What are payment processors?

customer paying by contactless card at cafe

A payment processor is a company that makes accepting cashless payments possible for businesses, from processing credit cards and debit cards, to online purchases.

Accepting card payments, or even going cashless can boost your sales because consumers are increasingly turning away from paper notes and coins – 77% of UK’s Gen Zers use their phones as their main payment method, according to a study by card issuer Marqueta.

That’s why it’s more important than ever to get to grips with how card processing works, and understand its ins and outs, since you’ll be handling your customers’ sensitive financial information.

By the end of this article, you should know exactly what a payment processor is, how payment processing works, and how to choose the right provider for your business.

What is a payment processor?

A payment processor – also called a payment or merchant services provider – is a company that handles a business’s cashless transactions, from in-store card payments to online purchases.

It’s responsible for securely communicating transaction data between a customer’s bank, the card network, and your business’s merchant account provider. The payment processor also ensures funds are transferred correctly to your merchant account once the transaction has been approved.

A lot of payment processors offer multiple services, such as providing hardware for in-store payments, and software that allows you to track and analyse sales data.

It’s not possible to accept cashless payments without passing through a payment processor. Popular providers include Retail Merchant Services, takepayments, and Zettle.

Payment processing - Key terms defined

Here are a few definitions of the key terms you’ll hear being thrown around when discussing payment processing:

Merchant account

A merchant account is a special type of bank account used by businesses to accept cashless payments. It holds funds received from cashless transactions before transferring them to your business bank account.

Many payment processors also act as merchant account providers to make things easier for you, since businesses can’t accept card payments without first opening a merchant account.

Issuing bank

The issuing bank, or issuer, is the bank that issued the card the customer paid with. Common high street branches include Barclays, HSBC, or Lloyds. They’re responsible for transferring funds from the customer’s bank to your merchant account.

Acquiring bank

The acquiring bank, or acquirer, is the bank where your business’s merchant account is registered. This is where the funds from the issuing bank will be sent to.

Payment gateway

Not to be confused with a payment processor, a payment gateway is a piece of software that encrypts the customer’s card details before the rest of the transaction takes place, in order to protect them from being stolen. A payment gateway also protects your business from fraudulent transactions.

Card network

A card network is a system that communicates between the issuing bank and the acquiring bank during a transaction. The main card networks are Visa, Mastercard, American Express, and Discover.

How does payment processing work?

Here’s a step-by-step look at how payment processing works:

Step 1: A customer gives you their card details, in store via a card machine, or online, for example. The transaction information goes through a payment gateway and is securely sent to the payment processor.

Step 2: The payment processor sends the information to the acquiring bank that handles your merchant account.

Step 3: The acquiring bank sends the transaction information to the issuing bank (the customer’s bank) via the relevant card network.

Step 4: The issuing bank checks to see if the customer’s checking account has the available funds and authenticates payment. If everything’s in order, it sends an authorization code to the acquiring bank via the card network.

Step 5: The card network relays this information to the payment processor, which informs your business that the transaction has been approved. If you’re using a card machine, for example, that’s where the confirmation of the sale will appear. You can then proceed with serving your customer.

At this point, the transaction is complete, but the funds still haven’t made their way to your business’s merchant account.

For this to happen, the payment processor has to ask the acquiring bank to request a transfer of funds from the issuing bank (your customer’s bank). This process can be instant or take a few days, depending on the payment processor and the banks involved.

Payment processing fees

There are three main processing fees that your payment processor will deduct from each transaction before transferring the funds into your merchant account:

  • A processor fee, which goes to your payment processor and merchant account provider. This is typically 0.8% to 3% per transaction
  • An assessment fee, which goes to the card network. This is around 0.018% to 0.0508% per transaction
  • An interchange fee, which goes to the issuing bank. It is capped at 0.2% for debit card and 0.3% for credit cards issued in the UK

These fees will usually be lumped together as one transaction fee in your invoices.

Transaction fees are typically higher when you’re accepting payments from cards not issued in the UK, and this can really add up if your business gets a lot of international customers.

For example, Paypal charges a transaction fee of 1.2%-2.9% plus a negotiable fixed fee for domestic transactions. For international transactions, an extra 1.99% cut is added to the transaction fee, with fixed rates varying from 0.3p to £10 depending on the country the customer’s card is registered in.

Some payment processors may also charge you a setup fee, or monthly account fees, so be sure to ask your chosen payment processor about its pricing system before signing up to avoid nasty surprises.

If you’re worried all these fees will put a damper on your profits, you might want to give our list of the cheapest ways to take card payments a read.

How to choose a payment processor

There are several factors you should consider before choosing a payment processor:

Pricing structure

Does the pricing structure make sense for your business’s needs? Look at transaction fees, account fees (if there are any), and any possible additional fees.

For example, does your business get a lot of online orders? Most payment processors charge more for online payments than in-person payments, as these are considered more risky. You’ll want to go with a provider who has a low markup for online payments.

If you’re getting hardware, such as card machines, from your payment processor, ask yourself how many you need and what type. Some providers will sell hardware to you outright, while others will charge a monthly subscription, sort of like a rental fee. One might be cheaper than the other depending on your business’s needs.

Since many payment processors double up as merchant account providers, our guide to merchant account fees can help you work out which payment structure is best for your business.

Integrations and additional services

If you have an existing EPOS system or ecommerce store, can the payment processor integrate with them? You don’t want to spend unnecessarily on replacing hardware or switching software.

If you don’t have any existing payment infrastructure, can you get everything you need from the payment processor? Providers that offer multiple services can be especially useful if you’re setting up cashless payments for the first time.

Stripe Payments, for example, is a payment processor that has a built-in merchant account and also sells card readers.

Compliance and security

Can the payment processor help you stay PCI compliant? Some payment processors ensure your business is PCI compliant by default, others require you to pay an extra fee for this, and some require you to become PCI compliant yourself without their help.

To be PCI compliant, a business needs to abide by security standards when processing card information.

If your business is new, we recommend going with a provider that helps you with PCI compliance  even if it costs extra.

PCI compliance isn’t a legal requirement in the UK, but it is required by card networks and banks. If you fail to meet PCI standards, card networks can fine the bank that manages your account, and this fine can be passed on to your business.

The size of the fine will depend on the number of transactions your business has made, but it can reach tens of thousands of pounds. In the worst-case scenario, your bank or merchant account provider will bar your business from accepting card payments.

Help and support

Try to find out what the payment processor’s customer support system looks like.

Look at what days and hours its customer team is available. Does the schedule align with your business hours? Find out whether the support team has a phone line you can call, or if they’re only available via live chat or email.

To get an idea of the quality of support you can expect, it’s a good idea to look at customer reviews on third party websites that deal specifically with this topic.


Reviews can also give you a good sense of a payment processor’s reputation among businesses just like yours.

By reading them, you can find out what the payment processor’s strengths and weaknesses are, how easy it is to work with, and whether it’s worth the investment.

Accredited review sites include Trustpilot and G2, but you can also delve into Reddit, or ask friends and acquaintances in small business associations for more personal accounts.


Payment processors play the role of communicator between all the different parties involved in transferring money from a customer’s account to your business’s merchant account.

Without them, cashless payments aren’t possible.

To make the switch easier for you, many payment processors double up as merchant account providers or EPOS system suppliers, sometimes doing all three.

If you want to start taking card payments, you can read our step-by-step guide, which breaks the process down into four simple steps.

Written by:
Tatiana is Expert Market's resident payments and online growth expert, specialising in (E)POS and merchant accounts, as well as website builders.