In the financial services industry, there are many players that play a critical role in making the entire ecosystem run smoothly and successfully. We have the card associations, merchant services providers, issuing banks, and acquiring banks. Then we have payment processors.
Payment processors are companies, usually third-party, that handle payment transactions between the merchant and customer by relaying payment information from the customer to the merchant’s bank account. They enable merchants to receive debit or credit card payments online by providing a connection to an acquiring bank.
Payment processors also evaluate if transactions are valid and approved by using anti-fraud measures to assure that a purchase transaction is initiated by the source it claims to be. They must also follow the standards and regulations organized by credit card associations. These standards include rules regarding fraud, chargebacks, and identity theft.
Payment processors have two types based on the functions they perform: front-end processors that authorize and capture transactions, and back-end processors that settle and/or acquire transactions.
Two Types of Payment Processors
- Front-End Processors handle the up-front authorization of a credit card transaction. They have the ability to connect to all card associations and route these transactions to the appropriate network for authorization. When merchants settle or submit a batch, this is sent to the front-end processor, which then routes this back to the back-end processor.
- Back-End Processors receive the settlement batches from front-end processors, and group these together by Bank Identification Numbers range. They then submit these to the appropriate issuing banks on a schedule timeframe.
Payment processors play an integral role in the industry since they provide a point of connectivity to merchants to settle and authorize their credit card transactions through appropriate payment networks. To break it down, they also offer these top 4 benefits:
- A payment processor offers more than one option to set up an account. Like most players in the payments industry, merchants have the luxury of choosing more than one option in accessing payment processors based on their needs and current financial capability. They can either directly apply for a payment processor through a bank or work with third-party companies, mostly called Merchant Service Providers or MSPs.
The former requires you need to open up a merchant account to establish a direct relationship with a bank and payment processing company, which tend to be more pricey. Some merchants prefer this option since banks have more extensive payments expertise, better customer service, and tighter fraud protection. Some choose merchant service providers or MSPs, especially small businesses, since they are generally more cost-effective, easier to set up, and do not bind their clients with monthly minimums and fees.
- Payment processors open up other payment acceptance options. To make a business successful, you always have to study the purchasing habits of your target customers, especially on how they pay. While payment processors accept card transactions, they also accept payments via their smartphones with mobile wallets or direct bank transfers.
- A payment processor is an entire integrated system. This makes business transactions more convenient and efficient. With its system, a payment processor can integrate payments with other business operations like billing software, customer relationship management software, and accounting software, among others.
- Payment processors grow with you. Once your account is set up with a payment processor, you will be able to increase the amount of volume that is processed through their system. As each transaction is an “approved” amount and each account is approved with an initial cap, as your business grows, you can get approved to continuously increase the volume of transactions or dollar amount over time.
Its core functionality and benefits make the payment processor an indispensable part of any successful business. But for you to fully enjoy the benefits it offers, choosing the best provider to solve your needs is most crucial.
Contact us at Agapay to learn more about payment processors, its benefits to you, and what package would best fit your needs. You may call us at 800 644 3909 or reach us here.