In today’s fast-paced digital economy, the world of commerce is continually evolving, with businesses and consumers increasingly relying on electronic payments for their transactions. At the heart of this financial ecosystem lies the entity known as the payment processor. While often operating behind the scenes, payment processors play a pivotal role in enabling seamless and secure financial transactions, whether you’re making an online purchase, swiping your credit card at a local store, or conducting international trade.
This article aims to dig into the world of payment processors, unravel their intricate mechanisms, explore their critical role in any business, and give a step-by-step guide on how to become a payment processor.
A payment processing company is a financial institution or a third-party entity that manages the credit card transaction process, acting as a kind of mediator between the bank and its client. In other words, the payment processor transfers the information from the customer’s card to the bank and the customer’s bank. Assuming there are enough funds, the transaction goes through.
These types of companies play a crucial part in the payment sector of financial industry as they provide secure and effective infrastructure and services needed to process various payments
If you are running a small business, developing your own digital payment solution may not be financially possible. But without it, you`ll be able to accept payments only in cash or check, which are not favorable terms in a fast-growing digital world. That’s where a payment processor is extremely valuable. Such providers can take care of transferring money from digital channels, which include credit and debit cards and even digital wallets.
According to Grand View Research, the global digital payment market size was valued at USD 81.03 billion in 2022 and is expected to expand at a compound annual growth rate (CAGR) of 20.8% from 2023 to 2030. The global digital payments transactions were valued at over USD 8 trillion in 2022.
Even during the pandemic, when a lot of businesses were struggling to provide their services efficiently, the digital payment market was positively impacted by these circumstances. Customers across the world have shifted from offline shopping to real-time online payments during the pandemic, which has become one of the major factors driving the growth.
Amazon, eBay, and other e-commerce giants grew faster than expected. But so did the surrounding ecosystem, including payments platforms and buy now pay later operators. Within this ecosystem are dozens of payment processing companies, making payment processing a profitable and fast-growing market with a large potential.
Payment gateways and payment processors are two essential components of the electronic payment ecosystem, but they serve different functions in the payment process.
The main purpose of payment gateway is to collect and verify a customer’s credit card information. It ensures that all the details are correct so the sale can be transmitted to the payment processor.
The gateway might be integrated into the website (a white-label payment gateway), or the checkout may send customers to the gateway’s own website to complete the transaction and then send them back to the merchant (a third-party payment gateway).
The payment processor is responsible for managing the entire payment transaction once it has been authorized by the payment gateway. It communicates with the customer’s bank or card issuer to authorize the transaction. Once authorized, they initiate the settlement process to transfer funds from the customer’s account to the merchant’s account.
In summary, a payment gateway is the initial point of contact for capturing payment information and ensuring its secure transmission, while a payment processor handles the behind-the-scenes processing, authorization, settlement, and management of the transaction. Many payment service providers offer integrated solutions that combine both payment gateway and payment processing services to streamline the payment process for merchants.
From the customer’s point of view, payment processing is a very quick and simple automated process. But if you dig deeper, it is, in fact, a multi-step process that includes customer authentication, authorizing, and settling the payment.
To make it more clear, let’s divide this process into steps:
The payment process begins when a customer makes a purchase from a merchant, either online or in a physical store. The customer provides their payment information, which typically includes credit card details, bank account information, or other payment methods like digital wallets (e.g., PayPal, Apple Pay).
The payment information is securely transmitted from the merchant to the payment processor through the payment gateway, which encrypts and transmits payment data.
The payment processor’s first task is to check the validity of the customer’s payment information and assess whether the customer has sufficient funds or credit to complete the transaction. This is done by contacting the customer’s bank or card issuer. The payment processor sends an authorization request to the bank or card network, which either approves or declines the transaction.
If the customer has sufficient funds or credit, and there are no other issues (such as a stolen card or suspicious activity), the bank or card network sends an approval message to the payment processor.
The payment processor informs the merchant whether the transaction was approved or declined. If approved, the merchant can proceed with delivering the product or service to the customer.
After a successful transaction, the payment processor begins the settlement process. This involves transferring the funds from the customer’s account to the merchant’s account. It may not happen instantly and can depend on factors like the payment processor’s policies, the merchant’s agreement, and the type of payment method used.
Overall, a payment processor streamlines the payment journey, enhances security, and simplifies financial transactions for both merchants and customers, making it a critical component of the modern digital economy. Different payment processors may offer various features, support multiple payment methods, and operate in different regions, catering to the diverse needs of businesses and consumers.
If you are planning to enter the payment processing market, there are two main ways to do so: building your payment processing software from scratch or choosing a white-label solution for your company.
Building payment processing software from scratch can be a difficult and time-consuming task, as it requires a lot of your resources and may take a few years to complete. You will also need server infrastructure robust security measures in place, and an expert development team capable of handling a complex fintech project.
Let’s figure out your steps:
Before entering any market, it is essential to conduct thorough market research. In this case, it will help you to understand the payment processing industry, including its current trends, competitors, and potential opportunities. It will also be useful while defining your target market and the types of payment services you want to offer.
Based on the results of your market research, develop a comprehensive business plan that outlines your business model, revenue strategy, marketing plan, and financial projections. During this step, you also should determine the legal structure of your business and register it with the appropriate authorities.
During this stage, you should gain an understanding of the legal and regulatory requirements for payment processing in your jurisdiction and any regions you plan to operate in. Here, you should also gain the necessary licenses and permits.
Establish relationships with banks or financial institutions that will facilitate the settlement of funds from transactions. Payment processors often need a sponsor bank to work with.
Build or acquire the necessary technology infrastructure for payment processing, including secure servers, payment gateways, and fraud detection systems. During this stage, you will also build or acquire a transaction processing platform that can handle authorization, settlement, and reconciliation of payments. Ensure that your platform supports various payment methods and currencies that you established in your business plan.
Conduct thorough testing of your payment processing system to ensure it works smoothly with different payment methods and devices. After all the testing, you can finally launch your payment processing services and start processing transactions for merchants. Continuously monitor and optimize your operations for efficiency and security.
As your business grows, consider expanding your services, entering new markets, and diversifying your payment offerings.
If you are going to choose this way and build your own payment processing software, consider Kindgeek. We provide core fintech banking and payment solutions to serve as a software shortcut for businesses looking to launch their fintech products, from digital wallets to neobanks, accommodating startups and enterprise-level customers.
The second option of choosing a white-label solution may significantly speed up your way to the market. That’s because you’ll have advanced payment software from the start without having to spend money, time and resources on developing one. White-label solution gives you the opportunity to brand and customize the ready software according to your product needs.
It’s important to understand that you’ll still need to do proper market research to find a trustworthy solution provider that aligns with your expectations. In addition, working with a reliable vendor can help save your team resources and costs, plus reduce CAPEX (capital expenditures).
You will also need to take care of your business plan, registration processes, and bank account opening. All of the development stages will be skipped. That means that all you have to do once you’ve settled on the white label payment solution vendor is integrate it and onboarding your merchants.
Payment processors play a pivotal role in modern commerce, seamlessly facilitating transactions and ensuring the smooth flow of funds in the digital age. Understanding the inner workings of payment processors is essential not only for businesses seeking to optimize their payment infrastructure but also for consumers who rely on secure and convenient payment methods in their daily lives.
The payment processing industry is not only desirable due to its potential for financial success but also because it underpins the global economy’s digital transformation. From compliance and technology infrastructure to partnerships and customization, becoming a payment processor requires careful planning, dedication to security, and adherence to industry regulations.
As the landscape of electronic payments continues to evolve, staying informed and adapting to new trends and technologies is a key to success. The world of payment processing is dynamic, and those who navigate it with expertise and innovation are able to play a pivotal role in shaping the future of commerce.
The payment processor transfers the information from the customer’s card to the bank and the customer’s bank, acting as a kind of mediator between the bank and its client.
A payment gateway is the initial point of contact for capturing payment information and ensuring its secure transmission, while a payment processor handles the behind-the-scenes processing, authorization, settlement, and management of the transaction.
Becoming a payment processor involves several steps and often requires compliance with various regulations and industry standards. Here are the general steps to becoming a payment processor: market research and planning, creating a business plan and registration, compliance and regulations research, building financial partnerships, building technology infrastructure and processing platforms, testing and launching, scaling and expanding.
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