Let’s say that you are a dutiful grandchild sending your grandma a care package. You drop it in a UPS drop box, UPS collects the package, transports the goods, and sends both you and grandma a confirmation email when delivery is complete.

Think of the UPS distribution network as analogous to a payment processor—and the associated dropbox as a payment gateway. To make an online payment, customers initiate a transaction via a payment gateway, and a payment processor facilitates communication between parties and transfers funds into the merchant’s bank account.

Both payment processors and payment gateways are necessary for accepting credit card payments. They make payments convenient and secure for customers and save business owners time by decreasing payment processing labor.

What is a payment processor?

Payment processors function as an intermediary between a merchant’s bank account and a customer’s bank account. Online payments involve, at a minimum, five parties: the merchant, the customer, the merchant’s bank, the customer’s bank, and the payment processor, the entity responsible for communicating between the parties involved in the transaction.

For example, accepting credit cards requires business owners to partner with a third-party credit card processor. Once a customer submits a payment, the payment processor will communicate the transaction to the credit card network and to the customer’s bank. After the customer’s bank approves (or declines) the transaction, the payment processor will inform the merchant’s bank, either depositing funds into the merchant’s bank account, or informing the bank, merchant, and customer of a declined transaction.

Advantages of using payment processors

In theory, not all transactions require an intermediary. Consider cash payments, for example: your customer hands you $5, you hand her a bag of premium fish food, and you head your separate ways. 

Most business owners choose to partner with a third-party…


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