Payment Processors Explained: What Every Business Should Know
Whether your business is just beginning to accept payments or still relies on cash, cheques, invoices, or other manual methods, you may be missing opportunities to get paid faster and more conveniently. By implementing a payment processor, your business would be able to streamline operations and improve cash flow.
A payment processor makes credit cards, debit cards, and online payments possible. They allow customers to pay the way they prefer while ensuring transactions are handled securely and efficiently.
What is a Payment Processor?
A payment processor is a company or service that handles electronic payment transactions on behalf of a business. Its role is to communicate between the customer’s bank (or card issuer), the card networks (such as Visa or Mastercard), and the business’s bank. The processor ensures the transaction is authorized, the funds are available, and the payment can be completed securely. In short, payment processors make sure you get paid when a customer uses a card or digital payment method.
How Does a Payment Processor Work?
When a customer pays, the payment processor springs into action. First, the customer’s payment details are securely transmitted from your point-of-sale system or website. The processor then sends the transaction information to the card network, which routes it to the customer’s bank for approval. If the bank confirms the funds are available and approves the transaction, that approval travels back through the same path to your business. After the transaction is completed, the payment processor helps settle the funds so they’re deposited into your business bank account, usually within one to three business days.
What’s the Difference: A Payment Processor vs. A Payment Gateway vs. A Payment Facilitator (PayFac)?
These terms are often used interchangeably, but they serve different purposes.
- A payment processor is a company that handles the actual movement and authorization of funds.
- A payment gateway is the channel that securely captures and transmits payment data from your website or POS to the payment processor.
- A payment facilitator (PayFac) is a company that works with a payment processor to let your business start accepting payments quickly.
Many modern payment solution providers, like OTT Pay, bundle all three together, which is why the distinctions aren’t always obvious.
Why Businesses Need a Payment Processor
Having a third-party payment processor will allow your business to accept the payment methods customers expect, including credit cards, debit cards, and digital wallets. It will help reduce the risk of fraud by using encryption, tokenization, and compliance standards like PCI DSS. Implementing a payment processor will also streamline your operations by automating payment handling, reporting, and settlement. For small and medium-sized businesses, a reliable payment processor improves cash flows, builds customer trust and supports growth both in-store and online.
How to Choose a Third-Party Payment Processor for Your Business
Here are some simple steps to follow when shopping for a payment processor for your business:
- Start by confirming how and where you accept payments i.e. online, in person, or both.
- Next, compare each payment processors’ pricing models, including their transaction fees, monthly costs, and any additional charges for features or hardware.
- Review which payment methods each payment processor supports to ensure they match your customers’ preferences.
- Evaluate ease of use, customer support, security features, and how well each payment processor will integrate with your existing point-of-sale, e-Commerce, and/or accounting systems.
Conclusion
Payment processors are a critical part of modern commerce. They will enable your business to accept electronic payments quickly and securely. The technology behind third-party payment processors is impressive and the benefits they can provide business owners are clear: an enhanced customer experience, protection for your business, and a building block for long-term sales growth.
Explore the benefits of having OTT Pay as your payment processor.