What Do Payment Processors Do?

The shift towards a cashless society continues to grow, with an astounding 41% of adults no longer making cash purchases in a regular week.

This clearly indicates a shift in consumer behavior, emphasizing the growing preference for fast and more convenient payment options. As a business owner, this statistic is a signal that incorporating cashless transactions into your business model is no longer optional.

Getting on board with cashless transactions means understanding and choosing the right payment processor for your business. If it’s your first time coming across the word “payment processor”, or if you find yourself needing more reasons to make the shift, this is where you need to be.

What Is a payment processor?

A payment processor helps businesses to accept and manage electronic payments from their customers.

It doesn’t matter which payment method the customer prefers—whether it’s a credit card, a debit card, or even a digital wallet—a payment processor makes these transactions happen seamlessly. Essentially, it’s the working bridge connecting your business’s bank account with that of the customer.

What do payment processors do?

Payment processors play an important role in the seamless operation of your business, ensuring swift and secure transactions.

From the moment a sale is made, they take charge by receiving transaction details and securely transferring these details across banks. They also perform necessary checks with the customer’s bank for fund availability and verify the legitimacy of the transactions to protect your business from fraudulent activities.

Since every sales transaction in your business involves sensitive financial information, payment processors also provide top-level protection by employing cutting-edge security measures like encryption and tokenization, all within the strict confines of PCI DSS standards.

Then, once a transaction is authorized, payment processors efficiently manage the transfer of funds to your bank, making sure your merchant account reflects the accurate transaction amount, net of any service charge.

Besides handling transactions, payment processors offer valuable insights by analyzing transaction data. This analysis helps you understand sales trends and make informed decisions. They equip you with tools to monitor transactions for potential fraud and manage disputes, thereby protecting your profits.

Expanding your business globally is furthermore simplified by payment processors' ability to accept payments in multiple currencies and offer local payment choices. This allows you to cater to a wider market and tap into new revenue streams.

In essence, payment processors facilitate not only the immediate benefit of smooth transaction handling but also offer long-term advantages such as data security, insightful business analytics, risk management, and global market access.

How does payment processing work?

Step 1. Purchase initiation

During a purchase, customers provide their payment input (which could be credit cards or e-wallets, etc.). This can happen in many ways—it could be at your in-store Point of Sale (POS) device, on your web merchandising platform, through mobile applications, or via direct payment links you provide.

Step 2. Protecting the transaction details

Your payment system now encrypts the transaction data before it heads off to the processor. This encryption process makes sure your customer’s private data remains confidential from unauthorized access.

Step 3. Moving data securely

Once encrypted, this sensitive data moves from your end to the payment processor. The processor acts as the middleman, passing along the data to your bank.

Step 4. Bank-to-bank communication

Your bank, known as the acquiring bank in this context, communicates with the customer’s bank - referred to as the issuing bank. This communication happens through the card networks, such as Visa or Mastercard, to get authorization for the transaction.

Step 5. Securing authorization

The issuing bank examines the transaction closely. It checks whether the funds are available, verifies the payment method, and confirms that the purchases' identities are valid, all to ensure a smooth transaction free of fraud.

Step 6. Response to the transaction

Upon approval, the issuing bank sends authorization back through the card network to your bank. If the transaction doesn’t go through, a decline message is returned with reasons.

Step 7. Finalizing the sale

After authorization, your business proceeds to complete the sale. If, for some reason, the transaction is denied, you would then ask your customer for a different payment method.

Step 8. Completing and capturing the transaction

After getting authorization, you deliver what was purchased. However, the transaction isn’t financially complete yet. The “capture” phase is when the money is officially transferred from the customer’s account to yours. At the end of your business day, you round up all the approved transactions and send them to the processor for settlement. The processor then handles the actual money transfer with your bank, which could take anywhere from 1 to 3 business days to complete.

What are common fee structures for payment processors?

More than the function and how payment processors work, it’s essential to understand payment processing fees and the different cost structures these may follow.

Let’s start with payment processing fees. These are what you pay for the ability to accept card payments. There are two types of these fees:

• Passthrough fees, set by the issuing banks and card networks (like Visa or Mastercard), are standard costs per transaction. They depend on several factors, such as transaction type or card type. They are non-negotiable and apply to all businesses.

• Markup fees are added by the processor or the middleman between you and the issuing bank. These depend on factors such as business type and perceived risk. Unlike passthrough fees, these may be negotiable.

Now, let’s look at the three main pricing models:

Flat Rate Pricing: This model combines both passthrough and markup fees into a single, consistent rate. You pay the same fee for every transaction, regardless of card or transaction type. The upside? It’s straightforward. You can forecast your costs, and there’s no need to worry about varying fees. Plus, you might not have to pay any additional monthly fees.

Tiered Pricing: Here, fees are divided into three tiers: qualified, mid-qualified, and non-qualified. The tier each transaction falls into reflects its risk and interchange level. The ‘qualified’ rate, which is typically the lowest, applies to standard card transactions. The most expensive ‘non-qualified’ rate could apply to manual card entries without address verification, for example This model’s main benefit is the potential for lower rates for ‘qualified’ transactions. Also, it is a commonly adopted model - making it relatively easy to understand.

Interchange Pricing: This transparent model separates the passthrough and markup fees. With an added markup, you pay the exact passthrough fee for each transaction. This clear separation allows you to see exactly what you’re paying for each part of the service. With some negotiable leeway and potentially lower passthrough fees for certain transactions, you might reduce costs.

Here at Helcim, we use the Interchange Plus Pricing model, which is all about transparency and cost-saving. You only pay for what you process and get the lowest possible rate with each transaction. You also get to see all costs, including our set service margin - no hidden charges! Plus, as your business grows and your processing volume increases, we automatically reduce our margin, helping you save even more.

How to choose a payment processor for your business?

Selecting the best payment processor is key for your business’s success. The stakes are high; settle for the wrong fit, and you could face huge setbacks and loss. To steer clear of trouble, keep these points in mind:

Fees and Pricing: Clarify the processor’s fee structure: setup costs, transaction and monthly charges, chargeback fees, and those related to currency conversion. Opt for a pricing model that matches your transaction volume and projected growth.

Payment Methods: Choose a processor that supports your customers' payment methods. This could range from credit and debit cards to digital wallets and even local payment preferences like ‘buy now, pay later’ or ‘cash on delivery’. More options mean convenience for customers, which also translates to higher customer satisfaction.

International Support: For businesses operating globally, it’s essential that your payment processor accepts multiple currencies and popular local payment methods. Scrutinize their currency conversion fees and international transaction costs, too.

Security and Compliance: Ascertain that the payment processor complies with security standards like PCI DSS, safeguarding sensitive customer data. Assess their fraud detection and prevention measures and use of secure technology like tokenization and encryption.

Customer Support: Quality customer support is important. Ensure the processor offers round-the-clock assistance accessible through multiple channels. Also, look for good reviews and testimonials about the responsiveness of their support team.

Integration and Compatibility: Select a processor that integrates seamlessly with your existing system. Many offer user-friendly APIs or SDKs that allow seamless integration with diverse platforms.

Scalability and Flexibility: Your payment processing needs will naturally change as your business expands. Choose a payment provider that can scale with your business, offering features like subscription billing, invoicing, and recurring payments. Helcim offers all these features, designed with your expanding business in mind.

Contract Terms and Cancellation Policies: Consider the contract’s minimum requirements, early termination fees, and any other restrictions.

Meet Helcim: Your payment processor solution that can save you money

Choosing the right payment processor is crucial, and Helcim ticks every box: savings, transparency, and ease of use.

With one free Helcim account, you’re set to take payments in-person, over the phone, or online. Our user-friendly POS system is also designed with your business in mind.

And with Helcim, you can potentially save an average of 25% compared to other payment processors! Talk about big savings.

Ready to get started without any paperwork or commitments? Check us out and take the next step towards streamlined payment processing for your business.

Frequently Asked Questions

What is the difference between traditional and modern payment processors?

Traditional payment processors typically work with brick-and-mortar businesses, requiring physical hardware to accept payments, such as credit card terminals for in-person transactions. On the other hand, modern payment processing embraces digital technology, allowing businesses to accept payments through mobile devices or online platforms. They provide flexible solutions for businesses to accept payment anytime, anywhere, and are generally quicker at adapting to new payment methods.

How quickly can I access funds after a transaction?

The speed at which you can tap into funds after a transaction varies among payment processors. Some offer next-day deposits, while others might take a few business days. Look for a processor that meets your cash flow needs and provides timely access to your funds to maintain smooth business operations.

What if my business has unique payment processing needs?

Our flexible solutions at Helcim cater to businesses of all sizes and shapes. We offer tailored payment solutions to suit your unique needs, including mobile POS for on-the-go transactions and versatile payment tools for physical locations.