What’s the difference between a payment gateway and a processor?

A gateway securely collects and transmits payment data from checkout to the processor. The processor handles authorization, clearing, and settlement by communicating with card networks and banks. Some providers bundle both.

How does a card transaction work step-by-step?

1) Customer initiates payment; 2) Gateway encrypts and sends data to the processor; 3) Processor requests authorization from the issuing bank; 4) Approval/decline returns through the chain; 5) Merchant gets confirmation; 6) Funds settle to the merchant, typically in 1–3 business days.

What fees will my business pay?

Typical costs include interchange (to issuing banks), assessments (to card networks), processor fees, and chargeback fees. Pricing is usually flat-rate, interchange-plus, or tiered.

Which pricing model is most cost-effective?

For higher volumes and varied ticket sizes, interchange-plus is often most transparent and economical. Flat-rate can be simpler for low volume or micro-merchants. Tiered pricing is easy to quote but can obscure true costs.

How do I choose a payment processor?

Compare pricing, supported payment methods (cards, ACH, wallets), integrations and hardware, settlement speeds, fraud tools, PCI DSS posture, and quality of support. Ensure it scales with your growth.

What security measures should I require?

PCI DSS compliance, point-to-point encryption, tokenization for stored cards/recurring billing, strong fraud detection (3-D Secure, risk scoring), and robust access controls with audit logs.

How can I reduce chargebacks and fraud?

Use AVS/CVV checks, 3-D Secure where appropriate, clear descriptors and refund policies, real-time risk rules, velocity limits, and prompt responses to disputes with complete evidence.

payment processing explained

Payment Processing: What It Is, How It Works, and Why It Matters

Q: What is payment processing?

Payment processing is the system that enables merchants to accept electronic payments (cards, digital wallets, ACH), securely transmit data, authorize transactions, and settle funds to the merchant account.

Learn the moving parts behind every card swipe and tap—gateways, processors, banks, fees, security—and how to pick a processor that cuts costs, speeds settlement, and protects your customers.

John Constantine

15 Oct 2025 • 3 min read

Payment processing is at the heart of every modern business transaction. Whether you’re running a brick-and-mortar store or selling online, understanding how payment processing works is essential to ensure smooth, secure, and reliable transactions for both you and your customers.

What Is Payment Processing?

Payment processing is the system that enables businesses to accept electronic payments, such as credit cards, debit cards, digital wallets, and bank transfers. It involves a series of steps and technologies that transfer funds from a customer’s account to a merchant’s account, all in a matter of seconds.

Key Players in Payment Processing

Merchant: The business accepting payments.

Customer: The person or entity making a payment.

Payment Gateway: The technology that securely transmits payment information from the customer to the payment processor.

Payment Processor: The company or system that handles the authorization, funding, and settlement of the transaction.

Issuing Bank: The customer’s bank or card provider.

Acquiring Bank: The merchant’s bank.

How Payment Processing Works: Step-by-Step

The process of payment processing may seem instantaneous, but it involves several steps behind the scenes:

Transaction Initiation: The customer presents their payment method (card, digital wallet, etc.) at checkout.

Data Transmission: The payment gateway securely sends the payment information to the payment processor.

Authorization Request: The payment processor forwards the request to the issuing bank to check for sufficient funds and validate the transaction.

Approval or Decline: The issuing bank approves or declines the transaction and sends the response back through the processor and gateway.

Transaction Completion: If approved, the merchant receives confirmation, and the customer’s purchase is finalized.

Settlement: Funds are transferred from the customer’s bank to the merchant’s account, typically within one to three business days.

Payment Processors vs. Payment Gateways

While often used together, payment processors and payment gateways serve distinct roles:

Payment Gateway: Acts as a secure conduit, encrypting and transmitting payment data.

Payment Processor: Handles the actual movement of funds and communicates with banks to approve or decline transactions.

Some providers offer both services as a bundled solution.

Types of Payment Processing Fees

Understanding the costs involved is crucial for any business. Common fees include:

Interchange Fees: Set by card networks, paid to the issuing bank.

Assessment Fees: Paid to the card networks (e.g., Visa, Mastercard).

Processor Fees: Charged by the payment processor for their services.

Chargeback Fees: Incurred when a customer disputes a transaction.

Fee structures can be flat-rate, interchange-plus, or tiered, depending on the provider and your business needs.

Choosing the Right Payment Processor

When selecting a payment processor, consider these factors:

Pricing Structure: Compare flat-rate, interchange-plus, and tiered models to find the most cost-effective option for your sales volume and transaction types.

Payment Methods Supported: Ensure the processor handles the payment types your customers prefer, including cards, ACH transfers, and digital wallets.

Integration and Hardware: Check for compatibility with your POS system, e-commerce platform, and any required hardware.

Scalability: Choose a processor that can grow with your business and handle increased transaction volumes.

Security Features: Look for PCI DSS compliance, encryption, and fraud prevention tools.

Customer Support: Reliable support can help resolve issues quickly and keep your business running smoothly.

Security in Payment Processing

Protecting customer data is non-negotiable. Robust payment processors offer:

Encryption: Safeguards sensitive payment data during transmission.

Tokenization: Replaces card details with unique tokens for recurring payments, reducing data exposure.

PCI DSS Compliance: Adherence to industry standards for handling payment information.

Fraud Detection: Monitoring and tools to catch suspicious activity and minimize chargebacks.

Best Practices for Payment Processing

Regularly review and negotiate fees to keep costs in check.

Keep hardware and software up to date to prevent vulnerabilities.

Train staff on secure payment handling to reduce human errors.

Monitor transactions for fraud and respond to chargebacks promptly.

Why Payment Processing Matters

Efficient payment processing means faster access to funds, lower operational costs, and a better customer experience. With digital payments on the rise and cash usage declining, having a reliable payment processing system is no longer optional—it’s essential for business growth and customer satisfaction.