A payment processor is a service that manages the technical logistics of payments for a business, serving as a middleman to authorise and settle funds between banks. Because modern businesses typically accept electronic payments through multiple channels, selecting a suitable payment processor is an important decision that can impact multiple parts of the business and affect long-term success.

Globally, the payment processing market is predicted to grow from $71.5 billion in 2026 to $122 billion by 2031. As more businesses expand globally, there is a growing need for multicurrency and localised payment options. To address these evolving demands, business owners and entrepreneurs should make sure they’re well-informed about the key factors to consider when choosing a payment processor.

Below, we’ll cover what you should know about payment processors: what they are, how they work, and how to choose one that works for your business.

What's in this article?

• What is a payment processor?
  
• What do payment processors do?
  
• How do payment processors work?
  
• How to choose a payment processor for your business
  
• How Stripe Payments can help
  

What is a payment processor?

A payment processor is a company or service that facilitates electronic transactions, such as payments made with credit cards, debit cards, or digital wallets, between businesses and their customers. Payment processors and payment processing solutions enable businesses to accept different forms of payment securely and quickly and facilitate the transfer of funds from the customer's account to the business's account.

What do payment processors do?

Payment processors play an important role in the electronic payment ecosystem, enabling businesses to accept and process different forms of payment from customers. Here's an overview of the primary functions of a payment processor:

• Transaction facilitation
  When a customer makes a purchase, the payment processor receives the transaction details and securely transmits this information to the appropriate parties, including the issuing bank (customer's bank) and acquiring bank (business's bank), via the card network.

• Authorisation and authentication
  The payment processor requests authorisation from the issuing bank to ensure the customer has sufficient funds or credit available. It also verifies the customer's identity and the validity of the payment method to minimise fraud and unauthorised transactions.

• Encryption and security
  To protect sensitive financial data, payment processors use encryption and tokenisation to securely transmit transaction data between the customer, business and banks. They also need to comply with the Payment Card Industry Data Security Standard (PCI DSS) to maintain a secure environment for handling cardholder information.

• Settlement and funding
  Once a transaction is authorised, the payment processor coordinates the transfer of funds from the issuing bank to the acquiring bank. The merchant account is then credited with the transaction amount, minus any applicable fees.

• Data for reporting and analytics
  Payment processors produce data about customer payments that can be used to generate transaction reports, analytics and insights to help businesses track sales, identify trends and manage their businesses more effectively.

• Fraud detection and chargeback management
  Payment processors use advanced algorithms and tools to monitor transactions for fraudulent activity, helping businesses minimise their exposure to fraud. They may also provide support and assistance in handling chargebacks and disputes.

• Support for multiple currencies and payment methods
  To help businesses expand globally, many payment processors offer support for multiple currencies and popular local payment methods. For example, Stripe supports more than 135 currencies, allowing businesses to do business globally and receive payouts in local currencies.

How do payment processors work?

To understand the details of how payment processors facilitate electronic transactions between customers and businesses, here’s an example of a typical payment processing flow:

1. The customer initiates a payment
   When a customer makes a purchase, they provide their payment information, such as a credit card or digital wallet, to the business. This can occur in-person at a point-of-sale (POS) terminal, online through an ecommerce website, via a mobile app, or through payment links.

2. The payment system encrypts the transaction data
   The business's payment system encrypts the transaction data, ensuring it is securely transmitted to the payment processor. This encryption helps prevent fraudulent actors from intercepting and misusing sensitive customer information.

3. The data is transmitted from the business to the acquiring bank
   The encrypted transaction data is sent from the business to the payment processor, which then forwards the information to the acquiring bank.

4. The acquiring bank transmits data to the issuing bank
   The acquiring bank forwards the transaction details to the issuing bank through the appropriate card network (e.g., Visa, Mastercard, or American Express) for authorisation.

5. The transaction is reviewed and verified
   The issuing bank reviews the transaction details and checks if the customer has sufficient funds or credit available. It also confirms the authenticity of the payment method and the customer's identity, to mitigate the risk of fraud.

6. The issuing bank approves or declines the transaction
   If the issuing bank approves the transaction, it sends an authorisation code back to the acquiring bank through the card network. If the transaction is declined, the issuing bank sends a decline message with a decline code that explains why the translation was not approved.

7. The payment processor receives the response
   The payment processor receives the response from the acquiring bank and forwards it to the business. If the transaction is authorised, the business can proceed with the sale. If it's declined, the business must request an alternative payment method from the customer.

8. The transaction is completed
   Once the transaction is authorised, the business delivers the goods or services to the customer. At this point, the transaction is considered complete, although the actual transfer of funds has not yet occurred.

9. The funds are captured and settled
   “Capture” refers to the transferring of funds from a customer's account to a merchant account for a particular transaction. Typically, at the end of the day, the business sends a batch of authorised transactions to the payment processor for settlement. The payment processor submits this batch to the acquiring bank, which initiates the process of transferring funds from the issuing bank to the merchant account. This transfer usually takes 1–3 business days, depending on the specific processor and bank involved.

While this is the general process that payment processors follow, there are some variations and special considerations for different types of payments and payment scenarios, based on payment method and industry. For a closer look at the specifics of payment processing for software-as-a-service (SaaS) companies, take a look here. And for a deeper examination of online payment processing, read our guide on the topic.

How to choose a payment processor for your business

Payment processors directly impact the customer experience, transaction security, cash flow, and overall efficiency of the payment process. Choosing a payment processor requires a solid understanding of exactly what you need, both now and in the future as your business grows and evolves. With that in mind, here are some factors you should consider when selecting a payment processor:

• Evaluate fees and pricing
  Understand the fee structure of the payment processor, which may include setup fees, transaction fees, monthly fees, chargeback fees, and currency conversion fees. Look for a pricing model that aligns with your business's transaction volume and anticipated growth. Some processors offer tiered pricing or flat rates, while others charge based on a percentage of each transaction plus a fixed fee. For details about Stripe’s pricing model, go here.

• Determine the accepted payment methods
  Ensure the payment processor supports the payment methods your customers are most likely to use. These could include credit cards, debit cards, digital wallets, buy now, pay later (BNPL), and any locally relevant payment options. For instance, cash on delivery (COD) is widely used in some markets, but in others it’s never used. Offering a variety of payment methods can increase customer satisfaction and conversion rates.

• Verify security and compliance measures
  Verify that the payment processor adheres to industry standards, such as the PCI DSS, to ensure a secure environment for handling sensitive customer information. Additionally, consider the processor's fraud detection and prevention capabilities, as well as their support for secure technologies such as tokenisation and encryption. Some businesses may also want to search specifically for payment processors for high-risk industries. For more details about how Stripe facilitates easy compliance adherence for businesses, read here.

• Check for international support
  If your business operates in multiple countries or plans to expand globally, look for a payment processor that supports multiple currencies and popular local payment methods. Also, assess their currency conversion fees and international transaction fees.

• Analyse integration and compatibility
  Choose a payment processor that is compatible with your existing ecommerce platform, POS system, or other business software. Most processors provide easy-to-use APIs, plugins, or SDKs that allow for seamless integration with various platforms. Read more about Stripe’s payment APIs here.

• Ensure ease of use and a positive customer experience
  Evaluate the checkout user experience for customers as well as the reporting and transaction management experience for businesses. The interface should be intuitive, user-friendly and efficient.

• Understand the customer support
  Assess the quality and availability of the payment processor's customer support. Ideally, they should offer 24/7 support through multiple channels, such as phone, email, and live chat, like Stripe Support does. Check online reviews and testimonials to gauge the responsiveness and helpfulness of their support team.

• Think about scalability and flexibility
  As your business grows, your payment processing needs will evolve. Look for a processor that can scale with your business and that offers features such as subscription billing, invoicing and recurring payments. Think about what your payment processing needs might look like in five years and make sure that the payment processor is able to support your future business needs.

• Read the contract terms and cancellation policies
  Review the payment processor's contract terms, including any minimum requirements, early termination fees or other potential limitations. Look for a processor with transparent and flexible terms that suit your business needs.

By carefully considering these factors, businesses can select a payment processor that aligns with their specific requirements, ensuring a simple and secure payment experience across channels for their internal teams and their customers.

How Stripe Payments can help

Stripe Payments provides a unified, global payments solution that helps any business – from scaling startups to global enterprises – accept payments online, in person and around the world.

Stripe Payments can help you:

• Optimise your checkout experience: Create a frictionless customer experience and save thousands of engineering hours with prebuilt payment UIs, access to 125+ payment methods and Link, a wallet built by Stripe.
  
• Expand to new markets faster: Reach customers worldwide and reduce the complexity and cost of multicurrency management with cross-border payment options, available in 195 countries across 135+ currencies.
  
• Unify payments in person and online: Build a unified commerce experience across online and in-person channels to personalise interactions, reward loyalty and grow revenue.
  
• Improve payments performance: Increase revenue with a range of customisable, easy-to-configure payment tools, including no-code fraud protection and advanced capabilities to improve authorisation rates.
  
• Move faster with a flexible, reliable platform for growth: Build on a platform designed to scale with you, with 99.999% historical uptime and industry-leading reliability.
  

Learn more about how Stripe Payments can power your online and in-person payments or get started today.