What's a payment processor? Payments process explained

A payment processor is a company that processes payments on behalf of a business’s bank. It usually operates in the background, making sure processed payments comply with rules and standards in the country that the business operates in. 

Payment processor companies act as the critical bridge between the merchant’s point of interaction and the complex global financial networks. The processor executes several high-stakes activities in a matter of seconds:

• Data orchestration: Receiving encrypted transaction data from gateways and translating it into network-compatible formats.

• Network communication: Directly interacting with card networks (Visa, Mastercard) and local payment schemes to facilitate money movement.

• Authorization: Managing the real-time logic flow that determines if a transaction is approved or declined by the customer’s bank.

• Clearing and settlement: Ensuring transactions are recorded and funds are prepared for transfer into the merchant’s account.

When a customer makes a purchase, the business sends their payment details to a payment gateway, which formats the data and passes it to the payment processor. The processor then routes this information through the card network to the customer's bank to verify if the account has enough funds. Once the bank approves or declines the transaction, this decision is relayed back down the chain — from the card network to the processor, and finally to the gateway  — to confirm the sale. At that point, funds are transferred from the customer’s bank to the acquiring bank, and ultimately into the business’ bank account.

A third-party payment processor is a company that lets a business accept payments online, in-store, and in-app. These companies act as the middle layer between a merchant’s bank, the card network, and the customer’s bank. Third-party payment processors handle authorization, transfer, and often fraud and security checks.  

Global payment processors are payment processing companies that support multiple regions, currencies, compliance frameworks, and customer expectations. Adyen, for example, lets you process payments in 150+ currencies in 130+ countries using 200+ payment methods. 

A PayFac (Payment Facilitator) is a business model that has historically been used by SaaS platforms. In this model, platforms bring payments in-house, which allows them to act as a payment processor. 

Payment processors, on the other hand, are companies that physically route transaction data between the merchant, the networks, and the banks. Think of payment processors like postal workers. They transmit data between key stakeholders.