Currency and how it is used for financial transactions have evolved considerably over time, and this trend has only accelerated in recent years.
While coins have been around for thousands of years, the notion of paper money only arrived in the West in the 1600s (about 700 years after it was invented in China). It wasn’t until the 1960s that you could take notes from an ATM, which is when automation really started to take off in the banking sector.
In 1994, a CD was sold on a website called NetMarket, marking the first official Internet purchase (although there are rumors that students at MIT and Stanford were using the Internet to sell marijuana from the 1970s…).
The story of payment processors begins in 1998 when Confinity (later X.com, but you probably know it as PayPal) was released. This early payment processor did very little and wasn’t all that important to global commerce.
But with the rise of ecommerce, the adoption of credit card companies, new digital wallets and apps, payment software and gateways, and even cryptocurrencies, payment processing has become big business and the payment processors an indispensable part of the global economy.
That history might be interesting to some, but the real questions are:
Well, stick around, and let’s see if we can answer these questions and more.
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A payment processor is a third-party company a merchant chooses to handle transactions from various payment channels, such as credit cards and debit cards.
There are two basic types of payment processors: front-end and back-end.
Front-end processors are connected to various card associations and provide authorization and settlement services to the merchant banks’ merchants.
Back-end processors take the settlements from front-end processors and, using, e.g., the Federal Reserve Bank, move the money from the issuing bank to the merchant bank.
In providing this service, payment processors take the information from the purchaser, verify it, and use the information to gauge the probability of the transaction being improved. This includes various anti-fraud measures.
The payment processor relays all of this information to the merchant via the payment gateway, who will then either complete the transaction or deny it based on the verification results.
To clarify things a bit, let’s examine the two other essential parts of the payment process: payment gateways and merchant accounts.
While payment processors are a huge part of the online payment ecosystem, they are not the only component that matters. There are also payment gateways and merchant accounts.
The payment gateway acts as a middleman between the payment processor and the credit card company and between the merchant and the credit card company.
It performs all the technical work of transferring credit card information securely. The payment gateway is an essential component of every transaction, so without one, commerce cannot take place.
A merchant account is a special bank account that can accept credit card and debit card payments. Payments sit here for a defined period of time before being transferred to a company’s bank account. When setting up your business, you will need a merchant account to be able to accept payments.
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The modern payment ecosystem is a lot more confusing than passing around metal coins, with payment gateways, payment processors, merchant accounts, credit card companies, and all their tasks designed to confirm the legitimacy and legality of the transactions.
Here is a step-by-step breakdown of the end-to-end process:
The customer opens their shopping card, clicks checkout, selects to pay by credit card, and submits their credit card info.
The merchant sends the financial information, including the cardholder details, to the payment gateway.
After receiving the transaction details, the payment gateway sends the information to the merchant's third-party payment processor.
The payment processor sends the transaction information to the card network (e.g., MasterCard or Visa).
The card network next sends the transaction information to the customer’s bank, which checks whether the customer has the credit limit space available to complete the purchase.
The bank then sends their response to the card network, i.e. whether the transaction has been approved or declined.
The card network relays this response to the payment processor and then, by the payment processor, to the payment gateway, which informs the merchant and customer of the response.
Finally, assuming the transaction has been approved, the funds are deposited by the customer’s bank into the merchant account, where they must sit for an agreed-upon period of time before being paid into the business’s bank account.
There are many payment processors out there, and sometimes, it feels like they are all the same. In addition to the obvious things—price and price structure (percentage and/or per-transaction fees), throughput (how many transactions per minute they can handle), needed features (ability to automate your recurring subscription revenue), and usability (how easy it is for you and your customers to process payments)—here are a couple of key factors you should confirm:
Compatibility: You probably use a shopfront, payment gateways, and software to collect and analyze your sales data, so you should be finding a payment processor compatible with all of these other key tools.
PCI compliance: Credit card information needs to be stored and transferred securely, so look for a PCI-compliant payment processor.
Fraud: Fraud is rampant, and you need a payment processor that will perform multiple fraud checks to reduce the chances of payments being refunded and the lost revenue that entails.
Customer base: Some payment processors have amassed a huge number of monthly users, and these users may be more inclined to use your service if they can use the payment processors they trust.
While this list is not exhaustive, here are some of the payment processors available. They range from newer to long-established, famous to less well-known.
2Checkout has provided mobile and desktop-based payment services in 196 countries for over 15 years. This PCI-compliant platform can process credit cards, debit cards, and even PayPal payments. It has low transaction fees as well as no recurring monthly or setup fees.
Payline Data offers good anti-fraud solutions, among many other tools, and it can be used on smartphones, websites, and e-commerce shops.
GoCardless can be set up easily and provides automated payment tracking. They are also cheaper than PayPal.
Paynova offers 21 payment options. Paynova is best suited for startups and small ecommerce businesses.
PayPal offers customers convenient digital wallets, among other services. This provides PayPal with over 300 million active users.
Its transparent pricing and simple setup make it an obvious choice for many business owners.
All of the Internet giants are getting into the payment processing space. These companies have the infrastructure to power even the busiest sites and come with built-in customer bases that could help drive more sales.
The convenience and perceived security of a big brand name make customers confident that they can shop easily and securely using these systems.
Similar to PayPal, often, the higher fees come with increased sales volume.
Stripe is often considered the most convenient for SaaS businesses because it comes with loads of features specific to the market. You can take a look at our article comparing Stripe to PayPal to see why.
For example, Stripe allows you to save all of your credit card information to make returning customers easier to process. Stripe also has the option for automated payments, which is crucial for recurring revenue.
Whatever payment processor you choose, ensure it works with your analytics tools. If you aren’t utilizing your sales data, then you aren’t getting the most out of your payment processor.
Baremetrics is a business metrics tool that provides 26 metrics about your business, such as MRR, ARR, LTV, total customers, and more.
Baremetrics integrates directly with your payment gateways, so information about your customers is automatically piped into the Baremetrics dashboards.
You should sign up for the Baremetrics free trial, and start monitoring your subscription revenue accurately and easily.