What is a payment processor? A guide to business payment processing

Key takeaways

• The global payment processing solutions market is projected to reach $208.91 billion in 2026, growing at a compound annual rate of 19.76% as cash usage declines worldwide.¹

• A payment processor is the back-end service that securely routes transaction data among merchant accounts, card networks, and issuing banks to authorize and settle every card payment.

• Airwallex helps companies bypass high exchange rates and forced conversion fees of legacy processors by consolidating global payment acceptance with multi-currency business accounts. 

The payment processor is the invisible engine behind every card transaction. Understanding how it works, what it costs, and what to look for when choosing one directly affects your margins and your ability to serve customers globally. This guide covers the mechanics, the fee structures, and how to pick the right fit for your business.

Understanding payment processors

What is a payment processor?

A payment processor is a financial technology company that manages the secure transmission of cardholder data and transaction instructions between the merchant and the commercial banking network. It authorizes, clears, and settles transactions, turning a card tap or online form entry into a confirmed payment. 

What do payment processors do?

The primary role of a payment processor is to authorize, clear, and settle transactions. When a customer initiates a purchase, the processor coordinates with card networks to verify card details, check for security risks, and confirm available funds. Processors also maintain PCI DSS compliance and handle dispute resolution for chargebacks.

Types of payment processors

Merchants generally choose between direct processors and third-party aggregators. Direct processors connect your business to a dedicated merchant account, offering higher transaction limits and custom markup rates, but require a lengthy underwriting process. Third-party aggregators like Stripe or PayPal let businesses start accepting payments quickly by pooling them under a single master account, trading lower setup friction for potentially higher per-transaction costs.

How do payment processors work?

Every card transaction moves through two distinct phases: real-time authorization and clearing and settlement. Authorization happens in seconds; settlement typically takes one to three business days. Here is the step-by-step flow.

Step 1: Transaction initiation

A transaction begins when a customer presents card credentials at a point-of-sale terminal or enters them in an online checkout. Card-present transactions carry lower fraud risk than card-not-present online purchases.

Step 2: Gateway encryption and data transmission

The payment gateway captures the card information and encrypts it immediately, converting sensitive data into a secure, tokenized payload. The gateway then transmits the encrypted data to the payment processor.

Step 3: Bank authorization request

The processor receives the encrypted data and routes it to the appropriate card network, such as Visa or Mastercard. The card network directs the transaction to the cardholder’s issuing bank for verification.

Step 4: Issuing bank verification

The issuing bank verifies the card is legitimate, checks the CVV and card status, assesses fraud risk, and confirms that sufficient funds are available. Based on these checks, it approves or declines the transaction.

Step 5: Transaction confirmation and response

If approved, the issuing bank places a temporary hold on the funds and generates an approval code. That code travels back through the card network to the processor and then to the gateway, where the merchant terminal or website displays the result.

Step 6: Settlement and cleared funds deposit

At the end of each business day, the merchant batches captured transactions and sends them to the processor. The processor coordinates with card networks and acquiring banks to move held funds from the issuing bank to the merchant account, typically within one to three business days.

The 7 key players in each payment processor transaction

Processing a card payment involves seven distinct entities working in sequence. Each one holds specific operational responsibilities, and the chain breaks if any link fails.

Cardholder

The cardholder is the individual or business customer who initiates the transaction by presenting card credentials or a digital wallet. They are responsible for repaying the issuing bank for credit extended.

Merchant

The merchant is the business accepting the payment. To do so, the merchant must have contracts with a payment gateway, processor, and acquiring bank.

Payment gateway

The payment gateway is the software interface that captures, encrypts, and transmits card data from the point of sale to the processor. To learn more, see our guide to how payment gateways work.

Payment processor

The payment processor is the back-end operator that routes encrypted transaction data through the appropriate networks for authorization and communicates the result back to the merchant. It also handles clearing and settlement of funds.

Issuing bank

The issuing bank is the cardholder’s financial institution. It verifies the transaction, checks for sufficient funds, and approves or declines based on its risk policies.

Acquiring bank

The acquiring bank holds the merchant’s business account and receives deposits from card transactions. It assumes financial risk for processed transactions. Learn more about merchant accounts and how they fit into the payment flow.

Card network

Card networks such as Visa, Mastercard, American Express, and Discover act as the routing highway linking the acquiring bank to the issuing bank. They set the operational rules, technical standards, and compliance parameters for all card-based payments.

Payment gateways vs payment processors vs. merchant accounts

These three components serve distinct roles in the payment stack. Bundling them into one platform is common, but understanding each one separately and comparing a payment gateway vs payment processor vs merchant account helps when troubleshooting or negotiating fees.

For a deeper look at each component, see our guides to payment gateways and merchant accounts.

How do payment processors charge

Processing fees are rarely a single flat rate. They consist of several layers that vary by card network, transaction method, and business size.

Interchange fees, assessment fees, and markups

Every credit card transaction incurs three distinct fee layers that determine the total merchant discount rate. The interchange fee, which goes directly to the issuing bank, typically accounts for around 70% of the total cost and ranges from 1.15% to 3.15%. The assessment fee goes to the card network and is usually 0.13% to 0.15% of transaction volume.

The processor markup is the only fee you can actually negotiate. Under interchange-plus pricing, the total cost formula is: C = I + A + M, where I is the interchange fee, A is the network assessment, and M is the negotiated processor markup.

Flat-rate pricing

Flat-rate pricing charges a fixed percentage plus a flat fee on every transaction, regardless of card brand or network assessment. A common rate is 2.9% + $0.30 for online card payments.³ This simplifies forecasting but can be expensive for businesses with high volumes of low-cost debit transactions.

Interchange-plus pricing

Interchange-plus pricing passes the actual interchange and network assessment costs directly to the merchant, adding a pre-negotiated markup. This structure gives finance teams full visibility into exactly what goes to the network, the issuing bank, and the processor. High-volume businesses almost always save money by switching to this model.

Tiered pricing

Tiered pricing divides transactions into qualified, mid-qualified, and non-qualified categories. Processors advertise low qualified rates but use subtle rules to reclassify common transactions into more expensive non-qualified tiers. Because this model lacks transparency, it is generally the worst option for cost-conscious finance teams.

How to choose a payment processor for your business

Choosing among the top payment processors affects your checkout conversion rates, net profitability, and ability to grow internationally. When determining how to choose a payment provider, here are the four criteria that matter most.

Industry compliance and PCI DSS security

Your processor must maintain PCI DSS compliance and support tokenization to protect cardholder data. Merchants should also evaluate how payment gateway providers help automate compliance under the latest PCI DSS v4.0 framework. Choosing a platform that handles compliance infrastructure reduces your audit burden significantly.

Software integrations and system uptime

The best payment processing systems need to sync with your ERP, CRM, and accounting platforms in real time. Check SLA terms for uptime guarantees: a processor that goes down during peak traffic costs you sales. Look for pre-built integrations with Xero, QuickBooks, and NetSuite rather than manual CSV workflows.

Global payment capabilities and local card acquiring

With cross-border eCommerce growing rapidly, a localized checkout experience is essential. Research shows that 93% of global consumers say pricing in their local currency impacts their purchase decision. Processors with local acquiring licenses in your target markets route payments domestically, improving authorization rates and reducing cross-border interchange fees.

The hidden cost of forced currency conversion

Standard processors often restrict merchants to a single settlement currency, converting international sales back to the home currency automatically. These forced conversions carry FX markups of 3% to 4% above market rates. For businesses selling in Europe, those markups apply to every EUR to USD conversion, compounding across every international transaction.

The advantage of like-for-like multi-currency settlement

Like-for-like settlement lets a business accept customer payments in foreign currencies and settle those funds directly into matching currency balances without conversion. This eliminates FX markups on international sales and lets you use those funds to pay overseas suppliers without a second conversion. For high-volume international businesses, the savings are significant.

Why Airwallex is the best payment processor

Airwallex Payments is built for fast-growing businesses that need to collect, hold, and spend multiple currencies without the friction of traditional banking. Instead of routing settled funds to external banks immediately, businesses manage them directly within Airwallex Global Accounts that hold 20+ currencies. When a customer pays in euros, you hold euros natively and pay European suppliers directly from that balance, eliminating double conversion entirely. Airwallex routes payouts through local payment rails in 

120+ countries, bringing transfer fees to near-zero and settling 93% of payments same-day or within hours. For eCommerce brands, native plugins for Shopify, WooCommerce, and Magento integrate directly with those Global Accounts so collections and payouts live on one platform.

Compare that to Stripe, which offers strong developer tools but charges an extra 1.5% on international card fees and 1% FX markups. Airwallex eliminates both costs for businesses using Global Accounts, making it the stronger fit for companies with meaningful cross-border volume.

Frequently asked questions about payment processors

Does a business strictly need a payment processor?

Yes, any business accepting credit cards, debit cards, or digital wallets must use a payment processor to securely route transaction data between the gateway, card networks, and banks.

Are banks payment processors?

No, traditional commercial banks are not payment processors, though some acquiring banks own processing subsidiaries. Payment processors are specialized fintech providers that act as intermediaries between merchants and the banking network.

What is a third-party payment processor?

A third-party processor is an aggregator that pools multiple merchants under a single master merchant account, enabling rapid onboarding with minimal underwriting. This simplifies setup but typically results in higher flat-rate fees compared to direct processor relationships.

How do payment processors make money?

Processors make money by taking a percentage of each transaction plus a flat per-swipe fee, and may also charge monthly fees, gateway fees, and international surcharges. The markup component is the portion that varies by provider and is negotiable for high-volume merchants.

Can a business accept online payments without a payment processor?

No, accepting card or digital wallet payments online requires a payment processor to handle security, routing, and settlement. A business could collect payments via direct bank transfer, but that method lacks the automation and checkout experience needed to scale.

How long does it take for payment processing funds to settle?

Standard card transactions typically settle within one to three business days. Airwallex Payments settles 93% of international payouts same-day or within hours via local payment rails.

Sources

1. https://www.precedenceresearch.com/payment-processing-solutions-market

2. https://baymard.com/lists/cart-abandonment-rate

3. https://stripe.com/annual-updates/2025

4.https://www.clearlypayments.com/blog/how-much-are-payment-processing-fees-in-the-usa-in-2025/