How Do Payment Processors Work?
A payment processor is a business that handles credit and debit card transactions for merchants. Payment processors seek approval for a transaction, contact the cardholder's issuing bank, and transfer money into a merchant account.
Merchants may choose to use a subscription-based payment processing service with a monthly fee, which comes in several different forms. A merchant can be charged each time a customer uses their credit or debit card.
These expenses might include a credit card company's interchange rate, also known as a swipe fee. Payment processors typically charge either an interchange-plus or a flat-rate transaction fee. The interchange-plus model is where the processor charges a fixed amount for the exchange and an additional charge on top of that.
For example, a processor may charge 1.8% of the purchase as the interchange fee and then another percentage or charge, such as 0.3 percent or 7 cents, on top of that. Flat-rate rates are usually above the interchange rate. The expense of the interchange rate would be covered by a 2.9 percent fee charged by the processor based on the transaction, with any additional amount being determined by negotiation between buyer and seller or other agreement in place. (Here's how to avoid credit card processing fees.)
Many processors offer a payment gateway or merchant account that covers these essential services at a fixed monthly cost. For example, merchants may be charged extra if they receive a chargeback or insufficient funds.
Payment processors are required to follow the Payment Card Industry Data Security Standard (PCI-DSS) by the PCI Security Standards Organization (PCI-DSS).
Merchants and service providers must securely handle, transmit, and store cardholder information during the transaction process. It's critical that you pick a credit card processor that is PCI compliant. The protection of your client's personal information is critical to maintaining a successful and lucrative company.
If a firm conducts in-person transactions, it should look at EMV-chip card POS systems. For in-person sales, EMV cards add another layer of protection against fraud. Embedded cards are now the standard for fraud prevention, and most payment processors can supply EMV-compatible terminals.
Some payment processors bundle services, such as a payment gateway and merchant account, so you can complete transactions using a single credit card processing firm.