How to choose a payment processor: ten questions to ask

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  1. Introduction
  2. What is payment processing?
  3. What is a payment processor?
  4. How do payment processors work with businesses?
  5. How to choose a payment processor

Companies need to manage customer payments efficiently and securely, whether they are brick-and-mortar retail businesses, e-commerce platforms or businesses with multiple sales channels. Payment processors facilitate every credit card swipe, mobile payment and online transaction. As a result, it's important to choose the right provider for your business.

Payment processors don't just handle transactions, they can affect the customer experience, too. If a customer is unable to complete a purchase due to unsupported payment methods or transaction failures, that could lead to a lost sale – or even a lost customer. But the right payment processor can offer valuable sales insights, prevent fraud and help you to maintain compliance with payment data regulations. Furthermore, as your business grows, your payment processor becomes increasingly important in terms of helping you to scale your operations and potentially expand on a global scale.

There are numerous payment processors that offer different services, fee structures and features – finding the right one for your business can be overwhelming. But with the right information, you'll be able to find a payment processor that delivers a reliable payment experience, back-end efficiency and fraud protection. Here's what you need to know to choose a payment processor for your business.

What's in this article?

  • What is payment processing?
  • What is a payment processor?
  • How do payment processors work with businesses?
  • How to choose a payment processor

What is payment processing?

Payment processing is a series of steps that occur after a customer has made a transaction with a credit or debit card, or another form of electronic payment, which uses a point-of-sale (POS) system, either online or via a mobile device. This process is necessary to transfer funds from a customer's account to a business's bank account, usually to purchase goods or services.

Here's an overview of this process:

  1. Transaction initiation: A customer initiates a transaction by presenting a payment method, such as a credit card or digital wallet, at the point of sale, or by entering their payment details online or in a mobile application.
  2. Transaction authorisation: The payment information is sent electronically to a payment gateway or payment processor, which forwards the transaction details to the issuer (the financial institution that issued the payment method, also called the "issuing bank" or "card issuer") or the appropriate card network (all major credit card companies operate their own card networks) for authorisation.
  3. Transaction verification: The issuer verifies the transaction by checking the customer's account for sufficient funds or credit. If sufficient funds are available, the issuer sends an authorisation code back to the payment processor via the card network. If the funds available are insufficient, the transaction is declined. This verification process ensures that the customer has enough money to complete the purchase, thus reducing the risk of bounced payments and fraudulent transactions.
  4. Transaction settlement: Once the transaction has been authorised, it is then queued for settlement. At the end of the day, issuers send a batch of authorised transactions to the card network for settlement. The customer's bank transfers the money to the business's bank. Following on from this step, the funds are then deposited into the merchant account.
  5. Transaction reporting: After the settlement, the business receives a report detailing the day's transactions. This information can be used for record-keeping, accounting and analysis.
  6. Fraud monitoring and chargebacks: Payment processors also monitor for fraudulent transactions and assist with handling chargebacks, which is when a customer disputes a charge.

Payment processing has a significant effect on how a business operates and how equipped it is to maintain a competitive and simple payment experience.

What is a payment processor?

Payment processors are service providers that facilitate the communication of transaction information among the various parties involved in a financial transaction. While payment processors are often invisible to the end users, they play an important role in e-commerce by handling payment data securely and efficiently. This includes working with entities such as card networks, merchant-services providers and banks. They connect the issuing bank with the acquiring bank and enable businesses to accept and manage different forms of electronic payments, which can increase sales.

How do payment processors work with businesses?

Here are more details about how payment processors work with businesses:

  • Merchant account setup
    To start accepting electronic payments, a business needs a merchant account. The payment processor, or a partner bank, provides this specialised bank account, which allows the business to accept payments from credit or debit cards. Some payment-processing providers, including Stripe, offer merchant account functionality as part of their suite of merchant services. This means that businesses don't need to open a separate merchant account on their own.

  • Integration with payment systems
    Payment processors integrate businesses' systems with a POS system or e-commerce platform. This integration enables the business to send transaction data to the payment processor. The level of integration can vary from a simple card reader to a complex POS system, or even a full-featured e-commerce platform. All-in-one payment providers, such as Stripe, offer a streamlined approach to multi-system integration by providing an array of natively connected payment components that are engineered to work together, in addition to an extensive library of ready-to-use integrations.

  • Transaction processing
    When a customer pays for a product or service, the payment processor facilitates the transaction by communicating with the customer's bank (the issuing bank) and the card network. It sends the transaction details, receives an authorisation or a decline, and then communicates this back to the business's system.

  • Settlement of funds
    Following a successful authorisation, the payment processor coordinates the transfer of funds from the customer's bank account to the business's account. This process, known as settlement, usually happens within a couple of working days.

  • Security and compliance
    Payment processors help businesses to adhere to the Payment Card Industry Data Security Standard (PCI DSS) requirements. They employ various security measures, such as encryption and tokenisation, to protect sensitive cardholder data during transactions. They also provide tools for fraud detection and prevention.

  • Reporting and analytics
    Payment processors provide businesses with access to transaction data and reports, which can be used for accounting, tracking sales and analysing business performance. Some processors offer advanced analytics to help businesses make informed decisions.

  • Dispute management
    If a customer disputes a charge, the payment processor assists the business in managing this process. This often involves providing documentation to prove that the transaction was valid. Stripe, for example, offers robust chargeback protection.

  • Customer support
    Payment processors typically offer support services to help businesses troubleshoot issues, understand fees and manage their accounts effectively. Stripe offers 24/7 support via email, chat and phone.

Most modern payment-processing providers, including Stripe, take a holistic approach to payment processing, handling everything from beginning to end. This relieves businesses of a significant amount of operational burden compared with building an in-house payment processing infrastructure. However, it also means that choosing a payment processor is an important task.

How to choose a payment processor

The right processor not only facilitates smooth and secure transactions, but also contributes to an improved and personalised customer experience. A seamless payment process can enhance customer satisfaction and loyalty, while glitches or limited payment options can frustrate customers and have an adverse effect on sales and retention.

To that end, here are some key questions that businesses should consider when choosing a payment processor:

  • Which payment methods does the processor support?
    Does it accept all major credit and debit cards, digital wallets and other payment types relevant to your customers?

  • What are the fees and pricing structure?
    This includes transaction fees, setup fees, monthly fees and any hidden charges. How do these fees align with your current sales volume and projected growth?

  • What level of customer support does the processor provide?
    Is it easy to get in touch with its Support team when you need help or if you have any questions? Which channels does it use to provide support (phone, email or live chat)?

  • Is the processor PCI-compliant and how does it ensure transaction security?
    Does it use encryption, tokenisation and other security measures to protect your customers' payment data?

  • How easy is it to integrate with your existing systems?
    Can you easily integrate it into your current POS system, e-commerce platform or other business systems?

  • What is the settlement speed?
    How long does it take for funds to be transferred from the processor to your bank account?

  • Does the processor provide a user-friendly interface and comprehensive reporting?
    Can you easily monitor transactions, access reports and gain insight into your sales data?

  • How does the processor handle chargebacks and disputes?
    Does it provide support and guidance during the chargeback process?

  • Can the processor support your business as it scales?
    Does it have the capacity to handle a higher volume of transactions as your business grows? Can it support multiple currencies and international transactions if you plan to expand globally?

  • What is the processor's reputation like and how reliable is it?
    What are other businesses saying about their experiences with the processor? Are there any red flags in terms of uptime, reliability or customer satisfaction?

Approach this process by clearly identifying which answers would indicate a good fit for your business. Spend time assessing what your business needs now, how those needs might evolve over time based on your growth trajectory, and how to prioritise different payment-processing features. Payment-processing providers that meet all of your requirements are likely to be a good fit. However, payment-processing providers that are highly adaptable are even better.

To learn more about the scope of services and support that Stripe offers surrounding payments, as well as how its suite of solutions can help businesses as they grow and change, get started here.

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