How does the payment processor work?

The payment processor is an essential part of the payments industry, working behind the scenes to enable transactions to be processed securely and efficiently.

Here is a high-level overview of how payment processors work:

1. Customer initiates payment: The customer selects a product or service, proceeds to the checkout, and enters their payment information – credit/debit card details.
2. Payment gateway: The payment information is encrypted and securely transmitted from the customer's browser or POS terminal to the merchant's acquirer through the payment gateway.
3. Transaction authorization: The card-issuing bank evaluates the transaction details, checks the customer's account balance or credit limit, and approves or declines the transaction based on various factors.
4. Response relayed to the merchant: The approval or decline response is relayed back through the card network (Visa, MasterCard, UnionPay, AmericanExpress, China UnionPay, Discovery, or Mir), payment processor, merchant's acquirer, and payment gateway.
5. Merchant's acquiring bank: The payment processor forwards the information about payment status to the merchant's acquiring bank (the bank where the merchant holds its account) and payment gateway. The acquiring bank receives funds from the customer's card issuer through the card network and transfers funds to the merchant's account in payment gateway with the transaction amount, minus any fees charged by the issuer, card network, payment processor, payment gateway, and acquirer.
6. Settlement and reconciliation: At the end of the day, the acquiring bank and the issuing bank settle their accounts. The acquiring bank sends the transaction details to the issuing bank, which then debits the customer's account for the transaction amount.

Throughout this process, the payment processor ensures secure data handling and efficient communication between all parties involved in the transaction.

Also, the payment processor provides reporting and analytics to the merchant's acquirer, allowing the acquirer to track merchant transactions. Payment processors use sophisticated security measures to protect sensitive transaction data, such as encryption and tokenization, to ensure that transactions are processed securely and without the risk of fraud.
Payment processors play a critical role in the payments ecosystem, enabling acquirers to provide a wide range of card payment methods.