What Is a Payment Processor?

A payment processor is a must-have for businesses that accept cards. Here's what to know.
Kurt WoockSep 3, 2021

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What’s inside

A payment processor is a vendor used by businesses to manage the backend logistics of accepting card payments. It shuttles card data from wherever customers tap, swipe or enter their card details to the payment networks — such as Visa, Mastercard, American Express and Discover — and banks involved in the transaction.

If your business wants to accept card payments, having a payment processor is a must. Some companies, like Square, combine payment processing with and hardware. Others, like Payment Depot, focus on payments. The best option depends largely on your business' sales volume and method of accepting payments.

When a business accepts card payments, a payment processor works in the background to finalize those transactions and move money from the customer's card account to the merchant's account. Here's what the process looks like:

It costs money to build, maintain and operate the networks along which the data and money flow. The companies that do this work — card issuers, networks and payment processors — charge merchants for using these networks and services.

The fees for each transaction are collected from the merchant's sales by the payment processor, which takes a cut and passes the remainder along to the various intermediaries. The total fee, called the merchant discount rate, is generally 2% to 3% of the total purchase and includes:

Before choosing a payment processor, consider these questions.

The best pricing structure for your business depends on the industry, sales volume and trade-offs you're willing to make. There are three common types of pricing:

Interchange-plus pricing consists of the interchange rate plus a defined markup. The markup can be a percentage, a fixed amount or both. For example, you might pay the interchange rate plus 15 cents on all transactions.

Flat-rate pricing consists of a single rate for all transactions accepted a certain way, regardless of the specific interchange rate. For example, you might pay 2.3% plus 15 cents for in-person transactions and 3% plus 30 cents for online transactions.

Tiered pricing combines elements of interchange-plus and flat-rate pricing. Interchange rates are sorted into a few broad groups. Payment processors assign a different cost to each tier. For example, you might pay 1.7% plus 25 cents for debit cards and 3% plus 30 cents for a high-end rewards card.

Other pricing details to consider:


Do your customers pay online? At a checkout counter? Do you take your business on the road? Some payment processors, like Stripe, are designed primarily for e-commerce. Others, like Square, have several hardware options for in-person businesses. While the differences here are more with the payment gateway rather than the payment processing itself, this can be an important deciding factor.

Some payment processors won’t provide services to businesses because of the regulatory or financial risk involved in accepting certain payments. Industries that sometimes are sometimes excluded in payment processors’ terms of service include those with:

If your business is in such an industry, your payment processor choices might be more limited.

The final step of the transaction process is getting paid. There are two types of accounts you can choose from: a merchant account (provided by a merchant acquirer) or an account with a payment service provider.

When money changes hands during a card transaction, it goes from the customer’s bank (the issuing bank) to a merchant account, a bank account where the business that made the sale can access the funds received. It can take a few days for funds to become available to the business’ account holder, though some financial institutions allow advance access.

Hundreds of banks offer merchant accounts, ranging from large banks, like Chase, to institutions that specialize in merchant account services, like Payment Depot. Businesses of any size can open up a merchant account, but larger businesses often find this type of account to be most cost-effective and scalable.

If you use a payment service provider account, such as Square or , you don’t have ownership of a merchant account directly. Instead, the payment service provider maintains its own merchant account, which collects the payments on behalf of your business and many others. Your funds get routed to a subsidiary account you maintain with the payment service provider.

Many popular payment service providers include features you might not get with a merchant account, like instant access to funds. However, because the payment service provider is ultimately the owner of the merchant account, you cede certain aspects of control. For example, if a payment service provider deems your business too risky, your account access can be disrupted.

Some payment processors offer no-contract relationships without cancellation fees while others don’t. With some services, you’ll own your customer data if you choose another vendor in the future; with others, you won’t. That could mean you’ll have to start a new loyalty program from scratch if you switch, for example.

payment processing services, which come included with its point-of-sale system, stand out with its easy-to-understand pricing. It charges 2.5% plus 10 cents per transaction for in-person transactions and 2.9% plus 30 cents for online transactions. Prices for restaurants or if you're using Square’s free version vary slightly.

likens its pricing structure to a Costco membership. Users pay a monthly membership fee, which starts at $79. When a transaction takes place, Payment Depot charges a flat fee — there's no markup to the interchange rate. The flat fee ranges from 15 cents per transaction for the least expensive monthly plan to 7 cents for the most expensive monthly plan. Payment Depot works with a variety of terminals or point-of-sale systems.

If you do most or all of your business online, it’s useful to have a processor that specializes in e-commerce transactions. stands out as a highly customizable option that also functions as a payment gateway and merchant account. It’s easy to use, too: You can customize a Stripe Checkout template and add it to your website. Stripe Checkout includes online-friendly features like real-time card validation and address auto-complete. It charges 2.9% plus 30 cents per transaction for online payments.

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