What is a payment processor? How it works, and how to choose one for your business

Key takeaways

• A payment processor is the go-between that moves transaction data between a customer's bank and a merchant's bank to approve and settle payments.

• Payment processors work alongside payment gateways and merchant accounts, and knowing what each one does helps you choose the right setup.

• Airwallex processes payments across 160+ payment methods in 130+ currencies, helping businesses accept payments globally with same-day settlement.

Cashless transactions could reach US$1.9 trillion in 2025, and by 2030, that figure could nearly triple.¹ If your business accepts digital payments, whether that's through credit cards, debit cards, or mobile wallets, you need to understand how payment processing works. It isn't optional anymore. It can be the difference between a checkout that converts and one that loses customers right at the final step.

Below, we'll walk through how payment processing works, the key players involved, what to look for in a provider, and how to match a processor to your business goals, especially if you're selling across borders.

What is a payment processor?

A payment processor is a company that acts as the go-between for your business and the financial institutions involved in a transaction. When a customer pays with a card or digital wallet, the processor handles the back-and-forth needed to verify the payment, check for available funds, and move the transaction through to completion.

Think of it like a courier service. The processor picks up the parcel, which is the payment details, checks the contents and the delivery address, which means card validity and the fund check, and then sends confirmation back to both sides. Without that courier, you'd have to communicate directly with every bank and card network involved, and for most businesses, that just isn't practical.

The upside is simple. You can accept card and digital wallet payments without building relationships with dozens of financial institutions. That's the role in a nutshell. So, here's what happens when a customer taps "pay."

How does a payment processor work?

Payment processing handles the exchange of payment details between your bank and the customer's bank, so the transaction can be approved and settled. Here's what happens in the few seconds between a customer tapping "pay" and seeing a confirmation screen:

Step 1: Customer initiates payment

The customer enters their payment details or taps their card or phone. The payment gateway captures that information and encrypts it so it can travel securely through the payment network.

Step 2: Authorisation request

The payment processor routes the encrypted details through the card network, like Visa or Mastercard, to the customer's bank, known as the issuing bank. The bank checks whether the card is valid and whether there are enough funds to cover the purchase.

Step 3: Approval or decline

The issuing bank sends an approval or decline response back through the same chain. The payment gateway shows the result to the customer. If it's approved, the transaction is authorised, but the money hasn't moved yet.

Step 4: Settlement

Settlement is the point when funds actually transfer. The acquiring bank, which is the merchant's bank, collects the funds from the issuing bank, usually within one to three business days, and deposits them into the merchant's account. So if a customer pays on Monday, the merchant might see the funds by Tuesday, Wednesday, or Thursday, depending on the processor and banks involved.

There are a few different players in that flow. Let's look at what each one does.

Key players in payment processing

The payment gateway collects payment data from customers, while the payment processor handles the transaction by communicating with the customer's bank. The merchant account holds the funds temporarily after a transaction is approved. These three parts work together to help businesses accept payments, but there are a couple more players worth knowing too.

Payment gateway

The payment gateway securely captures and sends the customer's payment information to the payment processor. It's what you use to accept payments online or through a point-of-sale system, and it helps prevent fraud by encrypting data during the transaction process.

Payment processor

The payment processor passes payment details between the customer's bank and yours. It verifies the payment details, authorises the transaction, and sends the approval or denial back to the payment gateway.

Merchant account

A merchant account temporarily holds funds from your customer's payments until they're approved and settled. Once settlement is complete, the funds move to your regular business account.

Acquirer (acquiring bank)

The acquiring bank is the financial institution that processes card payments on behalf of the merchant. If the processor is the courier, the acquirer is the warehouse that receives and sorts the deliveries. That's why merchants can accept card payments without having a direct relationship with every card-issuing bank in the world.

Issuer (issuing bank)

The issuing bank is the bank that issued the customer's credit or debit card. It's the one that approves or declines the transaction based on available funds and card validity. That matters because when a transaction gets declined, it's usually the issuer saying no, not the processor.

Now that the key players are clear, let's look at the different types of processors you can choose from.

Types of payment processors

"Payment processor" is an umbrella term that covers different models. Knowing the differences helps you pick the right setup for your business size and needs.

Front-end vs. back-end processors

Front-end processors connect to card networks and handle authorisation, which is the real-time approval or decline of a transaction. Back-end processors handle settlement, moving funds from the customer's bank to yours. Most businesses deal with front-end processors or payment service providers that bundle both functions together.

Payment service providers (PSPs) vs. dedicated merchant accounts

Payment service providers like Stripe, PayPal, and Airwallex bundle the gateway, processor, and merchant account into one platform. You sign up, integrate, and start accepting payments, often within a day. A dedicated merchant account is different. It requires separate relationships with an acquiring bank and gateway provider. That's more setup, but it can give you more control over pricing and processing.

Think of a PSP like a co-working space. You share the setup, but you can get up and running fast. A dedicated merchant account is more like leasing your own office. You get more control, but you also take on more setup and overhead.

Whichever model you choose, security should be one of your main criteria. So let's look at what that means in practice.

Security and compliance in payment processing

When you're handling customer payment data, security isn't a nice-to-have. It's a requirement. Here's what to look for when you're comparing processors.

PCI DSS compliance

PCI DSS (Payment Card Industry Data Security Standard) is a set of security rules that any business handling card data must follow. Think of it like a health and safety inspection for payment data. It makes sure businesses store, process, and send card details properly. If you choose a PCI-compliant processor, the heavy lifting of security compliance is handled for you. Airwallex is PCI DSS Level 1 certified, the highest level of compliance.

Fraud prevention and 3D Secure

Modern processors use several layers to prevent fraud. Tokenization replaces actual card numbers with tokens, so sensitive data isn't stored on your systems. 3D Secure adds an extra verification step, like entering a code sent to your phone, which reduces chargebacks and shifts liability away from the merchant. Many processors also use machine learning to flag suspicious transactions before they complete.

Once security is covered, the next step is to look at everything else a processor offers.

How to choose a payment processor

Your choice of payment processor affects everything from checkout conversion to how quickly you get paid. Here are the main things to weigh up:

Pricing models and fees

Payment processors usually use one of three pricing models:

• Flat-rate: Simple and predictable. You pay the same percentage on every transaction regardless of card type. A flat-rate processor might charge 2.9% + 30p per transaction.

• Interchange-plus: More transparent. The processor passes through the actual interchange rate (set by card networks) and adds a fixed markup. Better for high-volume businesses.

• Subscription: A fixed monthly fee plus a small per-transaction charge. Can work well if your volume is consistent.

Also watch for hidden fees. Cross-border surcharges, chargeback fees, and PCI compliance fees can add up quickly.

Payment methods and local coverage

Make sure your processor can accept the payment methods your customers use. Beyond Visa, Mastercard, and Amex, that can include digital wallets like Apple Pay and Google Pay, buy now, pay later options like Klarna and Afterpay, and local payment methods that dominate specific markets, like iDEAL in the Netherlands, Pix in Brazil, or UPI in India. Supporting local payment methods can significantly lift conversion rates in those regions.

eCommerce platform and tool integrations

Integrations make it easier to connect with the tools you already use. Look for processors that work with your eCommerce platform, like Shopify, WooCommerce, Magento, or BigCommerce, as well as your accounting tools. Airwallex integrates with Xero, QuickBooks, and NetSuite, so you can consolidate your operations. Some processors offer plug-and-play plugins, while others need developer resources to integrate.

Cross-border and multi-currency support

If your business sells internationally, your processor needs to handle multiple currencies, offer competitive FX rates, and support local acquiring to improve authorisation rates. This is where a lot of basic processors fall short. Cross-border transactions often come with additional fees, so look for a provider that's transparent about what you'll pay.

If your business operates across borders, all of these criteria matter even more.

Accept payments globally with Airwallex

If you're selling to customers across multiple markets, you need a processor that can handle currency conversion, local payment methods, and fast settlement without eating into your margins. That's where Airwallex comes in.

With Airwallex, businesses can accept payments through 160+ payment methods in 130+ currencies. We process payments on the same day, and our interbank FX rates can save you up to 80% compared to traditional providers. Local acquiring in 35+ markets means higher authorisation rates and fewer declined transactions.

Our Payments product connects directly with the rest of our platform. Multi-currency Global Accounts let you collect and manage funds in multiple currencies, avoid unnecessary conversion fees, and keep your global cash flow moving smoothly.

Create a free Airwallex account to start accepting payments globally, or talk to our team to see how we can help.

Frequently asked questions

How long does payment processing take?

Most card and digital wallet payments are authorised in seconds. Settlement, when funds actually arrive in your account, usually takes one to three business days. Airwallex processes payments on the same day.

What fees are associated with payment processors?

Payment processors usually charge a per-transaction fee, which is a percentage plus a fixed amount, and some also charge monthly subscription fees. You may also come across chargeback fees, cross-border fees for international transactions, and PCI compliance fees.

What's the difference between a payment processor and a payment gateway?

A payment gateway captures and encrypts the customer's payment details, while the payment processor routes those details to the banks involved to get the transaction approved. Many modern providers bundle both into one platform.

Is PayPal a payment processor?

PayPal is a payment service provider (PSP) that bundles payment processing, a payment gateway, and merchant account functionality into one platform. It acts as a processor for merchants who use it, but from the customer's point of view, it's also a digital wallet.

What's the difference between a payment processor and a bank?

A bank holds your money and offers financial products like loans and savings accounts. A payment processor handles the transfer of funds between the customer's bank and yours during a transaction.

Sources and references

• https://www.pwc.com.au/digitalpulse/report-future-payments.html