What is a payment processor?

  • History

Paper currency became a way to trade consumer goods in the 16th century. A farmer would deposit his crop in a depot and would receive a bearer-demand note which he could trade for other goods available on the open market. The modern payment processor partners with merchants through a service called software-as-a-service (SaaS) that offers an electronic portal. The merchant can scan checks and process payments, process remittances, Web payments and cash transactions. Because of this system, costs are reduces and the transaction if more time effective.

  • Payment processor

A payment processor is a company that handles credit card transactions for merchant acquiring banks and is appointed by a merchant. Front end processors offer services to the merchant banks’ merchants, while back end processors move money from the issuing bank to the merchant bank via The Federal Reserve Bank. The payment processor forwards the details of the operation to the issuing bank for verification. This process only takes seconds and includes additional information about the previous payment history. After the credit card has been verified, the details are sent back to the merchant by a payment gateway and the transaction is finalized.

  • The agreement

Sometimes a payment processor or a member service provider takes part in a merchant agreement directly with an acquiring bank or through a facilitator like PayPal. The agreement follows the operating rules of a card association and is binded by a contract to do so. Merchant accounts are a type of bank accounts that accept payment via credit or debit cards and are regulated by a settlement between a merchant acquiring bank and an acceptor.

  • Online payments

Modern online payments are exposed to risks like abuse and fraud. Merchants suffer great loss due to liability for credit card misuse. A method to lower the expenses and exposure to liability is to segment transactions. SaaS Online Payment Processing maintains a secure payment information and relieves responsibility for the management of recurring payments. The payment is passed back to the merchant as a token that is used to process charges. Many payment processors specialize for high-risk industries like adult video distribution with frequent charge-backs.

  • Architecture

A modern online payment system is formed by a chain of providers that add value and cost to the transaction process. The first link is the SaaS, then the Aggregator, Credit Card Network and finally the Bank. A POS (point-of-sale) provider processes less transactions than the Aggregator because it cannot handle enough traffic to sustain a direct connection. A direct connection to the Aggregator can not be handled by the merchant alone, thus the responsibilities are divided between business partners.