We all know how traditional cash payments are declining. And don’t let me get started on cheques – they are as obsolete as typewriters. According to a 2023 report by UK Finance, more than half of all payments are made using debit or credit cards.
In this situation, not integrating digital payment processing into your business ecosystem is a big no. But sure, there are many complexities involved in it. In this article, we will touch upon the basic discussion of payment processors.
What’s in this article?
- What is a payment processor?
- How do payment processors work?
- Types of payment processors
- How to choose a payment processor
- Fees of payment processing
We will describe what a payment processor is, how it works, and the popular types of payment processors before transitioning into the explanation of fees you have to endure and the best practices for choosing the right payment processor. Let’s start.
What is a payment processor?
A payment processor serves as the bridge between your business and the financial institutions managing transactions. When a customer makes a purchase using a debit card, credit card, or other digital payment methods, the processor securely captures and transmits the payment information to the respective bank to finalise the transaction. A popular example of a payment processor is PayPal.
What are the benefits of using a payment processor? Well, it streamlines the payment process, improves customer experience by offering multiple payment options and enhances the overall efficiency of transactions. It also provides you with detailed analytics on payment activities, helping you manage your finances more effectively.
How do payment processors work?
A payment processor links customers to card networks and banks to finalise transactions. Multiple parties play a role in payment processing, with the payment processor being a key participant. Here’s how the process goes:.
- The customer presents the card to make a purchase.
- The merchant processes the transaction and sends the request to the payment processor.
- The payment processor submits the authorisation to the payment brand.
- The payment brand sends the request to the card issuer.
- The card issuer approves or declines the transaction and sends the message back to the payment brand.
- The payment brand sends the authorisation response to the payment processor.
- The payment processor forwards the response to the merchant.
- The merchant completes the transaction.
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Types of payment processors
When selecting a payment processor for your business, it’s important to understand the
different types available and their key features.
1. Traditional merchant accounts
Merchant accounts are bank-based payment processors that strictly handle card payments. They hold the payment for some time before transferring it into the main bank account of the business.
2. Payment service providers (PSPs)
These include companies like PayPal and Square, which offer an all-in-one solution to simplify digital payment processing. They don’t require a separate merchant account, making them ideal for businesses looking for a quick setup.
They handle everything from payment acceptance to processing and funds transfer. Their lower upfront costs and integrated features like invoicing have made them quite popular over the years.
3. Integrated payment gateways
Payment gateways like WorldPay are designed for businesses that need to accept payments on the go. They offer portable card readers that connect to mobile devices which allow for transactions anywhere.
How to choose a payment processor
Before choosing a payment processor, make sure you follow the following considerations.
1. Pricing
Pricing is a crucial factor. Look beyond the transaction fees and evaluate the overall cost structure, including setup fees, monthly fees and any hidden charges. Compare different providers to understand their fee structure and determine the total cost of ownership.
Smart tip: Consider the volume of transactions your business processes and see which fee structure suits you the most. E.g. the percentage structure or the fixed transaction fee structure.
2. PCI compliance and fraud prevention protocols
Ensuring PCI compliance and robust fraud prevention protocols is essential. PCI compliance guarantees that the payment processor adheres to industry standards for protecting cardholder data. The fraud detection tool such as encryption and tokenisation keeps your business and customers protected from fraudulent transactions and potential financial losses.
3. Whether you need POS
Think about whether your business needs a Point of Sale (POS) system. If you run a brick-and-mortar store, a POS system can streamline in-person transactions and manage inventory. Some payment processors offer integrated POS solutions that sync with your online store while others provide separate functionalities. Choose accordingly.
Make sure to choose a payment processor that supports your POS hardware, whether it’s mobile, countertop or a more complex setup.
4. Customer support
Look for a provider that offers 24/7 support through various channels such as phone, email and live chat. Reliable customer service ensures that any issues are addressed promptly, minimising downtime and keeping your business running smoothly.
Smart tip: Check online reviews and testimonials on platforms like Trustpilot to gauge the quality of their support.
5. Accepted payment methods
Another important consideration in choosing a payment processor is the accepted payment methods. Your customers, especially if you have an e-commerce business, are paying through different methods. The processor should be able to process them e.g. debit cards, digital wallets, credit cards, etc.
Fees of payment processing
As a business owner (or merchant), you have to keep in mind the fees of payment processing because only then can you see which payment processor is suitable for you and whether employing a payment processor is profitable for your business. Here is the list of fees.
- Interchange fees: These are the fees the acquiring bank pays to the issuing bank. This fee is set by the card brands like HSBC and is non-negotiable. The interchange fee is different according to the card levels.
- Transaction fee: This is a set network fee added to each transaction. It’s either a percentage of the purchase or a fixed number or a combination of both.
- Setup fees: These are one-time charges for setting up your account and integrating the payment processor with your business. Some providers don’t charge it while others do.
- Other fees: It includes other variable fees like cancellation fees, chargeback fees, international fees, etc.)
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FAQs
A payment processor provides various benefits like faster payment processing, reduced risk of fraud, better customer experience and streamlined operations. It ensures funds are quickly and accurately transferred to your business account.
Yes, payment processors can hold funds temporarily. This usually occurs for security reasons, such as fraud prevention, verification of large transactions, or when your account is new. Once the review process is complete, the funds are released to your business account.
Payment processors get paid through various fees, including transaction fees (a percentage of each sale, a fixed amount or a combination of both), monthly fees (some payment processors take it), chargeback fees and setup fees.
