How to choose a payment processor

Chase JonesDirector, SMB Integrated Marketing, PayPal

Chase Jones

Director, SMB Integrated Marketing, PayPal

October 16, 2022

Woman in a skateboard shop checking her business tablet

One of the most crucial steps for getting paid in person and online is selecting a payment processor. But comparing solutions for accepting credit cards and other payment options can be daunting. Learn about the top factors to consider when selecting a payment processing company and the mistakes to avoid.

What is a payment processor?

To complete a transaction between a buyer and a merchant, think of the payment processor as the middleman. Payment processors are typically responsible for:

  • Handling the transaction authorization and settlement
  • Determining how much to charge you for each transaction
  • Transferring funds from your customer’s bank to your merchant bank (that’s how you get paid!)

You may not know who your payment processor is unless you work with a provider like PayPal, as the processor’s relationship is often with your acquiring bank, not you directly.

Another essential component of payment processing is the payment gateway, which is the software that connects your business (or cash register) to the processing networks. For instance, when you process a credit card, the payment gateway securely authorizes the payment by encrypting the customer’s sensitive information like card numbers and other account information. Learn more about payment processing with our reference guide.

How does payment processing work online and in-store?

Payment processing can be divided into two parts. First, it starts with the authorization, which is the approval of a sale. Then comes the settlement, which is how you get paid.

The steps of payment processing look something like this:

  1. Your customer wants to buy an item in your store or on your website with a credit or debit card.
  2. They scan their card or enter their payment information.
  3. That information is then encrypted via the payment gateway and sent to the payment processor.
  4. The payment processor sends a request to the customer’s issuing bank to confirm their billing information and authenticate the funds for the purchase. In the case of a credit card transaction, they would verify if the customer has enough credit to satisfy the transaction.
  5. The issuer responds with a yes (an approval) or a no (a denial).
  6. The payment processor sends the answer back to you, the merchant, indicating if the sale is approved. If approved, this is when the payment processor instructs your merchant bank to credit your account—so you can get paid!

The above steps generally occur within one to two seconds. However, the settlement—in which the funds are deposited and available in your account—can take a few days. Depending on the business and transaction, your bank may allow you to access the money before it’s even received by the merchant bank. On the other hand, they may keep a portion in your account that you can’t touch in case the customer returns the item.

Factors to consider when choosing a payment processor

How to choose a payment processor? With many options to consider, we know it can be a difficult decision.

  1. Keep costs as low as possible

    There are various costs and fees merchants should be aware of when choosing a payment processor, including:

    • Interchange: The interchange fee is how the credit card issuer gets paid. It’s a percentage of each sale, and it varies on factors like transaction amount, type of card used, and industry.
    • Assessment: This is the fee charged by the credit card association (Visa, MasterCard, etc.).
    • Percentage: Your merchant bank takes a cut by charging you a percentage fee. Like the interchange fee, the percentage fee can vary based on transaction amount, type of card used, and industry.
    • Markup: Your payment processor may add a markup fee in addition to the interchange fee.
    • Authorization: This is the fee charged by the payment processor (which may also be your merchant bank). Each time a transaction is processed (whether a sale, decline, or return), an authorization fee applies.
  2. Provide multiple payment options for customers to boost sales

    Today's customers expect more options than ever—and not just in products and services. They expect to be able to pay online with a range of options, and if your payment processing company imposes limits on what you can accept, you might see an increase in abandoned shopping carts on your site. Choose a provider that can offer your customers plenty of payment options.

    Offering multiple payment options can help you better meet the preferred payment methods of your customers. This can then help boost sales, satisfaction, and loyalty.

  3. Secure your site against fraud

    Data breaches have hit retailers large and small, and customers now demand the best protection possible to help lower their risk of card fraud. As you evaluate vendors, look for a payment gateway that’s backed by a secure, reliable payment processing company. Also, look for vendors that offer services to help you proactively prevent fraud. It can not only help protect both your customers and your business but also help ensure you'll be compliant with the Payment Card Industry Data Security Standard (PCI DSS), which sets rules for preventing, detecting, and reacting to security incidents.

  4. PCI compliance requirements

    Merchants who want to accept electronic payments must follow the rules set by the Payment Card Industry (PCI), which helps protect and encrypt sensitive customer information during and after a transaction. However, not all payment processors are PCI compliant, which can lead to unexpected fees (and complications) for merchants.

    Look for a payment processor that offers built-in features within their platform that can help you reduce your time spent to manage PCI compliance.

Common mistakes to avoid when choosing a payment processor

Check out these common mistakes to help you make the right choice.

  1. Choosing based on rates alone

    While low processing rates may seem great, you shouldn’t choose a credit card processor based on rates alone. There are many factors that can dramatically affect how your business runs, including security, technical support, and cost.

  2. Choosing a payment processor that won’t give you fast access to funds

    Some payment processors can freeze access to funds for several reasons, such as suspicious activity, irregular transactions, sudden spikes in sales volume, and more. Before choosing a payment processor, determine whether they will provide you quick access to funds.

  3. Not considering the need for help, support assistance, and easy integration

    There are many moving parts when it comes to payment processing, so it’s important to choose a processor that offers quality support and technical assistance in case something goes wrong.

  4. Trying to set up payment processing yourself

    Setting up multiple payment options can take a lot of time and effort if you're not well versed in payment gateways and online checkout details. Finding a payment processing company that can deliver easy setup along with your account is imperative and backing that up with technical support is crucial. Every moment of downtime potentially lowers sales. You need a processor that understands those challenges and has a dedicated team to help support you on payment-related problems.

How to switch to PayPal’s payment processor

PayPal may be the right option for merchants looking for a payment processor. Start accepting payments online and get started with PayPal.

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