Payment processor: Definition, types, and examples

What is a payment processor?

A payment processor facilitates the flow of transactions typically made with credit cards, debit cards, and other digital payments. To operate as an integrated software vendor (ISV) or payment facilitator, a software company requires a relationship with an acquiring bank and a payment processor. The processor is responsible for processing and settling the transactions initiated by the payment facilitator’s merchants, but they can also offer so much more.

Working on behalf of the acquiring bank, the payment processor performs multiple functions at once, from connecting merchants, customers, payment networks, and financial institutions to managing authorizations and settlements. The most successful payment processors bring these third-party technologies and services together seamlessly to facilitate the transaction with simplicity, speed, and security.

With the rise of Embedded Payments, payment processors have a new role as a powerful sales tool for software companies that strive to become the “everything platform” — empowering them with essential digital finance tools to manage and grow their business — as well as generate new revenue streams.

The role of a payment processor

The payment processor is a key player in a complex, evolving process that involves multiple technologies, card networks, and financial institutions. But at the most basic level, this is how the payment processor is involved in a credit card transaction:

1. A cardholder initiates the payment for a purchase or service to the merchant or service provider with their payment information from a credit card, debit card, or bank account.

2. The payment processor sends the transaction information to the financial institution where the business has its account — otherwise known as the acquirer, or acquiring bank — which handles the payment authorization, clearing, and settlement of the transaction.

3. The issuing bank, or issuer, then confirms the cardholder’s available funds or credit, and approves or declines the transaction.

A payment processor helps facilitate a seamless, repeatable payment experience across channels that creates growth and possibilities for software companies and their customers. Many technologies and services are involved — from POS terminals to card networks to payment gateways — so it’s essential that the payment processor can work closely with them to help authorize and settle every transaction as securely, efficiently, and quickly as possible and stay in compliance with regulations and industry standards.

Choosing the right payment processor is key for software companies. The decision can impact more aspects of your business and your brand than you may realize, which can directly affect your relationship with your customers. Focus on the payment acceptance needs of your customers and find a processor that can support them with a comprehensive set of solutions that accommodate both card-present (i.e. in-person) and card-not-present (i.e. online) payments.

Common types of solutions payment processors offer

Omnichannel payments

Payment processors that offer omnichannel payment solutions deliver the full spectrum of supported payment methods across card-present and card-not-present transactions. When successfully implemented, they create a unified payment experience between online, in-store, mobile, and digital wallets, which decreases friction and increases customer engagement.

Digital wallets

A digital wallet is an application that operates on mobile devices like smartphones and tablets and stores the cardholder’s payment information. It allows cardholders to conveniently pay for purchases directly from their devices instead of using their physical debit or credit cards. When purchasing online, digital wallets eliminate the need for customers to manually enter their card and billing information, making it a fast and simple payment option that drives sales. Digital wallets also allow users to easily view payment histories and store other important digital documents.

Point-of-sale (POS) systems

The point-of-sale system is the physical or digital interface where the customer’s payment information is captured and transmitted for processing with a tap or a swipe. In physical stores, a POS system may include card readers or mobile payment devices. Online they may include e-commerce platforms, mobile apps, or websites.

Embedded Payments

Embedded Payments include three types of payment models that SaaS platforms use to manage their transactions: integrated payments or referral partnerships, PayFac-as-a-service, and payment facilitation, or PayFac®. Whichever model you choose to activate with a payment processor, Embedded Payments can supercharge a software company’s revenue, increase customer engagement, and provide a solid foundation for additional Embedded Finance solutions, like capital lending. Learn more about the types of Embedded Payments.

Embedded Finance

Embedded Finance refers to the integration of financial services within non-financial platforms. It allows software companies to expand beyond their core subscription-based revenue models by seamlessly offering their customers new fintech products such as funding, deposits, loans, payment cards, and more. By partnering with a payment processor that can help you create an all-in-one embedded financial experience within your platform, you can increase conversion rates, boost customer loyalty, and generate new revenue streams. Learn more about Embedded Finance.

Payment processor FAQ

Why should you look for a payment processor that offers Embedded Finance solutions?

Partnering with a payment processor to add payments to your software experience can increase customer stickiness and drive growth, but it’s only the beginning for platforms that intend to add to their finance stack. Embedded Payments can act as the foundation of your ancillary revenue growth strategy, allowing you to add other Embedded Finance solutions to your software more easily. These products build deeper relationships with customers by giving them an alternative way to access financial solutions within the familiar ecosystem of your platform. In fact, SaaS businesses that embed additional financial products such as capital lending are seeing a 2–5x revenue increase per user. The key is partnering with a payment processor that can offer the value-added services and financial products your customers need and want.

What are the benefits of partnering with a payment processor that offers omnichannel payments?

A payment processor that enables the seamless integration of omnichannel payments into your environment can add value to your platform and help create a unified experience for your users and their customers. By giving your user base all of the payment acceptance capabilities they need to successfully run their businesses, you become a trusted partner in their growth.

How do payment processors secure payments?

Fraudsters are everywhere, and they’re getting smarter. Reliable payment processors know PCI compliance is the first line of defense against payments fraud, and use it as a framework to offer prevention strategies, security solutions, and expert services that help software companies protect users and their customers.