Payment Processors are the technical glue in the transmission of credit card transactions. They maintain the computer network between Merchant Account Providers and the banks, and facilitate communication between these providers.
Despite being a blanket term for all parties involved in payments, Payment Processors are actually one of many providers supplying a unique service in the payment process.
It’s important to note that processors do not directly work or interact with businesses during the payment process. They are true “middlemen” and are chosen by Merchant Service Providers’ banks.
Let’s breakdown where Payment Processors contribute their service during the payment process. After a card is swiped or inserted into a card reader, the card information is tokenized and passed onto the Payment Processor.
Tokenization is the process of removing raw data and replacing it with a string of characters that have no value if breached. For example, the credit card number 1234-5678-9123-4567 could become EO5L-X03K-S2LX-79BQ through tokenization. These tokens are then securely stored in a token vault, where they are mapped back to the credit card numbers.
The Payment Processor has access to the token vault that decodes the data. From there, the information is passed onto the acquiring and issuing banks via the network. Without the processor, the banks have no way of receiving the data or transaction information.
The banks need to be notified of the transaction and card data so 1) the issuing bank can confirm that the card being charged has enough credit so the transaction can be approved and 2) the acquiring bank can accept deposits via the credit card transaction.
Here’s a diagram to get a visualization of this process and where Payment Processors contribute.
Of course, Payment Processors don’t provide their service for free. But as we said before, they do not directly work with businesses nor do they collect fees from them, despite businesses’ indirect use of their services. So, how exactly do processors stay afloat?
Processors collect a per-transaction fee for every credit card transaction. To the untrained eye, it may seem as though there is no fee for their services. However, this flat dollar amount is built into the rate plan the provider builds for its customers.
Which Payment Processor is providing a service to your business shouldn’t be a deciding factor when evaluating merchant services. However, there are some providers that double as a Merchant Service Provider and Payment Processor. In this case, you should carefully consider what such a provider has to offer.
Were you surprised to learn that Payment Processors are individual providers and not a blanket term for all players in the payments space?
Editor's Note: This post was originally published in January 2019 and has been updated for comprehensiveness and accuracy.