A Payment Processor is a company that routes credit card transactions from merchant locations to credit card issuers for complete authorization and eventual settlement.
The Payment Processor is a financial institution distinct from the banking institution that processes all of the data from individual and batched credit card transactions. The Payment Processor provides pre-authorization, post-authorization, re-authorization, as well as refund services to merchants that accept credit cards and other equivalent bank cards for sales transactions. They are ultimately responsible for the distribution of funds between consumers and businesses. The Payment Processor is also referred to as a Transaction Processor in many cases.
Payment Processors are companies that attend to the actual processing of a credit card transaction, which is different from the merchant account bank which largely acts as the recipient of the transaction proceeds.
There are several Third Party Payment Processors that act in between traditional Payment Processors and merchants and consumers.
If a merchant wishes to take credit cards and other forms of payment online and it does not have an established merchant account, a merchant can use what is known as a third-party payment processor. These companies and organizations allow a merchant to use their process payments through their merchant account and then transfer the money to the merchant’s own bank account.
The advantage of this scenario is that there is typically very little setup required in terms of providing comprehensive paper work and business history documentation. Of course, the potential negative effect is that it adds another layer of processing to a merchant’s payments and therefore the commission charged for each individual payment is sometimes greater. One of the best known and most popularly used third-party payment processor is PayPal, which often uses accounts set up by purchasers who have either accumulated credits from their own sales or have applied a credit card or direct bank account funds on account to make such payments.