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What is a payment processor?

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What is a payment processor?

Updated:
May 15, 2024
by
What is a payment processor?

Payment processors are companies that do just as their name suggests—provide payment processing services. They act as the intermediary between merchants, customers, and financial institutions.

Merchants partner with payment processors to securely handle electronic payments, ensuring funds are safely transferred from customer to business. Types of processorsPayment processors can be categorized based on various criteria, such as the type of transactions they handle, the services they offer, and their integration capabilities. Here are some common types of payment processors:

*Note: A single payment processor can handle multiple merchant services simultaneously.

1. Front-end processors

These processors have connections to various card networks and are responsible for handling the initial parts of the payment process, including authorization and capture of funds. They ensure that ACH/debit/credit card processing transactions are approved by the cardholder's bank and provide an immediate response to the merchant.

2. Back-end processors

After front-end processors capture the transaction, back-end processors take over to settle the funds. They are responsible for the movement of funds from the cardholder's bank to the merchant's bank. They handle the clearing, settlement, and any necessary batching of transactions that occur after the initial authorization.

3. Integrated payment processors

These processors offer seamless integration with other business systems like eCommerce platforms, point of sale systems, accounting software, and customer relationship management (CRM) systems. They provide APIs (Application Programming Interfaces) allowing businesses to customize the payment experience and automate various operations.

4. ACH processors

An ACH (Automated Clearing House) processor specifically handles transactions that go through the ACH network, which is a network used for electronic money transfers and payment services in the United States. ACH transactions are becoming standard in a number of use cases, like recurring payments, iGaming, cannabis, payroll, and peer-to-peer (P2P) payments. ACH is the fastest, most secure way to move money.

5. Mobile payment processors

These processors are designed to handle transactions initiated from mobile devices. Examples include mobile-specific payment solutions like Square, PayPal Here, Apple Pay, and Stripe, which provide businesses with apps and dongles to accept payments directly on smartphones and tablets.

6. Cryptocurrency processors

With the rise of digital currencies, some processors specialize in handling transactions using cryptocurrencies like Bitcoin, Ethereum, and others. They convert cryptocurrencies into traditional currency in real time, allowing merchants to accept digital currencies without needing to manage them directly.

7. High-risk payment processors

These processors specialize in working with businesses that are considered high-risk due to their industry type, higher chances of chargebacks, or regulatory issues. Examples of these industries include cannabis, gaming, and gambling.

High-risk processors are equipped to handle the additional scrutiny and risk management required to service such accounts.

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