What is a payment processor? How it works, fees, and types (2026)

Key takeaways:

• A payment processor is the company that moves transaction data between your customer's bank, the card network, and your bank — authorising and settling every card or digital payment your business accepts.

• Understanding how payment processors work, including fee structures, types, and key ecosystem parties, helps you choose the right one and avoid unnecessary costs.

• Airwallex is a payment processor built for businesses that operate across borders, with support for 160+ payment methods and the ability to collect funds in multiple currencies without unnecessary conversion fees.

Digital payments are growing fast. Spending through digital payment methods reached $18.7 trillion globally in 2024, and that figure is expected to climb above $33.5 trillion by 2030.¹ For businesses, that means accepting digital payments is no longer optional. It's the baseline.

A payment processor is the engine behind every card and digital wallet transaction your business accepts. It's the company that moves payment data between the parties involved, checks that funds are available, and makes sure money lands in your account.

This guide explains what a payment processor is, how the process works step by step, the fees involved, and what to look for when choosing one.

What is a payment processor?

A payment processor is a company that facilitates transactions between your business and your customer's bank. Every time a customer pays by card or digital wallet, the payment processor handles the communication between the parties involved: verifying the payment details, checking that funds are available, and authorising the transaction.

To understand what a payment processor does, it helps to know the other parties involved in every transaction:

1. The issuing bank

The issuing bank is the financial institution that issued the customer's card — for example, DBS or OCBC in Singapore. When a transaction is submitted, the issuing bank checks whether the customer has sufficient funds and either approves or declines the payment.

2. The acquiring bank

The acquiring bank (also called the merchant's bank) is the financial institution that holds your business account and receives the funds once a transaction is approved. It works with the payment processor to request authorisation from the issuing bank on your behalf.

3. Card networks

Card networks — such as Visa, Mastercard, and Amex — are the infrastructure that connects the issuing bank and the acquiring bank. They set the rules for how transactions are routed and processed, and they determine the interchange fees charged on each transaction.

4. The payment processor

The payment processor sits at the centre of this ecosystem. It routes transaction data between the acquiring bank, the card network, and the issuing bank — and returns the approval or decline to the point of sale. Without a payment processor, your business has no way to accept card or digital wallet payments.

How payment processors work

When a customer pays, the entire process happens in a matter of seconds. Here's what occurs at each step.

Step 1: The customer initiates a payment

The customer presents their card or digital wallet at checkout, either online or in person. The payment gateway captures the payment details and encrypts them before passing them on.

Step 2: The payment processor receives the data

The encrypted payment data is sent to the payment processor. The processor verifies the data is complete and valid, then routes it to the relevant card network: Visa, Mastercard, Amex, or whichever network the customer's card runs on.

Step 3: The card network routes the request

The card network receives the transaction request from the payment processor and forwards it to the customer's issuing bank for authorisation. The card network acts as the switchboard, directing traffic between the acquiring side and the issuing side.

Step 4: The issuing bank approves or declines

The issuing bank checks whether the customer has sufficient funds, whether the card is valid, and whether the transaction looks legitimate. It then sends an approval or decline back through the card network to the payment processor.

Step 5: The result is returned to the point of sale

The payment processor passes the approval or decline back to the payment gateway, which displays the result at checkout. If approved, the customer's payment is confirmed and the transaction is complete from the customer's perspective.

Step 6: Settlement and funding

Authorisation and settlement are two separate events. Authorisation confirms the funds exist and are reserved, but the money doesn't move immediately.

Settlement typically happens within one to three business days, depending on the processor and the card network involved. During settlement, the card network batches approved transactions and the acquiring bank transfers the funds — minus any applicable fees — into your business account.

Payment gateway vs payment processor vs merchant account

These three terms are often used interchangeably, but they refer to different things. Each plays a distinct role in getting a payment from your customer's card to your bank account.

Payment gateway

A payment gateway is the technology that captures and encrypts your customer's payment details at checkout. It's the front-facing layer of the payment process — what your customer interacts with when they enter their card number online, or tap their card in store. The gateway's job is to securely collect that data and pass it to the payment processor.

Payment processor

The payment processor is the engine that drives the transaction. It takes the encrypted data from the gateway and routes it through the card network to the issuing bank, then returns the authorisation result. It also handles settlement, making sure funds move from the customer's account to yours after approval.

Merchant account

A merchant account is a type of bank account that temporarily holds funds after a transaction is approved, before they are transferred to your regular business account. Some payment processors bundle a merchant account into their service. Others require you to set one up separately with an acquiring bank.

How they work together

Here’s how these three systems work together:

• The gateway collects the payment data.

• The processor moves it through the system and gets authorisation.

• The merchant account holds the funds until settlement is complete.

All three are needed for a card payment to work. However, some modern payment processors combine all three functions into a single integrated service, which simplifies setup for businesses.

5 types of payment processors

Not all payment processors work the same way. The type you choose affects how you get set up, how much control you have over the payment experience, and what fees you pay.

1. Front-end processors

Front-end processors connect directly to card networks and issuing banks. They handle the authorisation side of the transaction: routing the request, getting the approval or decline, and returning the result. Front-end processors typically work with acquiring banks rather than directly with merchants.

2. Back-end processors

Back-end processors handle the settlement side, moving funds between banks once a transaction has been authorised. They work behind the scenes, often in partnership with front-end processors, to complete the financial transfer after approval.

In practice, many modern payment processors handle both front-end and back-end functions, so you don't need to think about this distinction when choosing a provider. It's more relevant if you're building a payments infrastructure or working at scale.

3. Direct processors (acquirer processors)

A direct processor (sometimes called an acquirer processor) has a direct relationship with card networks like Visa and Mastercard. They act as the acquiring bank themselves, or work closely with one. Direct processors typically serve larger businesses and enterprises, and often offer more competitive rates at high transaction volumes.

Examples of direct processors: Worldpay, Adyen.

4. Third-party processors (payment service providers)

A third-party processor, also known as a payment service provider (PSP), aggregates many merchants under a single master merchant account.

Instead of setting up a dedicated merchant account for your business, you share infrastructure with other merchants on the platform. This makes onboarding faster and simpler — which is why PSPs are popular with small businesses and startups. The trade-off is that you have less control, and accounts can occasionally be frozen if the PSP flags unusual activity across its merchant pool.

Examples of third-party processors: Stripe, PayPal.

5. Integrated payment processors

Some providers combine the payment gateway, payment processor, and merchant account into a single platform. This simplifies setup and reduces the number of vendors you need to manage.

Airwallex is an example of this model — we handle payment acceptance, currency management, and fund collection in one place, which is particularly useful for businesses operating across multiple markets.

Examples of integrated payment processors: Airwallex

Payment processor fees

Every payment processor charges fees for their service. Here’s a quick overview:

Interchange fees

Interchange fees are charged by the issuing bank every time a transaction is processed. They are set by the card networks (Visa, Mastercard, Amex) and vary depending on the card type, the transaction method, and the merchant's industry. Interchange is typically the largest component of the total fee you pay to accept a card payment.

You don't pay interchange directly — your payment processor pays it to the issuing bank and passes the cost on to you.

Assessment fees

Assessment fees are charged by the card networks themselves — separate from interchange. They are a small percentage of your total transaction volume and go directly to Visa, Mastercard, or Amex for maintaining the network infrastructure. Like interchange, these are non-negotiable and passed through by your processor.

Payment processor fees

On top of interchange and assessment fees, your payment processor adds their own margin. This is how processors make money. Processor fees are typically structured in one of three ways:

• Flat rate: A single fixed percentage plus a small per-transaction fee, regardless of card type. Simple and predictable. Common with PSPs like Stripe and PayPal. Good for low-volume businesses but can be expensive at scale.

• Interchange-plus (cost-plus): The processor charges interchange at cost, then adds a fixed markup on top. More transparent than flat rate, and often cheaper for higher-volume businesses. Common with direct processors.

• Tiered pricing: Transactions are grouped into tiers (qualified, mid-qualified, non-qualified) with different rates for each. This is less transparent, and it can be difficult to know which tier a given transaction will fall into.

Monthly and subscription fees

Some processors charge a monthly fee for access to their platform, dashboard, or support. These are separate from transaction fees and may or may not be worth the cost depending on your volume and the features included.

Chargeback fees

When a customer disputes a transaction and the dispute is upheld, you lose the transaction amount. On top of that, most processors charge a chargeback fee — typically a flat amount per disputed transaction. Keeping your chargeback rate low is important, as high chargeback rates can result in additional penalties or account suspension.

Currency conversion fees

If you accept payments in a foreign currency, most processors apply a currency conversion fee on top of the base transaction fee. This can add up quickly for businesses with international customers.

Some processors let you collect and hold funds in foreign currencies, so you avoid conversion fees entirely. Airwallex does this through Global Accounts, which are multi-currency accounts that let you receive and hold funds in the currency they arrive in.

PCI compliance fees

Payment processors are required to maintain PCI DSS (Payment Card Industry Data Security Standard) compliance. Some pass a portion of this cost on to merchants as a separate annual or monthly fee. Others include compliance in their standard pricing. It's worth checking whether your processor charges for this separately.

Security and compliance

Payment processors handle sensitive financial data on your behalf, so security is a core part of what they do — not an optional extra.

PCI DSS

PCI DSS (Payment Card Industry Data Security Standard) is the global security standard that governs how cardholder data must be stored, processed, and transmitted.

Any business that accepts card payments must comply with PCI DSS — but in practice, much of the compliance burden falls on your payment processor. When choosing a processor, confirm they are PCI DSS certified and understand what obligations remain on your side.

Tokenisation

Tokenisation replaces sensitive card data (such as a card number) with a randomly generated token. The token has no value outside the payment system, so even if intercepted, it cannot be used to make a fraudulent transaction. Most modern payment processors apply tokenisation automatically, meaning your systems never store raw card data.

Encryption

Payment processors encrypt cardholder data in transit using TLS (Transport Layer Security), ensuring that payment details cannot be read if intercepted between the customer's device and the processor's servers. Encryption works alongside tokenisation to protect data at every stage of the transaction.

Fraud detection

Many processors include built-in fraud detection tools that flag suspicious transactions in real time — for example, unusual transaction patterns, mismatched billing addresses, or payments originating from high-risk locations. Some offer machine learning-based fraud scoring that improves over time based on transaction history.

How to choose a payment processor

The right payment processor depends on your business model, transaction volume, and the markets you operate in. Here are the key criteria to evaluate.

Pricing structure and total cost

Don't just compare headline rates — look at the full fee stack. A flat-rate processor may look simple, but interchange-plus pricing is often cheaper at higher volumes. Factor in monthly fees, chargeback fees, currency conversion fees, and PCI compliance fees to get a true picture of what you'll pay.

Payment methods supported

Your processor needs to support the payment methods your customers actually use. In Singapore, that means card schemes like Visa and Mastercard as a baseline, but also local methods like PayNow and GrabPay.

If you sell internationally, check which local payment methods are supported in each market you operate in. A processor that only covers cards will leave revenue on the table in markets where wallets and bank transfers dominate.

Multi-currency and cross-border capability

If you have international customers or pay international suppliers, currency handling matters. Check whether your processor supports collecting payments in foreign currencies, what conversion fees apply, and whether you can hold balances in multiple currencies to avoid converting funds unnecessarily. For businesses managing cross-border transfers, this can have a material impact on costs.

Settlement speed

How quickly do funds reach your account after a transaction is approved? Settlement timelines vary between processors — from same-day to three or more business days. For businesses with tight cash flow, faster settlement is a meaningful advantage.

Integration and setup

Consider how the processor integrates with your existing stack — your eCommerce platform, accounting software, and ERP. A processor with pre-built plugins and a well-documented API reduces implementation time and ongoing maintenance. If you're a developer-led team, check the quality of the API documentation.

Reliability and uptime

Payment processing downtime costs you sales. Check the processor's published uptime record and whether they offer a service level agreement (SLA). Look for processors that publish live system status pages so you can monitor incidents in real time.

Support

When something goes wrong with a payment, you need to be able to reach someone quickly. Check what support channels are available — live chat, phone, email — and whether support is available in your time zone and language.

Accept payments in 180+ countries via 160+ local payment methods

Most payment processors are built for domestic transactions. If you operate across borders, use Airwallex Payments, which supports payments in 180+ countries, via 160+ payment methods and across 130+ currencies.

Here’s what you get with Airwallex:

• Multi-currency collection: Hold funds in 20+ currencies, so you're not forced to convert every payment back to SGD and lose margin each time.

• Competitive FX on transfers: When you do need to move money across borders, we offer competitive FX rates that save you up to 80% on FX fees.

• One platform: You get payment acceptance, currency management, and international transfers in one place — this reduces complexity, and gives you a clearer picture of your cash flow across markets.

Frequently asked questions (FAQs)

What is the difference between a payment processor and a payment gateway?

A payment gateway captures and encrypts your customer's payment details at checkout. A payment processor takes that data and routes it through the card network to get authorisation from the customer's bank. The gateway is the front-end interface; the processor is the engine behind it. Many modern providers bundle both into a single service.

What fees does a payment processor charge?

Most processors charge a combination of interchange fees, assessment fees, and their own processing margin. On top of that, you may encounter monthly subscription fees, chargeback fees, currency conversion fees, and PCI compliance fees. The total cost depends on your pricing model — flat rate, interchange-plus, or tiered — and your transaction volume.

How long does payment processing take?

Authorisation happens in seconds. Settlement — when funds actually arrive in your account — typically takes one to three business days, depending on your processor and the card network involved. With Airwallex, 93% of our transactions settle within the same day.

What is PCI DSS and do I need to comply?

PCI DSS (Payment Card Industry Data Security Standard) is the security standard that governs how card payment data must be handled. Any business that accepts card payments must comply. In practice, a good payment processor handles most of the compliance burden — but some obligations remain on your side, such as how you store customer data.

What happens when a payment is declined?

A decline means the issuing bank did not approve the transaction. Common reasons include insufficient funds, an expired card, a suspected fraud flag, or a mismatch in billing details. The processor returns a decline code to the payment gateway, which displays an error at checkout. The customer can then try a different payment method.

What is a chargeback?

A chargeback happens when a customer disputes a transaction with their bank rather than requesting a refund directly from you. The bank reverses the payment and you lose the transaction amount, plus a chargeback fee from your processor. High chargeback rates can result in penalties or account suspension, so it's worth having a clear refunds policy and fraud controls in place.

Sources:

1. https://corporate.worldpay.com/news-releases/news-release-details/10-years-cash-cards-and-crypto-worldpays-global-payments-report

This publication does not constitute legal, tax, or professional advice from Airwallex, nor does it substitute seeking such advice, and makes no express or implied representations / warranties / guarantees regarding content accuracy, completeness, or currency. If you would like to request an update, feel free to contact us at [[email protected]]. Airwallex (Singapore) Pte. Ltd. (201626561Z) is licensed as a Major Payment Institution and regulated by the Monetary Authority of Singapore.