Technology has changed the landscape of modern business in many ways, but few are as crucial as payment processing. While businesses once could only accept cash, checks, or institute their own forms of credit, modern payment processing has streamlined customer payments and improved efficiency in all kinds of businesses.
In this article, we break down everything you need to know about payment processing, including common payment methods, key industry players, security and compliance, and the costs for businesses.
What Is Payment Processing?
Payment processing is the movement of money from buyer to seller through electronic systems. A transaction typically looks like:
- A customer initiates a payment using a payment method such as a credit card.
- The payment terminal (or point-of-sale device) sends the payment request to the acquirer
- The acquirer then routes it to the card’s network who then sends it to the card’s issuing bank.
- The bank authorizes the payment, putting a hold on the customer’s account to represent the cash value of the purchase.
All of this happens in a matter of seconds. For business owners, payment processing services function as essential tools that streamline business operations. For customers, they’re a convenience that improves the customer experience. Modern payment processing has revolutionized how we do business and purchase everything from groceries to clothes in stores and online.
How Does Payment Processing Work: Key Components
There are several key components of any payment processing system:
- Payment Gateways: A payment gateway is a technology that securely transmits transaction data between the merchant and the payment processor or bank. It acts as a virtual bridge for payment authorization, especially for online transactions. It’s not a physical device but rather technology that encrypts sensitive payment information.
- Payment Terminals: A terminal (also called a point-of-sale or POS terminal) is the physical hardware device used to accept in-person payments. When you tap your credit card or debit card at the grocery store, you’re using a payment terminal. This device reads card information and connects to payment networks through the gateway.
- Merchant accounts: A account established with your payment provider that enables businesses to process and receive customer payments.
- Payment processors: Perhaps the most vital part of the electronic payment system, a payment processor is a company that facilitates the transaction to allow businesses to accept electronic payment solutions.
All of these components are essential to successful credit card payment processing or online payment processing. Working in tandem, they allow a streamlined, secure payment experience that can cut down on the resources businesses need to check out customers and reduce the time customers spend at the checkout counter.
Types of Payment Processors
There are a few types of payment processing companies in today’s marketplace. These options support different payment solutions and work in slightly different ways.
- Payments service providers (PSPs): This broad term encompasses most payment processors. PSPs allow businesses to accept multiple payment methods, like credit cards, debit cards, digital wallet payments, and more for both in-person and online payments.
- Specialized payment processors: These focus on a specific type of industry or transaction type and are usually found in niche markets. Specialized processors tailor features to that market or business type, usually by offering simplified application processes or unique pricing structures.
While PSPs are far more common for small and medium-sized businesses, specialized payment processors may be used in high-risk industries like cannabis or gambling, as well as subscription-based services that require recurring billing. Very large retailers that support international markets or do extremely high transaction volume may also need a specialized processor to support a range of transaction types and meet compliance requirements.
See how the right payment processor can make a big difference for your business. Read our Chai Lifeline success case.
6 Factors to Consider When Choosing a Payment Solution
There are many payment processing companies on the market, so it can be hard to know how to choose the right option for your business. When you’re shopping for payment processors, these are the key items to consider:
- Transaction fees: Payment processors make their money by charging small fees for every transaction. While these fees are inevitable, working with a provider like altbanq payments gives you complete visibility into your transaction costs. With our transparent fee structure, you’ll always know exactly what you’re paying and why—no hidden charges or surprise costs. This transparency becomes especially valuable as your transaction volume grows, helping you better manage and reduce your overall processing expenses.
- Pricing structures: While most payment processing companies offer standardized pricing, your business model may justify exploring different pricing structures. For instance, if you mostly need online payment processing rather than in-person credit card payment processing, you should work with a processor that offers better pricing on online transactions.
- Integration capabilities: Partner with a payment processor that offers ideal POS solutions tailored specifically to your business. Choose a provider that delivers systems that integrate seamlessly with your existing accounting technology while supporting your operational needs.
- Transparency and efficiency: Payment processing is crucial to supporting your business’s cash flow, so it’s imperative to use a processor that moves money into your merchant account quickly and doesn’t assess hidden fees. Payment processors should improve your cash flow, not put additional restrictions on it.
- Security and compliance: Credit card fraud and identity theft are more rampant today than ever, but the best payment processors offer security and compliance solutions to protect both you and your customers. Newer solutions may offer innovations like biometric authentication or AI-enhanced fraud detection to stop identity theft and flag fraudulent charges before they hit a customer’s account.
- Customer experience and usability: Payment processors should increase efficiency and streamline the customer experience, not complicate it. Make sure your payment processor offers usable, intuitive tools that support an improved customer experience.
While there are many payment processing solutions on the market that will get high marks in one or more areas, it’s important to find the right one for your business. The most secure platform may have the highest transaction fees, or vice versa. Changing a payment processing company can be a hassle, so it’s important to take the time to make the right decision for your business once and have your payment processor grow with your business.
Payment processing FAQs
What is the strongest current trend in payment processing?
There are several key trends in payment processing today, most of which fit under the umbrella of innovation. Some key trends to look out for when you’re shopping for a payment processor are:
- Support for contactless payments like NFC cards, digital wallets, and mobile payments from Apply Pay, Google Pay, and Samsung Pay
- Biometric authentication with fingerprint scanning, facial recognition, and voice verification to increase security
- AI-enhanced fraud detection
What is an example of a payment processor?
The most well-known payment processors are PayPal, Stripe, and Square. If you’re looking for a more flexible payment service provider that can grow with your business, check out alternative options like altbanq payments.
How long can a payment be processing?
While the initial transaction happens in a matter of seconds, allowing a customer to be on their way, the complete payment process may take anywhere from a few hours to a few business days, depending on the payment method. Credit card payment processing usually takes between one to three business days to be deposited into your account. The same is true of online payment processing.
What is the best online payment processing system?
The best online payment processing system for your business may not be the same as the best for another business. That’s why it’s important to do some research and compare options. Remember to weigh factors like transaction costs, pricing structures, integration capabilities, transparency and efficiency, security and compliance, and customer experience.