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

You need a reliable way to accept customer payments, whether online or in person. Ensuring those payments are processed quickly and securely is vital. That's where payment processors come in.

If you accept credit cards or other electronic payments, you'll need a third-party payment processor to handle those transactions and ensure the safe transfer of funds. Choosing the right one will help you protect revenue streams, keep customers happy, streamline your finances, and reduce transaction costs.

In this post, we'll explain payment processors, how they work, their fees, and how to choose the right one for your business.

What is a payment processor?

A payment processor is a company that handles electronic transactions between businesses and their customers, facilitating the secure transfer of funds. It routes payment information between the merchant’s account (the acquiring bank), the customer’s account (the issuing bank), and card networks such as Visa, Mastercard, and American Express.

Payment processors handle all types of electronic transactions, including credit and debit card purchases, Automated Clearing House (ACH) transfers, and digital wallet payments. You probably already know some of the most popular online payment processors—companies like Stripe, PayPal, and Square.

With the right payment processor, you should never have to worry about the security or reliability of your transactions.

Payment processors vs. payment gateways

Payment processors and payment gateways work together to complete transactions, but they handle different parts of the process.

A payment gateway is the technology that securely captures and encrypts customer payment information behind the scenes. Think of it like a digital card reader for online transactions: It collects card details, validates them, and securely transmits the data for processing.

In contrast, a payment processor handles the actual movement of funds. Many modern providers like Stripe and Square bundle both services together, which is why the lines can get a bit blurry. The key distinction to remember is that gateways handle secure data collection and transmission, while processors handle the financial transaction itself.

What do payment processors do?

A payment processor’s main role is to ensure that electronic payments are processed quickly, securely, and reliably. To that end, here are the key functions payment processors perform:

• 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: Payment processors validate the customer’s identity and payment information and ensure 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 PCI DSS (Payment Card Industry Data Security Standard)
• 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: Payment processors 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

Take these functions into account when researching payment processors so you can find one that meets all your requirements.

What are some payment processor examples?

There are a huge number of payment processors on the market, each with unique strengths designed to serve different business types and payment needs:

• PayPal: One of the oldest and best-recognized online payment systems, PayPal can be used for both business and peer-to-peer (P2P) transactions
• Square: Square is one of the largest point-of-sale (POS) systems in the U.S., enabling businesses to accept credit and debit card payments both in-store and online
• Stripe: Some of the world’s largest companies use Stripe as their payment solution, and it’s especially well-suited for recurring revenue models such as SaaS
• Helcim: Helcim is a payment processing company that’s popular with small and medium-sized businesses thanks to its straightforward pricing model
• WorldPay: Geared toward global businesses with international payment needs, WorldPay supports transactions across 146 countries and 135 currencies
• Fiserv: Fiserv is a major fintech company that offers payment processing services for the financial services industry, including banks, credit unions, and mortgage lenders
• Amazon Pay: Amazon’s payment processing solution lets customers buy from your site using their Amazon account

These processors represent just a portion of available options, so evaluate multiple providers to find the best match for your specific requirements.

How do payment processors work?

To understand how payment processors work, here are the main steps involved in completing a transaction:

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 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 then sends the transaction details to your customer’s account or card issuer to verify that the transaction is legitimate and that they have sufficient funds to cover the purchase
4. The transaction is authorized: Your 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

Thanks to the power of modern software and efficient computers, payment processors work quickly and reliably. Depending on the method of payment used and the particular payment processor, payments can go through immediately or may take a few business days.

Understanding payment processing fees

Payment processing fees are the expenses your business incurs to process credit card payments. All payment processors charge fees to cover the costs of processing payments, though their pricing models may differ.

Here are the main types of fees charged by payment processors:

• Interchange fees: Account for the majority of the total fees. The various card networks set these credit card processing fees, and they ultimately go to the financial institution that issued the customer’s card. Interchange fees are usually a percentage of the transaction amount plus a fixed fee (e.g., 1.5% of the total transaction + $0.10).
• Assessment fees: Charged by card networks to cover the use of their payment infrastructure. These fees go directly to the card companies, and they’re typically a smaller percentage of the transaction amount (e.g., 0.14% for Visa and 0.17% for Amex).
• Processor markup fees: Compensate your payment processor for their role in facilitating the transaction. Depending on your payment processing partner, it could be a percentage of the transaction, a fixed fee, or a combination of both.
• Monthly/annual fees: Charged by payment processors for account maintenance, access to their platform, and ongoing services such as reporting and customer support. These are typically flat fees regardless of transaction volume (e.g., $25 per month or $300 annually).
• Chargeback fees: Imposed when a customer disputes a transaction and the payment is reversed. These fees cover the administrative costs of handling the dispute process and are usually a fixed amount per chargeback (e.g., $15–$25 per occurrence).

Payment processors offer two main pricing approaches: bundled and itemized models. Bundled pricing combines all fees into one flat rate per transaction, making it simple to predict expenses. You might see rates like 2.9% + $0.30 per transaction.

Itemized pricing breaks down each component separately—interchange fees, assessment fees, and processor markups—giving you more transparency about where your money goes.

Other factors that influence payment processing fees

Fees fluctuate based on several business factors. High-risk industries such as gambling or adult entertainment typically face higher rates due to increased chargeback potential. Your monthly transaction volume matters too. Processors often offer better rates to businesses processing larger amounts.

The payment method also influences pricing, with card-present transactions generally costing less than online payments due to lower fraud risk.

Watch out for fees that processors don't always highlight up front. Monthly gateway fees, PCI compliance charges, and chargeback fees can add up quickly. Some processors charge extra for features such as recurring billing, international transactions, or weekend processing. Early termination fees can be particularly expensive if you need to switch providers.

Payment service providers vs. merchant acquirers

A payment service provider (PSP) is a broader service than a payment processor. It typically includes payment processing but also offers additional merchant services such as payment gateways, fraud protection, reporting tools, and customer support. It essentially provides a complete payment solution rather than just the underlying processing technology.

Merchant acquirers are banks or financial institutions that directly process card transactions and maintain relationships with card networks such as Visa and Mastercard.

PSPs operate differently by aggregating multiple merchants under their master merchant account. This allows faster setup and simplified onboarding. Merchant acquirers provide dedicated merchant accounts with direct bank relationships, offering more control over transaction processing.

How to choose a payment processor for your business

Selecting the right payment processor requires careful evaluation of your business needs, transaction volume, growth plans, and customer preferences to ensure optimal performance and value.

Here are the major factors business owners and entrepreneurs should consider when choosing a payment processor:

Pricing model

Choose a payment processor whose fee structure aligns with your business needs. Most payment processors use one of two pricing models:

• Flat-rate pricing: A single fixed rate for all transactions. It usually consists of a fixed percentage and, often, a fixed fee. For example, Stripe charges 2.9% + $0.30 per card transaction for domestic payments. While these fees are simple and predictable, they may wind up being more expensive for businesses with a high sales volume.
• Interchange-plus pricing: The actual interchange and assessment fees for each transaction plus a fixed fee from the payment processor. This model can often be less expensive than flat-rate pricing and offers greater transparency into the fees involved, but you’ll experience higher variability due to the sheer number of interchange rates.

If you have a low sales volume and value the predictability of a fixed rate, choose a payment processor with a flat-rate model. If you have a high volume of transactions, a large average sale price, or both, then an interchange-plus pricing model might be the better choice for your business.

Payment methods accepted

Offering multiple payment options at checkout can improve the customer experience. Make sure the payment processor you choose supports your customers' preferred payment methods, including credit and debit cards, digital wallets, or online payment platforms. B2B companies will also want to prioritize processors that can handle ACH payments and wire transfers as well.

Where and how you do business

If your business has a global customer base or you plan to expand internationally, look for a payment processor that can handle multiple currencies. Be sure to look into currency conversion fees and other charges for international transactions as well.

Similarly, if you handle a lot of in-person transactions in brick-and-mortar locations, you might want to prioritize a payment processor that offers its own POS hardware. This kind of integrated payables system can eliminate any potential integration problems with your existing hardware.

Integration and POS hardware considerations

If your business relies on in-person transactions, the compatibility and quality of POS hardware become a significant factor in your decision. Some payment processors offer proprietary hardware that streamlines setup and integrates seamlessly with their platform. Others work with third-party manufacturers, giving you flexibility in choosing devices that fit your needs and budget.

If you’re happy with your existing e-commerce platform, POS system, accounting software, and other business tooling, choose a payment processor that offers extensive integration capabilities. Most modern payment processors provide plugins or APIs to connect all your systems, allowing for the seamless transfer of financial information.

Scalability

Consider whether the payment processor will be able to grow with your business. It must be able to handle an increased transaction volume as you scale, and it should also offer more advanced features such as subscription billing, recurring payments, invoicing, and detailed analytics.

Customer support

Look for a payment processor that offers 24/7 customer support through multiple channels, such as phone, email, or live chat. Responsive and accessible customer support ensures you can resolve issues quickly, minimizing any potential disruptions to your business. Seek out user reviews or peer recommendations to get a sense of the processor’s customer service.

Contract terms

Review the payment processor’s contract terms, keeping an eye out for any termination fees or minimum requirements. Some processors require long-term contracts, while others offer month-to-month agreements or even no-contract relationships. Look for a payment processor with transparent terms that meet your current and future business needs.

Merchant acquirers vs. PSP fees

Depending on your business model, the differences in fee structure between merchant acquirers and PSPs can significantly impact your bottom line. PSPs offer transparent, flat-rate pricing that's easy to predict, making them attractive for smaller businesses. However, these rates may be higher than dedicated merchant accounts through acquirers.

Merchant acquirers often provide interchange-plus pricing, resulting in lower costs for high-volume businesses, but may charge additional monthly fees, statement fees, and equipment costs. Acquirers also require extensive underwriting with stricter approval requirements, while PSPs enable faster payment processing with minimal documentation.

Payment processing best practices

Following these proven practices will help you maintain secure transactions and optimize your payment operations for long-term success.

• Protect customer data: Maintain PCI DSS compliance and implement strong encryption to safeguard sensitive payment information and build customer trust
• Reduce chargebacks and fraud: Set up active monitoring systems and effective dispute management processes to catch suspicious activity early and protect your revenue
• Review and negotiate fees regularly: Analyze your payment processing costs and negotiate better rates with providers to ensure you're getting the most value for your business
• Keep hardware and software up to date: Install security patches and upgrade payment systems consistently to prevent vulnerabilities and maintain smooth operations
• Train staff on secure payment handling: Educate your team on proper procedures and security protocols to minimize human error and maintain compliance standards

These practices work together to create a secure, efficient payment environment that protects both your business and your customers.

How the right payment processor helps improve cash flow

The payment processor you choose should accelerate fund availability and reduce operational expenses that drain your resources.

The right payment processor can settle funds within 24–48 hours instead of the typical 3–5 business days. Lower processing fees mean more revenue stays in your pocket, while transparent pricing eliminates surprise charges that can disrupt your budget planning. These improvements create a more predictable cash flow pattern.

Faster payments and lower costs translate to better customer experiences through smoother checkouts and more competitive pricing. When you're not tied up waiting for settlements or absorbing high fees, you can reinvest in inventory, marketing, and growth initiatives that drive long-term success.

The right processor becomes a financial asset that actively supports your growth by keeping money flowing efficiently through your business operations.

Enhance your payment processing with Ramp

Understanding what payment processors do and how they charge for service will better equip you to choose the best partner for your business. With the right payment processor, you can be sure your sales revenue will land in your business accounts quickly and reliably, helping you maintain a healthy cash flow to cover your business expenses.

That’s where Ramp’s all-in-one financial operations platform can help. Ramp streamlines your vendor payment workflow so every bill is recorded, approved, and paid without any manual entry. With Ramp, you can consolidate all your payment methods into a single platform and pay domestic and global vendors by card, check, same-day ACH, or international wire.

Ready to learn more? See how Ramp Bill Pay can save you time and money.