What is a payment processor? Who does what when a customer pays by card

The short answer

A payment processor moves card payments between your business and the banks. When a customer taps their card, the processor sends the details to be approved, and later helps move the money to you.

The Federal Reserve’s debit rule defines a processor as “a person that processes or routes electronic debit transactions for issuers, acquirers, or merchants” (12 CFR 235.2, Regulation II).

In everyday talk, “your payment processor” usually means the company you signed up with to take cards, like Square, Stripe or Helcim. That company may do several of the jobs below itself, or hire others to do them.

The five players in every card sale

Who	What they do	Example
Issuer	Your customer’s bank. It gave them the card and approves or declines the payment.	The bank named on the customer’s card
Card network	Carries the payment between the banks and sets the rules.	Visa, Mastercard
Acquirer	The bank that holds your merchant account and settles your card sales.	Your provider’s bank
Processor	Routes the payment data for the acquirer, issuer or you.	Often part of your provider
Gateway	Sends payments from your website or app into the system.	Authorize.net

Here’s how the official sources describe each one.

Issuer. Authorize.net describes the issuing bank as “The bank or financial institution that provides the customer’s payment card and account” (Authorize.net). The Federal Reserve’s rule says an issuer is “any person that authorizes the use of a debit card” (12 CFR 235.2).

Card network. The same rule defines a payment card network as an entity that provides the services, infrastructure and software “that route information and data to an issuer from an acquirer” to approve, clear and settle debit payments.

Acquirer. The rule says an acquirer is “a person that contracts directly or indirectly with a merchant to provide settlement” for the merchant’s debit payments. Authorize.net puts it simply: “The bank where you have your merchant account is called the acquirer.” Visa’s merchant guide calls it “your bank or processor (the acquirer)” (Visa).

Processor. Defined above. Note that the Fed’s definitions come from its debit card rule, but the same roles exist for credit cards.

Gateway. Authorize.net says “A payment gateway lets your business accept payments made via your eCommerce website or mobile app.” If you only sell in person, your terminal does this job and you may never hear the word.

What happens when a customer pays

Authorize.net breaks a card payment into steps (Authorize.net):

1. Authorization. The payment details go from your terminal or website, through the gateway and network, to the issuer.
2. Approval. The issuer approves or declines, and holds the funds on the customer’s card.
3. Settlement. Usually once a day, the day’s payments are sent in a batch. The money moves from the customer’s bank to your merchant account. Authorize.net says this “typically takes a couple of days.”
4. Payout. The money moves to your business bank account. Some providers are faster: Square pays out free the next business day for payments taken before 5 PM PT, and Helcim pays out the next business morning.

The approval part takes seconds. Getting the money takes longer.

Who gets paid out of each sale

• The issuer gets the interchange fee. Visa says interchange is a transfer fee “between acquiring banks and issuing banks” (Visa), and its rate tables say the fees “are paid to cardholder financial institutions.” Our interchange guide explains how much.
• Your provider keeps its markup on top of interchange.
• You get the rest.

You don’t pay each player separately. Visa says merchants pay a “merchant discount” to their own financial institution. That’s the rate your provider quotes you.

Processor, payment facilitator, POS: what you’re actually buying

Most small businesses never deal with an acquirer or a network directly. They pick one provider that bundles the pieces. Those providers come in a few shapes:

• Payment facilitators. One provider signs you up under its own account with the banks. Square’s US terms say “Square is a payment facilitator that allows you to accept Cards.” They also say Square must “enter into agreements with Networks, processors and acquiring banks” (Square). Stripe says it “operates as a payfac” (Stripe). Toast says it “is not a payment card processor, but it is a payment facilitator that partners with processors” (Toast).
• Providers that open a merchant account for you. You get an account in your business’s name. See what is a merchant account for how that differs.
• POS companies. Square, Toast, Clover and others sell the till software and take the payments too. See POS systems compared.

The label matters less than the cost. A flat rate from a payfac and an interchange-plus quote from another provider can land far apart for the same month of sales. The only fair way to compare is your effective rate: total fees divided by total card sales.

Keep reading

• The fee calculator: enter last month’s statement and see your real rate, and what other providers would charge.
• Compare payment processors: every provider side by side.
• Interchange fees, explained: the part of each fee that goes to your customer’s bank.
• What is a merchant account?: your own account or a payfac’s.