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What is a payment processor? Everything you need to know
Learn the key differences between payment processors and gateways and how combining both benefits your business.
The card payments world is full of specific terms that overlap and can be difficult to understand.
One area of common confusion is the role of the payment processor – especially in Australia, where businesses have a lot of choice when it comes to providers. Payment processors are often mentioned in the same breath as payment gateways, but the two serve different purposes in the payments flow.
In this article, we’ll open up this black box and focus on understanding the payment processor's critical role, distinguish it from the functions of a payment gateway, and show how a solution that covers both can streamline your business.
What is a payment processor?
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 like credit card transactions comply with rules and standards in the market that the business operates in.
After receiving payment information from a payment gateway, the payment processor communicates it directly to the payment network and authorises and clears or captures the transaction.
What is a payment gateway?
A payment gateway is a service that helps businesses initiate payments.
It provides them with various channels and services for their customers to make payments online. Gateways can be provided by a business’s bank, or exist as a separate service that connects to one or more payment processors.
However, not all payment gateways process all types of payments. Some only focus on ecommerce payments while others focus on in-person payments. To reduce integration complexity and future-proof your business, it’s important to choose a gateway that processes multiple types of payments.
What’s the difference between a payment gateway and a payment processor?
A payment gateway helps businesses initiate payments and a payment processor handles the technical aspects of payment processing on behalf of an acquiring bank.
A payment gateway and payment processor are usually two separate systems. However, having both in one can increase efficiency and reliability of the payment process and improve speed of innovation.
How payment processing works as a whole
Although payment processing is over in a matter of seconds, quite a few steps happen during this time.
Let’s start from the beginning:
After a payment is initiated, the business sends the customer's payment information (e.g. cardholder details) to the payment gateway.
The payment gateway transforms the information in adherence to proprietary standards and shares it with the local payment processor.
The payment processor shares the information with the card payment network, which shares it with the customer's bank, which performs several checks, e.g. if there are enough funds in the account.
Based on the outcome of the checks, the customer’s bank tells the card network whether the transaction is approved or declined.
The card network passes the message to the payment processor, which passes it to the payment gateway, which communicates it back to the business and customer to complete the purchase.
The transfer of funds goes from the customer’s bank account to the acquiring bank and then to the business’s bank account and is typically initiated before the end of the day.
Where does Adyen fit in?
At Adyen, we simplify and improve online payments and in-person payments for businesses and their customers. We consolidate a payment gateway, payment processor, and an acquiring bank in one platform for both online and in-person payments. Managing payments is easy when you only have one contract and one party to interact with to optimize your business performance.
As the acquirer, payment processor, and payment gateway in Australia, our direct connection to global and local card networks enables businesses to benefit from local market conditions. This helps to improve authorisation rates and lower transaction fees.
Explore Adyen’s payment-related services and features, such as:
Access to all relevant payment methods globally
Donations through Adyen Giving
Payment processor FAQ
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.
Authorisation: 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.