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For any business looking to accept payments online or in-store, understanding the role of payment processors is key. Payment processors are the unseen heroes that ensure money flows smoothly from your customers' bank accounts into your business.
In this post, we’ll break down what a payment processor is, how it differs from a payment gateway, the fees involved and define some important payment terms to get you started.
What is a payment processor?
A payment processor is the company or system that handles the transaction between the customer’s bank and the merchant’s bank.
When a customer makes a payment, whether with a card or digital wallet, the payment processor facilitates this by transferring the payment details securely from the customer to the merchant. It ensures that funds are available and handles the authorisation and settlement of transactions, making sure that the money reaches the business.
Payment processor vs payment gateway
While often used interchangeably, payment processors and payment gateways serve different functions:
Payment Processor:
As mentioned, the processor is responsible for moving the payment between the customer and the merchant’s banks. It's the back-end system that ensures the transaction happens.
This is the software that connects the merchant’s online store to the payment processor. It's responsible for securely capturing the customer’s payment information during an online transaction and passing it to the processor for approval.
Think of it this way: the payment gateway is like the front door of a business, capturing your payment data, while the payment processor is the behind-the-scenes worker who processes that payment and makes sure the money goes where it needs to.
Payment processor fees
When selecting a payment processor, it’s important to understand the various fees involved. These fees typically include the following:
1. Payment processing fee:
This is the fee paid to the payment processor for facilitating transactions. It's usually a fixed percentage or amount charged every time a customer uses a credit or debit card.
To reduce these fees, businesses can set a minimum transaction amount, minimise chargebacks, or encourage more in-person transactions.
2. Assessment fees:
These fees are paid to credit card networks (like Visa, Mastercard, or American Express) based on monthly sales volume, not per transaction.
American Express and Discover, which run their own networks, collect both assessment and interchange fees.
3. Interchange fees:
Paid to the customer’s card-issuing bank, these fees cover costs like handling, fraud, and bad debt.
The Merchant Category Code (MCC) usually determines the interchange fee rate. For example, if a customer uses a Visa card issued by Metro Bank, the interchange fee goes to Metro Bank.
4. Account service fees:
Various additional fees you may encounter, which include:
- AVS fee (Address Verification Service): A small fee charged per transaction to verify the customer’s billing address and reduce fraud.
- Batch fee: A fee charged when multiple transactions are grouped and sent for settlement at the end of the day.
- Chargeback fee: Charged when a customer disputes a transaction. If the dispute is resolved in your favor, the chargeback fee may be refunded.
- Minimum monthly processing fee: A fee charged if your business doesn't meet the minimum transaction volume set by the processor.
- Monthly statement fee: A flat fee charged by the payment processor to cover administrative services like preparing monthly account statements.
- PCI compliance fee: Charged to ensure your business adheres to the Payment Card Industry Data Security Standard (PCI DSS).
- PCI non-compliance fee: A penalty charged if your business fails to meet PCI compliance requirements during any period.
- Terminal lease fee: A monthly fee for leasing credit card terminals or payment devices. Buying terminals outright may be more cost-effective in the long run.
Important payment terms
- Acquirer: The financial institution that processes credit and debit card payments for merchants. Sometimes, the acquirer and the payment processor are the same entity.
- EMV: A security standard developed by Europay, Mastercard, and Visa. EMV cards have a chip that enhances security in card transactions.
- Issuer: The bank that provides the customer with their credit or debit card and pays the merchant for approved transactions.
- Merchant account: A special bank account that allows a business to accept credit and debit card payments.
- Merchant category code (MCC): A four-digit code used to classify businesses based on the services or products they provide. This code affects interchange fees and can have tax implications.
- PCI compliance: Short for "Payment Card Industry Data Security Standard," this is a set of security requirements for businesses that accept card payments.
- Settlement: The process of transferring funds from the customer’s bank account to the merchant’s after a payment has been authorised.
- Tokenization: The process of replacing sensitive card data with a unique token, making it safer to store and use for future transactions.
Choosing the right payment processor is crucial to keeping your business running smoothly and securely.
With Planet, you get a comprehensive, reliable payment solution that handles every aspect of your transactions—from fast, secure processing to advanced fraud protection and transparent fees.
Whether you’re accepting payments online or in-store, Planet’s flexible and scalable solutions are designed to grow with your business. Let Planet help you simplify payments and provide the effortless experience your customers deserve.
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