The content of this article is provided for informational purposes only. You should always obtain independent business, tax, financial, and legal advice before making any business decision.
A payment processor is an intermediary party that facilitates card and electronic payments between two parties. It enables communication between financial institutions, like banks and credit card networks, to let your businesses accept digital payments.
You need a payment processor to start taking payments for a business.
Payment processors help businesses facilitate credit card, debit card, Automated Clearing House (ACH), and other payments. But they’re more than they appear; payment processors can also help your business grow and open your sales potential to new markets.
Read on to find out more about how they work and what features to look out for.
Table of contents
Payment processors work by taking the payment information customers input online or in-store and sending it between banks, credit card networks, and the business. Financial institutions verify the information and authorize the transaction, and then the payment processor finalizes the payment.
Customers add items to their cart, or employees ring them up in-store. While checking out, customers provide their card or payment information and add it to the system.
The payment gateway securely connects your website’s checkout page, where the customer enters their payment information, to the payment processing network. It also connects to physical point-of-sale (POS) systems for in-store purchases.
Next, the payment processor takes the information from the payment gateway and sends it to the customer’s bank or credit card account to request authorization.
While some businesses use separate vendors for their merchant account, payment gateway, and payment processor, companies like PayPal can take care of all three.
If the customer has enough funds or room on their credit balance, the issuing bank will approve the transaction. If not, the bank will reject it. This may also happen in other circumstances, such as a fraud flag.
The payment processor communicates the issuing bank’s decision through the payment processing network, confirming at the point of sale. This process of passing transaction information across the networks is also known as clearing.
At this point, the customer's financial institution has approved the transaction and begun removing the funds from the customer’s account.
The final stage involves funds arriving in the merchant’s bank account. The acquiring bank receives the funds and sends them to the account, minus any processing fees.
When a purchase begins, payment processors exchange information between multiple parties. These are the systems and entities involved:
Customer | Initiates payments and provides payment information |
Merchant | The seller who receives payment |
Issuing bank | The institution that issued a customer’s card or account |
Acquiring bank | The institution that holds the business’s bank account and settles funds |
Payment gateway | A service that securely transmits payment data after a customer enters it |
Payment processor | Connects the parties in a payment system together and handles technical processing |
Credit card network | Provides financial infrastructure to check information and authorize transactions |
Today's customer expects fast, low friction payments, and if a store doesn't approve their transaction or have a good mobile experience, they may look elsewhere.
With payment processing software, you can accept electronic payment methods like mobile apps, digital wallets, and buy now, pay later financing. They can also help you build an online store to reach new customers and sell to international audiences.
Depending on the service you choose, a payment processor can also:
Your payment processor is in a position to be a valuable collaborator for your business. If yours isn't doing all of the above, it could be time to revisit which payment processor is right for your enterprise.
A payment gateway is an encryption and data transmission service that sends a customer’s data from the point of sale to the next stage in the payment process. They’re important for security and privacy.
A payment processor then takes that information and facilitates communication between banks and credit card networks.
Payment processor | Payment gateway | |
|---|---|---|
Role | Facilitates communication between parties | Securely transmits account and customer data |
Functions | Initiates approval requests, communicates results, and initiates settlement | Encrypts data and sends it to payment processors or networks |
Fees for payment processing services depend on the company you use and the fee model they select. Payment processors generally apply fees for each transaction, which can take the form of percentages, flat rates, and interchange-plus fees.
Different fees also go to different entities in the process:
Fees have many variables, including your industry, the transaction and card type, networks, pricing models, and customer locations.
Direct payment processors are both a “set it and forget it” necessity and a revenue generator. They can assist your business with system and data integrations and enhance customer experiences by providing various electronic payment options.
Look for these capabilities when you evaluate payment processors:
Most payment processors act as card payment processors, enabling credit, debit, and ACH payments, plus the ability to process multiple currencies.
However, mobile devices and other technologies enable a variety of additional payment method options that customers might expect:
Buy now, pay later (BNPL) integration allows customers to quickly apply for an installment payment plan checkout. And since the payment processor handles the financing, you don’t have to worry about managing it.
The rising popularity of buy now, pay later transactions has made this an important payment method to offer. Payment processors that offer BNPL options can help you secure more purchases and increase the average customer purchase value.3 Most of the time, they don’t involve a hard credit check, so customers have fewer barriers to financing.
PayPal Pay Later offers several advantages that can impact a business's bottom line:
The right payment processor can provide consistently great experiences across mobile, desktop, apps, and in-person, using features like:
Payment processors should offer robust payment system integrations to make tracking, reporting, and accounting easier. Look for seamless software connections with:
This ensures all the systems communicate with each other, allowing for smoother customer experiences and reduced manual data entry tasks.
Your payment processor can help mitigate losses due to security issues by:
A truly global payments platform provides local payment capabilities as well as support. For example, PayPal can help you to:
Successful e-commerce operations often require you to quickly send refunds, rebates, rewards, and commissions around the world. Taking a “set it and forget it” approach gets the job done, but leading payment processors for e-commerce can help you find efficiencies and optimize your payouts.
PayPal’s payout capabilities can:
Low friction payments aren’t just about the front-end customer experience. You want strong authorization rates on the back end to help drive revenue for your business.
Processing tools like payment vaults, account updaters, and network tokenization help keep card data fresh and accurate. In turn, increased accuracy helps to drive authorization rates.
PayPal’s network processed 6.2 billion payment transactions in Q2 of 2025 alone, providing us with unique data from both customers and merchants that continues to enhance our authorization process.5
If payment technologies crash during times of high volume, like Black Friday or the first day of ticket sales for an event, so could your revenue. Plus, customers might not come back if they encounter errors or downtime. Your payment processor should generally have high uptime and resilience during high volume.
A comprehensive suite of solutions shouldn’t come with complex onboarding barriers, and a global scale shouldn’t require you to have a global team to implement.
A payment processor should provide flexible solutions that won’t overwhelm your team. For example, PayPal can:
Payment processing makes online and in-store purchase experiences convenient for customers and efficient for your business. But a payment service should do more; download this checklist to see a full list of features that modern payment processors should offer.
PayPal powers modern global payment solutions, simplifying your payment process whether you’re a small business or a massive enterprise.