One of the numerous challenges facing small and medium-sized businesses (SMBs) lies in processing cashless payments such as credit cards. Despite it being an afterthought for many businesses, processing payments is a major decision.
After all, a seamless checkout experience is critical for both cashiers and customers alike – a faulty machine can mean lost sales, and high processing rates can end up costing even a small business thousands of dollars every year. There’s a lot to consider.
To make the checkout process frictionless, retail stores, eCommerce merchants, vendors, and service providers turn to third-party payment processors. However, the use of payment processors is not without cost. There are fees charged on every transaction. But with so many third-party payment processors on the market, which one is right for your business? What is the actual role of payment processors, and how do they work? Does your retail store have the right POS software to integrate your choice’s payment processor? Check out the answers to all these questions in the sections that follow.
Table of contents
- What is a third-party payment processor?
- How does third-party payment processing work?
- Basic terminology for understanding payment processors
- Examples of payment processors
- POS System vs. payment processor
A third-party payment processor, also known as a credit card processing company, is an entity that allows businesses to accept customer credit card payments, online payments, and any other cashless payment method without having to create their own merchant account. A payment processor is also the third-party processor of ACH bank transfers.
For their services, payment processors charge a fee. This is usually a percentage per transaction or a flat fee per transaction. Other pricing plans include a flat monthly fee with a lower per-transaction authorization fee. Merchants with high transaction volumes can usually negotiate better rates with payment processors.
Here is an overview of how credit card/retail payment processing works:
- A payment gateway is required for secure credit card processing. The payment gateway is used through the retailer’s point of sale (POS) card reader device to securely transmit transaction and card data to credit card networks, acquirers, and card issuers. Payment gateways are a merchant service that processes credit card payments for eCommerce sites and traditional brick-and-mortar stores.
- The merchant receives authorization for the credit card sale through the acquiring bank, which contacts the card-issuing bank to verify the customer’s ability to pay for the credit card transaction. The merchant provides batch transaction data for the credit card transactions to the acquirer (acquiring bank) to get paid for its sales. The payment processor acts as an intermediary throughout all of this.
- The transaction amount may be placed on hold by the issuer on the customer’s credit card account to reserve credit availability for the transaction.
- The issuer sends the net amount to the acquirer to settle the credit card transactions and deposit money into the merchant’s bank account within 24 hours to three days.
- The issuer, acquirer, and payment processor receive a service fee. The credit card issuer (a bank) deducts interchange fees as compensation for processing the payments. The acquirer deducts a rebate from the amount as compensation for its services. The payment processor charges merchants a fee for its services. And the card networks get a tiny fee for their role in regulating the industry.
To further understand the functioning of third-party payment processors, you need to know the basic terminology. Here are some terms you need to understand:
The acquiring bank
The acquiring bank, or merchant acquirer, is the financial institution that issues the merchant account for accepting credit and debit cards. The acquirer receives payments from the issuer through the payment processor. Batch transactions are credited to the merchant account by the acquirer.
A merchant account is a commercial bank account that allows a business to accept and process electronic payment card transactions. The merchant account is the bank account on which the issuer’s money, on behalf of the cardholder, is deposited to pay for batches of credit card transactions of the merchant’s customers within one to three days after a sales transaction.
The card processor sends the transaction details to your merchant account when a customer swipes their credit or debit card to pay for a transaction. Your merchant account provider then confirms that sufficient funds are available from the customer’s card issuer. Once funds are approved, your merchant account provider advances your company the funds for that transaction.
The issuer, or issuing bank, is the bank that delivers the credit card to customers to pay for purchases. Through a payment processor, this issuing bank pays the acquirer responsible for paying the merchant for the credit card transactions. The issuer then receives the funds from the cardholder, who pays the credit card statement. The issuer is often the same as the customer’s bank.
A payment gateway differs from a processor in that it is a fast and secure method for transferring payment data online. A payment gateway includes a point of sale (POS) card reader and online portal software technology for eCommerce transactions. It authorizes and enables payments from a customer to a merchant or vendor.
The Payment Card Industry Data Security Standard (PCI DSS) is a set of requirements designed to ensure that all companies that process, store, or transmit credit card information maintain a secure environment.
A point of sale system, or POS, is where your customer makes a payment for products or services in your store. Simply put, every time a customer makes a purchase, they are making a POS transaction.
Finding the right point of sale system for your business can eliminate many manual entry and reporting errors. Many of these systems are similar in nature, but key features stand out in the different systems that can make all the difference. Choosing a third-party processor payment also depends on the type of POS software you have.
Here are some examples of payment processors:
- Amazon Payments
- QuickBooks Payments
- Secure Payment Systems
Both are essential players in the process of a payment transaction. When a customer tries to purchase something, they use their payment method (credit card, cash, etc.) at a point of sale system, and then the payment processor exchanges information from the buyer’s bank to the seller’s bank in a secure and timely manner.
However, as mentioned above, using third-party payment processors means you will be charged a fee for each transaction. A payment processor that charges high fees can negatively impact your bottom line. This is why it’s best to choose POS software that can integrate with any payment processor rather than a POS solution that also acts as a payment processor.
A third-party payment processor is ideal if you’re looking for convenience, low fees, and minimal hassle. It allows start-up or expanding businesses to handle card payments securely without struggling with the back end’s technical configuration to make everything work. If you choose a point of sale software that also runs as a payment processor, always be sure to know what rates you will be charged, if there are any hidden fees, or what kind of binding contract there might be.
Third-Party Payment Processors: Final Words
You need a reliable way to process payments as a small business owner. Third-party payment processors can make your first foray into credit card acceptance a simple process with minimal hassle.
However, there is no payment processor without POS software. KORONA POS is a retail POS that can be integrated with any payment processor. To learn more, click the link below.
FAQs: Third-Party Payment Processors
Some popular processors include Paypal, Square, ChargeBee, Wise, Stripe, 2Checkout, WePay, etc.
Yes, PayPal is a third-party payment processor. But in 2013, it acquired Braintree, a separate eCommerce payment processing service and gateway that integrates with PayPal.
Apple Pay is not a payment processing service system. It is a mediator or digital wallet that stores private data and allows the user to pay through a third-party processing system.