What is a Payment Processor?


Anta Pattabiraman


April 19, 2022

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What is a payment processor and how does it work?


As the number of online transactions are increasing at a steady rate, customers are expecting business owners and service providers to present a choice of payment options to make efficient purchases.

For both online merchants and offline business owners, it is imperative to not only understand how the payment processing system works but also to learn about the stakeholders involved in the process and which payment processor is right for their business.

In this article, you will learn about the basic stakeholders involved in processing a payment, the difference between a gateway and a processor and we'll introduce a few top payment processors that you might be familiar with. Lastly, we'll discuss some important parameters and issues that will help you in deciding which processor is right for your business.

What is a payment processor?

A payment processor sets up a merchant account that allows you to accept credit cards as a form of payment. It essentially connects your bank account to your customer's bank account to obtain funds from your customer. Therefore, it acts as a mediator between the merchant account and the customer account relaying transactions from one party to the other. It is also the function of a payment processor to verify the customer card details and avoid any fraud by putting adequate security measures in place. Every payment processor should make sure to comply with PCI (Payment Card Industry) standards that lay out technical guidelines to protect user data.

Different Parties involved in payment processing

Every credit card transaction or payment process involves different parties that fulfill the payment—

  1. Card Holder/Customer: The cardholder is the person who gets a credit or debit card from the issuing bank and opens an account to avail the services or products offered by the merchant.
  2. Merchant: A merchant is a person or a company that sells their products or services to prospective buyers. The payment received by the merchant goes to the merchant account that is provided by the acquiring bank.  
  3. Issuing Bank: It is the customer’s bank that verifies whether he is eligible to be a cardholder. During a payment process, the issuing bank transfers the funds from the customer’s account to the merchant’s account after verifying if the cardholder has enough funds to make the payment.
  4. Acquiring bank:  It is the merchant’s bank that accepts payments through a credit or debit card and transfers funds to the merchant’s account. It is a financial institution that lets business owners open merchant accounts to receive payments. After a purchase is made by the customer, the merchant sends the payment information to the acquiring bank which then forwards it to the issuing bank for approval. Though it can be, the acquiring bank it not always the same as the payment processor.

Payment Gateway vs. Payment Processor

A payment processor authorizes the transaction and transfers the customer’s credit card details to the issuing bank. It works as a mediator between the customer and merchant ensuring that the payment process is secure and smooth.

Although the payment processor alone cannot securely validate the transaction, if you have solely a brick and mortar business, your POS system will authorize the payment using the chip reader.

A payment processor facilitates the transaction while the payment gateway encrypts the customer’s credit card information to the issuing bank and securely authorizes the transaction to ensure you get paid.

Top Payment processing companies

The best payment processors make it easy for users to make credit and debit payments without any delays or security issues. While the type of payment processor to be used depends on several factors like the scale of your business and the mode of payments that you typically offer– different payment processors offer different features that are most suited to your business needs.


Suitable for online businesses, Stripe offers a host of features that help in customizing your payment procedures. It supports more than a hundred currencies, offers mobile payments so that you can carry business deals from anywhere and anytime; and also offers subscription billing.

As it comes with built-in APIs and developer tools to provide you with a payment solution tailored to your needs– an intermediate understanding of technology is advised for its usage.


One of the most widely used payment processors, PayPal provides payment processing services for e-commerce and small businesses around the world. Easy-to-use integration option with multiple platforms and a range of features like online invoicing make PayPal a go-to choice for customers.


Suitable for driving conversions and scaling your business, Braintree increases your outreach by being the only payment processor that provides integration with PayPal, credit and debit cards and digital wallets like google pay and apple pay. It manages internal costs and automates back end operations without any additional revenue.

Comparative features of payment processors

Each payment processor has its own strengths and weaknesses and these vary across markets and the products they offer. For example, while some payment processors may have an excellent software layer, many merchants may find that their fees are expensive. Hence, it is crucial to invest some time in researching and finding the right payment processor for your business.

In this section, we take a look at some of these parameters—


It is imperative for you to maintain the trust of the customer by providing protection to sensitive data relating to credit or debit cards. Make sure that your payment gateway is PCI compliant if you want to accept online payments through credit cards.

Hosted or Self Hosted

A hosted payment processor will send the customer to a different website for making payment whereas a self hosted processor collects the payment information from your website itself. The latter provides a streamlined, holistic customer experience. With a self hosted payment processor, there is an added responsibility of security on you so make sure that your payment gateway is PCI compliant.


There are different pricing models available depending upon the kind of business you have and the sales volume. Average payment gateway fees also vary depending on the provider and the features that it offers. There are also many hidden costs associated with certain payment gateways.  Hence, it is important to research and choose the one which offers the most value for your business.

Issues with Payment Processors

Ownership of Data/Migration of Providers

Typically, merchants are not PCI compliant so they rely on their payment processor to tokenize the customer’s payment data and store it securely.  This ends up locking the merchant with a specific payment processor. So when they try to switch out of a payment processor, it can be troublesome as the processor has all the payment data and has to either transfer to a PCI compliant processor or entity or their customers will be required to re-enter payment details with the new provider which can result in significant drop offs.

Expanding to New Markets

When companies are trying to enter a new market, sometimes the payment gateway they use does not operate in the new market or they operate poorly because they can't offer the payment methods commonly used by the customers in the new markets or have poor authorization rates in those markets because they don't offer local acquiring. They have to deal with spending weeks of engineering resources on integrating a new payment gateway to enter the market, or forgo the new market and leave revenue on the table.

About the author
Anta Pattabiraman is the co-founder and CEO of Inai, a global payment stack simplifying native payments within a single integration. Over the last 5 years, he has worked with 200+ businesses ranging from SMEs to Bigtechs.
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