Glossary
What is a payment processor?
A payment processor moves card transactions between your customer's bank and yours. Learn how it works, what it charges and how to compare providers.
Updated · By PayToMe Editorial
A payment processor is the company that handles the technical and financial work of a card payment. It sends the transaction to the customer’s bank, receives the approve or decline answer, and settles the money to the merchant.
How it works
Processors sit in the middle of a chain with several parties. The customer’s bank (the issuer) holds the card. The merchant’s bank (the acquirer) receives funds. The card network, such as Visa or Mastercard, connects them. The processor connects your business to that system.
- Request. A payment gateway or card terminal sends the payment details to the processor.
- Authorization. The processor routes the request through the card network to the issuer, which approves or declines.
- Clearing and settlement. Approved payments are batched and the money moves to your merchant account.
- Payout. Funds are deposited into your bank account, minus fees.
Pricing comes in two main shapes. Flat-rate pricing charges one percentage plus a fixed amount per payment, which is easy to predict. Interchange-plus passes the interchange fee through and adds a fixed markup, which is more transparent. Also look at fees beyond the rate: monthly fees, chargeback fees, payout fees and fees for refunds.
Example
Over a month you collect $12,000 through 8 card invoices of $1,500 each. Compare two illustrative offers.
| Item | Flat rate: 2.9% + $0.30 | Interchange-plus: 2.0% + 0.5% + $0.10 |
|---|---|---|
| Percentage fees | $348.00 | $300.00 |
| Fixed fees | $2.40 | $0.80 |
| Monthly fee | $0.00 | $15.00 |
| Total | $350.40 | $315.80 |
On large invoices, the second plan saves $34.60 in this example. On many small payments, the flat rate could win. These rates are made up for illustration, so run your own numbers. A card payment of $1,500 can cost much more than a $1,500 bank transfer, so see ACH vs credit card. You can prepare your invoices with the free invoice generator.
Related terms
- Payment gateway: the secure checkout layer that feeds the processor.
- Merchant account: where settled card sales land first.
- Interchange fee: the part of the fee paid to the card issuer.