.

5. The transaction is settled: After the transaction is approved, the funds are held in the merchant's account where the funds will be transferred to your business account.

Payment gateway vs. payment processor vs. merchant account

The payment gateway collects payment data from customers, while the payment processor handles the transaction by communicating with the customer’s bank. The merchant's account is a type of account that holds the funds temporarily after a transaction is approved. These three components work together to enable businesses to accept payments from customers.

Here’s a comparison of each below:

• Payment gateway: The payment gateway securely captures and transmits the customer’s payment information to the payment processor. It’s what you use to accept payments online or via a point-of-sale system, and it helps prevent fraud by encrypting data during the transaction process.

• Payment processor: A payment processor transfers payment details between the customer’s bank and yours. It verifies the payment details and authorises the transaction. It also sends the approval or denial back to the payment gateway.

• Merchant account: A merchant account is an account that temporarily holds funds from your customer’s payments until they are approved. Once approved, funds are moved to your regular business account.

Knowing how these three work together is necessary for understanding the payment process.

Tips for choosing a payment processor 

Finding the right payment processor for your business’ goals is important. Here are some helpful tips to consider when it comes to choosing the right platform:

• Costs and fees: Review and compare the different fees associated with your payment processor. Pricing models may include flat fees, percentage-based fees or bundled pricing. Bundled fees may keep costs predictable, but percentage-based fees may benefit businesses with smaller volumes. 

• Onboarding time: Consider how easy the platform is to set up and use. Payment API integration methods can significantly impact this process, as some platforms offer simple plug-and-play APIs, while others may require more customisation. A user-friendly API can make accepting payments from your customers much more streamlined and quick.

• Payment methods accepted: Ensure your payment processor can accept payment methods in the currencies and markets you currently operate in or are looking to move into. They should be able to accept payments from the major card schemes like Visa, Mastercard and Amex. 

• Integrations: Integrations make it easy to pair with tools you already use. For example, Airwallex integrates with popular accounting tools like Xero, QuickBooks and Netsuite so you can consolidate your operations.

Maximise business potential with the right payment processor 

The right payment processor can make a huge difference in scaling and growing your business. If you’re a global business, Airwallex can offer a comprehensive solution to power your expansion. With Airwallex, businesses can accept payments through 160+ payment methods in 130+ currencies, helping you expand your customer base and revenue potential.

Airwallex’s Payments is designed to work in harmony with our extensive suite of services. Our Business Account lets you open multi-currency Global Accounts that allow you to collect and manage funds in multiple currencies, avoiding unnecessary conversion fees, and allowing smoother global cash flow.

Payment processor frequently asked questions

Below are some frequently asked questions related to payment processors.

How long does payment processing take?

The payment process timeline will depend on factors, like the type of payment processor used, what payment method is submitted, and the financial institutions involved.

However, card and mobile wallet payments are usually the quickest. For example, Airwallex processes payments on the same day. 

Which payment processor is the best?

The payment processor that's best for your business will depend on your needs and goals. Be sure to compare different payment processors and their costs to see which aligns most.

What fees are associated with payment processors? 

Payment processors typically charge several types of fees, including transaction fees, monthly subscription fees, and chargeback fees.

Additional costs may include BECs transfer fees, cross-border fees for international transactions, PCI compliance fees, and hardware fees for payment terminals.

Sources:

1. https://www.pwc.com.au/digitalpulse/report-future-payments.html