What is a payment processor? How to pick the right one

A payment processor is the service that moves money securely from a customer’s card or bank account to your business account. It routes payment information between banks and card networks in seconds, enabling fast, reliable digital checkout experiences across in-store, online, and mobile channels. Choosing the right processor helps you reduce failed transactions, manage costs, and support the payment methods your customers expect.

What is a payment processor?

A payment processor is a company that manages the technical and financial steps involved in completing an electronic payment. It connects your customer’s bank, the card networks such as Visa or Mastercard, and your merchant account to validate payment details, request authorization, and move funds. This coordination happens in seconds, enabling you to accept payments securely across online, mobile, and in-person channels.

In 2024, according to Grand View Research, the global digital payment market size was estimated at $114.41 billion. It’s projected to grow at a compound annual growth rate of 21.4% from 2025 to 2030, reaching $361.3 billion by 2030.

Payment processor vs. payment gateway

Payment processors and payment gateways serve different roles in the payment flow. A payment gateway captures and encrypts a customer’s payment information at checkout, while the payment processor takes that encrypted data to request authorization from the issuing bank and move funds to your merchant account.

A simple way to think about it: the gateway collects the information, and the processor completes the transaction behind the scenes. Many providers bundle both services into one platform, but understanding the distinction helps you evaluate how each component fits into your payment stack.

Payment processor vs. merchant acquirer

A merchant acquirer is the financial institution that provides and manages your merchant account, while the payment processor handles the technical workflow of routing transactions, securing data, and moving funds. The acquirer underwrites your business, sets processing limits, and assumes financial liability for chargebacks and settlements. The processor focuses on the mechanics of payment authorization and fund transfer.

Some providers operate as both processor and acquirer. Square, Stripe, Shopify Payments, and PayPal follow this model, simplifying setup by offering one contract and one platform. Traditional acquirers include banks such as Chase Paymentech and Wells Fargo Merchant Services. Larger businesses sometimes separate these roles to negotiate pricing or customize how payments flow through their systems.

What do payment processors do?

A payment processor’s primary job is to move electronic payments from your customer to your business quickly, securely, and reliably. To do that, processors handle several important functions:

• Transaction processing: When a customer makes a payment, your payment processor receives the transaction information from your customer’s credit card or bank account and securely transfers this payment data to your business account
• Authentication and authorization: They validate the customer’s identity and payment information and check that they have sufficient funds to make the purchase
• Data security and encryption: Payment processors encrypt sensitive financial information for both you and your customers, ensuring compliance with data security regulations such as payment card industry data security standards (PCI DSS)
• Fraud detection and dispute resolution: Payment processing services help minimize the risk of fraud by flagging unusual or high-risk transactions. They also assist in managing chargebacks and disputes, reducing the administrative burden on your team.
• Subscriptions and recurring payments: They help automate billing processes for businesses with recurring revenue models, such as SaaS companies and other subscription-based services
• Reporting and analytics: You can use the transaction data from your payment processor to build reports and analyze trends, helping you make better decisions on everything from marketing and inventory to strategic budgeting
• Handling multiple payment methods and currencies: The best payment processors can handle multiple B2C and B2B payment methods, including cards, ACH, wire transfers, and digital wallets, across a variety of global currencies

Together, these capabilities streamline payment operations, reduce manual work, and help you accept payments reliably across channels.

How do payment processors work?

Payment processing happens in seconds but involves several behind-the-scenes steps to verify, authorize, and transfer funds securely from the customer to your business:

1. A customer initiates a transaction: The payment process starts when a customer makes a purchase with an electronic payment method, either through a payment gateway on your website, at a point-of-sale (POS) terminal in your physical store, or via mobile app
2. The payment processor receives the payment information: Your POS system or online checkout encrypts the customer’s payment information for security and fraud prevention and transmits it to your payment processor
3. The payment processor requests authorization: Your payment processor sends the transaction details to your customer’s bank or card issuer to confirm the transaction is legitimate and that sufficient funds are available
4. The transaction is authorized: The customer’s bank, card issuer, or other account either approves or declines the transaction and sends the response back to your payment processor
5. The payment is settled: If the transaction is approved, your payment processor initiates an electronic funds transfer (EFT) from your customer’s account to your merchant account, finalizing the sale

Example: How a card payment flows in real time

Imagine a customer taps their card to buy a $4 coffee at your café. Within a second or two, your checkout system encrypts the card details and sends them to your payment processor, which routes the request through the card network to the issuing bank. The bank approves or declines the transaction in milliseconds, allowing you to complete the sale almost instantly, while settlement typically occurs within 1–3 business days depending on your processor’s payout schedule.

Key players in payment processing

Several organizations work together behind the scenes to move money securely from your customer to your business:

• Card networks: Organizations such as Visa, Mastercard, American Express, and Discover that set interchange rates, maintain network infrastructure, and facilitate communication between banks
• Issuing banks: Financial institutions that provide credit and debit cards to consumers, authorize card transactions, and manage cardholder accounts
• Acquiring banks: Banks that sponsor merchant accounts, assume financial liability for businesses, and handle settlements and risk oversight
• Payment processors: Technology providers that route transaction data, submit authorization requests, encrypt sensitive information, and coordinate fund movement
• Merchants: Businesses that accept online, in-person, or mobile payments across retail, service, and subscription models

Each party performs a specific role in verifying, approving, and settling transactions so payments can be completed quickly and securely.

Types of payment processors

The type of payment processor you choose affects how quickly you can get set up, how predictable your costs are, and how much flexibility you have as you scale. Most providers fall into one of three models.

Traditional payment processors

Traditional processors provide the core infrastructure for routing transactions but require a dedicated merchant account and, often, a separate payment gateway. They typically offer customizable solutions and negotiated rates, making them a strong fit for established or high-volume businesses with more complex requirements. Major providers include Fiserv, FIS (Worldpay), Global Payments, and Chase Paymentech.

Payment service providers (PSPs)

PSPs combine payment processing, gateway functionality, and merchant acquiring into a single platform. Their unified setup means faster onboarding, simpler contracts, and consolidated reporting. Examples include Stripe, Adyen, Braintree, Amazon Pay, and Checkout.com. PSPs are popular with ecommerce businesses, SaaS companies, and merchants that want a flexible, developer-friendly way to accept online and mobile payments.

Payment facilitators (PayFacs)

PayFacs use a master merchant account and onboard sub-merchants beneath it. This approach enables quick approval, minimal underwriting, and rapid access to payment acceptance. Square, PayPal, and Shopify Payments use this model, making it a strong option for small businesses, new merchants, and platforms that need to onboard sellers quickly.

Summary table

Which type is right for you?

If you want the fastest path to accepting payments, a PSP or PayFac is often the easiest starting point. As your volume grows and you need more control over pricing, risk management, or integrations, a traditional processor may offer more flexibility. Many businesses begin with a PSP or PayFac and reassess as their transaction volume increases.

Payment processing fees and costs

Payment processing includes several types of fees that can influence your overall cost of accepting payments. Understanding these fees helps you compare providers more accurately and choose a pricing model that supports your margins.

Types of payment processing fees

Processing costs extend beyond the per-transaction rate. Common fees include:

• Transaction fees: The primary cost per transaction, typically ranging from 1.5% to 3.5%, plus $0.10 to $0.30 depending on card type and processing method
• Monthly fees: Recurring charges for account maintenance, gateway access, reporting tools, or premium support, usually ranging from $0 to $50 per month
• Setup fees: One-time charges for account creation and technical configuration, ranging from $0 to several hundred dollars
• Chargeback fees: Fees assessed when customers dispute transactions, typically $15 to $100 per chargeback
• PCI compliance fees: Annual or monthly fees to maintain PCI DSS compliance, usually ranging from $0 to $200 annually, sometimes waived for compliant merchants

Comparing each fee type across providers gives you a clearer picture of your effective processing costs.

Pricing models explained

Processors use different pricing models that determine how much you pay per transaction and how predictable your costs are. The three most common models include:

• Flat-rate pricing: A single percentage applied to all transactions regardless of card type
• Interchange-plus pricing: The actual interchange rate plus a fixed processor markup
• Tiered pricing: Transactions grouped into qualified, mid-qualified, and non-qualified tiers, each with different rates

Pricing model comparison

If you’re comparing payment processors, reviewing both advertised rates and the fine print of their pricing model will help you understand your true cost of acceptance.

Benefits of using a payment processor

Payment processors offer more than basic transaction handling. The right provider can improve security, expand payment options, and streamline financial operations across your business.

• Security and fraud protection: Advanced encryption, tokenization, and real-time fraud detection reduce chargebacks, protect sensitive data, and help you meet industry security standards
• Convenience and speed: Transactions clear in seconds, funds settle quickly, and automated systems reduce manual work and processing delays
• Global payment acceptance: Support for multiple currencies and international card networks makes it easier to serve customers around the world without separate banking relationships
• Automated reconciliation: Transaction data can sync directly with your accounting software, eliminating manual matching of payments to invoices and reducing bookkeeping time and errors
• Customer data insights: Detailed analytics reveal purchasing patterns, popular payment methods, peak transaction times, and other trends that inform business decisions
• Compliance management: Processors help you meet PCI DSS requirements and manage data privacy and card network rules
• Mobile payment processing: Accept payments through smartphones and tablets using card readers, tap-to-pay technology, or mobile wallets such as Apple Pay and Google Pay

These benefits help reduce operational complexity and support a consistent, secure payment experience across channels.

How to choose a payment processor

Selecting the right payment processor starts with understanding your business model, transaction volume, and customer payment preferences. The best fit will offer the features you need today and the flexibility to support your growth over time.

Transaction volume and pricing model

Choose a processor whose pricing structure aligns with your volume and average transaction size. If you want predictable costs and have lower volume, a flat-rate model may be suitable. High-volume businesses or those with large average tickets may save more with an interchange-plus model.

Payment methods accepted

Support for your customers’ preferred payment methods is essential. Confirm that the processor handles credit and debit cards, digital wallets, and online payment platforms. B2B businesses should also look for support for ACH payments and wire transfers.

International capabilities

If you sell to customers in other countries or plan to expand internationally, choose a processor that supports multiple currencies and can handle currency conversion fees and cross-border charges. For in-person sales, look for processors that also offer compatible POS hardware or integrated card readers to avoid hardware conflicts.

Integration and POS hardware considerations

If you rely on in-person transactions, the quality and compatibility of POS hardware is a key factor. Some processors offer proprietary hardware, while others work with third-party manufacturers to give you more flexibility. If your business uses established ecommerce, accounting, or point-of-sale tools, prioritize processors with broad integration capabilities so financial data can move seamlessly across your systems.

Scalability

Your processor should be able to support your growth. Look for providers that can handle increasing transaction volume and that offer advanced capabilities, such as recurring billing, subscription payments, invoicing, and granular analytics, as your needs evolve.

Customer support

Responsive customer support can reduce downtime and payment disruptions. Look for 24/7 availability through multiple channels, such as phone, email, or chat. User reviews and peer recommendations can help you assess the quality and consistency of support.

Security and compliance

Any processor you consider should help you keep cardholder data secure and stay compliant with industry rules. At a minimum, look for PCI DSS support, end-to-end encryption, and tokenization so sensitive card information never passes through or lives on your systems. Built-in fraud monitoring, chargeback management tools, and clear dispute workflows will help reduce risk and protect your revenue.

Red flags to avoid

Some warning signs suggest a processor may create challenges down the road:

• Hidden fees: Charges that don’t appear in initial quotes but show up later, such as batch fees, statement fees, or regulatory fees
• Long contract terms: Multi-year agreements with steep termination fees that limit your flexibility
• Poor customer reviews: Frequent complaints about delayed funds, unresponsive support, or account freezes
• Limited payment methods: Only supporting basic cards without broader digital wallet, ACH, or international capabilities

How Ramp enhances your payment processing

Understanding how payment processors work and the fees they charge helps you choose the right partner for your business. With the right processor in place, you can speed up revenue collection, reduce failed transactions, and maintain healthy cash flow.

Ramp brings these benefits into a single workflow. Ramp streamlines your vendor payment process so every bill is recorded, approved, and paid without manual entry. You can consolidate all payment methods into one platform and pay domestic and global vendors by card, check, same-day ACH, or international wire.

See how Ramp Bill Pay can save you time and money.

You can learn more about Ramp Bill Pay and how it helps automate accounts payable at our official page: https://ramp.com/accounts-payable