Payments can be confusing. We’re here to help.
Most consumers never give them a second thought, or even a first. Though they work behind the scenes, payment service providers represent essential links in the global financial chain.
Payment service providers connect merchants to the broader financial system so they can accept credit and debit card payments from customers. Payment service providers connect merchants, consumers, card brand networks and financial institutions.
Payment service providers bring all financial parties together to deliver a simple payment experience for merchants and their customers by processing payments quickly and efficiently. Invisible to most but essential to all, payment service providers make modern commerce possible.
Who are payment processors?
A payment processor acts as the mediator between merchants, consumers, card brand networks and the financial institutions to process electronic payment transactions. The terms “payment processors,” “merchant service provider” “merchant acquirer” and “payment services provider” all refer to companies that perform similar functions in the payment ecosystem.
Payment processors handle the entire payment transaction to ensure merchants get paid. From authorization to settlement, payment service providers facilitate the transfer of funds from customers’ accounts to merchants’ accounts. Payment service providers act on behalf of merchants and are paid by merchants for their services.
Some payment service providers offer just the basics, while others provide comprehensive consultation and support services to their merchant clients. Beyond that commodity service provision, however, payment services are differentiated by companion offerings such as merchant financing, security and fraud protection services, and regulatory compliance assistance.
Payment services are essential to the operation of any business that accepts credit cards. When choosing a payment service provider, consider the whole package beyond pricing and fees: exceptional customer service, security offerings that help protect your business from fraud and data breaches, flexibility to accommodate future growth, and the tools to help your business grow and keep more of what it earns.
Not all payment service providers process every type of payment. Some may specialize in processing online payments (aka card-not-present or CNP) while others focus on processing in-store (card-present or CP). Think about the future and what your business may look like down the road when selecting a payment service provider.
How do the card brand networks fit in?
Card brand networks are the most visible actors in the payments ecosystem. Card brand networks act as the intermediary between payment service provider and an issuing bank. There are two primary types of card networks: credit card associations that include Visa, Mastercard, Discover and American Express; and PIN-less debit card networks such as NYCE, Interlink and Cirrus.
What is an issuing bank?
An issuing bank is a financial institution, bank, or credit union; the issuing bank provides credit and debit cards to the consumer on behalf of the card brand networks. The issuer is responsible for approving or declining each transaction request based on the customer’s available funds (among other factors) and ultimately delivering funds to the merchant for each transaction.
Issuing banks will often co-brand with one of the card brand networks, i.e. “Citibank VISA” or “Chase Mastercard.” Discover and American Express use a different model by acting as both card network and issuing bank.
Additional reading: What are the benefits of using a payment processor?
Are there other options for payment services?
Every business that accepts credit and debit cards needs payment processing services. Not all of those connections are direct—some involve third parties like payment gateways and payment facilitators.
Payment gateways provide a connection point between different systems, such as point of sale systems and card processing platforms. Payment gateways provide connectivity for businesses to access the payment processor of their choice. Gateways are appropriate for a wide array of business configurations both online and in-store.
Payment services are often embedded in more comprehensive service. An eCommerce platform may offer to facilitate payments for your business. eCommerce platform providers may also simply facilitate access to the payment processor of your choice (sometimes via a payment gateway).
What about ISOs and VARs?
An ISO (Independent Sales Organization) is a third party that works with payment service providers to procure new merchant relationships. ISOs resell products and services from payment processors as well as other service providers. ISOs receive commissions from the processors for which they sign up merchants.
Value Added Resellers (VARs) work in partnership with one or more payment processors to provide payment services to merchants. VARs offer additional features that complement payment processing such as point of sale hardware, inventory management, accounting tools and professional services.
What role do banks play?
Issuing banks and acquiring banks work closely together in a payment transaction. The issuing bank issues credit or debit cards to consumers. The acquiring bank processes credit and debit payments on behalf of a merchant. A merchant enters into a contract with the acquiring bank in the form of a merchant account. The acquiring bank exchanges funds with the issuing banks and ensures the merchant receives payment for payment card activity—minus interchange and other fees.
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