What a third party payment processor actually does
A third party payment processor is a company that sits between your customer's bank and your business bank account. When someone pays you by card, the processor receives the payment details, sends them to the card networks and banks involved, collects the money, and deposits it into your account — usually within one to three business days. You never touch the customer's card number or bank details directly.
The processor is called "third party" because there are three parties in the transaction: your customer, your business, and the processor. The processor is not your bank and not the customer's bank — it is a separate company licensed to handle payment information and move funds between institutions.
Most small businesses use a third party processor because handling card payments yourself requires expensive security certifications, compliance with payment card industry standards, and the ability to store sensitive data safely. A processor handles all of that, which is why they charge a fee — usually a percentage of each transaction plus a small flat fee.
Key Takeaways
- A third party processor receives payment details from your customer, routes them through card networks and banks, and deposits the money into your account within one to three business days.
- You never see or store the customer's full card number because the processor handles that data, which keeps you out of expensive compliance requirements.
- The processor charges a fee per transaction, typically 2 to 3 percent of the sale plus 20 to 30 cents, though rates vary by business type and payment method.
- Different processors connect to different card networks and banks, so the one you choose affects which payment methods your customers can use and how fast money reaches your account.
How the money actually moves through the system
When a customer enters their card details on your checkout page or payment form, that information goes to your processor, not to you. The processor encrypts it and sends it to the card network — Visa, Mastercard, American Express, or Discover. The network checks whether the card is valid and whether the customer's bank will approve the charge.
The customer's bank either approves or declines the transaction in seconds. If approved, the processor receives confirmation and shows a success message to your customer. The money does not move when ready. Instead, the processor batches all your transactions from that day and sends them to the acquiring bank — the bank that holds your business account. That bank then pulls the funds from each customer's bank and deposits them into your account, a process that usually takes one to three business days.
During that waiting period, the processor holds the money in a holding account. This is why you see a delay between when a customer pays and when the money shows up in your bank. The processor uses that time to verify transactions, check for fraud, and handle any chargebacks or disputes that come in when ready after the sale.
Why you need a processor instead of handling payments yourself
If you wanted to accept card payments without a third party processor, you would need to become PCI DSS compliant — a set of security standards that require you to store card data in encrypted form, audit your systems regularly, and maintain expensive security infrastructure. Most businesses cannot do this cost-effectively.
A processor is already PCI compliant and licensed by the card networks to handle sensitive payment information. By using one, you shift that responsibility to them. Your business only needs to follow the processor's integration requirements, which are usually much simpler — add a payment form to your website or use their point-of-sale terminal.
Processors also carry insurance and fraud detection tools that catch suspicious transactions before they become chargebacks. If a customer disputes a charge, the processor has records and documentation to defend you. Handling that yourself would require legal resources most small businesses do not have.
Different types of third party processors and what they do
Not all processors work the same way. A payment gateway is software that encrypts and routes payment information but does not hold the money — it passes everything to your acquiring bank. Stripe, Square, and PayPal are payment gateways. They are fast to set up and good for online businesses.
A payment processor in the strict sense receives the payment information, routes it, and also holds the funds in a holding account before depositing them. Some processors do both the gateway and holding functions themselves. Others partner with acquiring banks to handle the deposit part.
A point-of-sale processor handles in-person card payments through a terminal or mobile reader. Square Reader and Clover are examples. They work the same way as online processors — they receive the card data, route it through the networks, and deposit the money into your account — but they are built for physical locations instead of websites.
Some processors specialize in specific industries. A processor for restaurants might include tip handling and kitchen integration. A processor for nonprofits might offer lower fees or recurring donation tools. The processor you choose depends on how you take payments and what features matter to your business.
Fees and how processors make money
Processors charge in several ways. The most common is interchange-plus pricing: a percentage of each transaction (usually 1.5 to 2.5 percent) plus a flat fee per transaction (usually 20 to 30 cents), plus the interchange fee set by the card networks. Interchange is the fee the card networks charge for processing — it varies by card type and industry but is typically 1 to 2 percent.
Some processors offer flat-rate pricing, where you pay the same percentage and fee regardless of card type — often 2.9 percent plus 30 cents. This is simpler to understand but usually costs more if you process a lot of high-value transactions.
A few processors charge a monthly subscription instead of per-transaction fees, though this is less common for small businesses. Some also charge setup fees, PCI compliance fees, or fees for features like invoicing or recurring billing.
The processor keeps part of the fee and passes the rest to the card networks, your acquiring bank, and the customer's bank. You never see that breakdown — you only see the total fee deducted from each transaction or charged monthly.
How to choose a processor for your business
Start by deciding how you take payments. If you sell online, you need a payment gateway or online processor. If you have a physical location, you need a point-of-sale processor. Some processors handle both — Square and Stripe both offer online and in-person options.
Next, compare fees. Get quotes from at least three processors and calculate what you would pay on a typical month of sales. A processor with lower percentage fees might have higher flat fees, so the math matters more than the advertised rate.
Check which payment methods each processor supports. Most accept Visa, Mastercard, and American Express, but not all accept Discover, ACH transfers, or digital wallets like Apple Pay. If your customers use a payment method, make sure your processor does too.
Look at settlement speed — how fast the processor deposits money into your account. Most take one to three business days, but some offer next-day or same-day settlement for an extra fee. If you need cash quickly, this matters.
Finally, test customer support. Call or email with a question and see how fast they respond. Payment problems can cost you money, so you want a processor that answers quickly.
What happens when something goes wrong
If a customer disputes a charge, the processor handles the dispute process. The customer's bank contacts the processor, which then contacts you. You have a window — usually 7 to 10 days — to provide evidence that the transaction was legitimate: an order confirmation, shipping proof, or a signed receipt.
If you cannot provide evidence or the customer's bank sides with them, the processor reverses the charge and deducts the money from your account. This is called a chargeback. Most processors also charge a chargeback fee, usually 15 to 100 dollars, on top of the refund.
If you have too many chargebacks — the threshold varies by processor but is often more than 1 percent of your monthly transactions — the processor can freeze your account or terminate your service. This is why fraud detection and good customer service matter: they reduce disputes.
Frequently Asked Questions
Can I use multiple payment processors at the same time?
Yes. Many businesses use one processor for online payments and another for in-person payments, or use different processors for different sales channels. Each processor deposits into the same business bank account, so you see all the money in one place. The downside is managing multiple accounts and fee structures.
What is the difference between a processor and a payment gateway?
A payment gateway is software that encrypts and routes payment information. A processor receives that information and moves the actual money. Some companies use both terms interchangeably, but technically a gateway is just the software layer while a processor handles the full transaction and deposit.
How long does it take to get money after a customer pays?
Most processors deposit money one to three business days after the transaction. Some offer next-day settlement for an extra fee. Weekends and holidays add time — a payment on Friday might not deposit until Tuesday. Check your processor's settlement schedule when you sign up.
What happens if the processor goes out of business?
Your money in the processor's holding account is protected by federal banking regulations, but the transition to a new processor takes time. You will need to update your payment forms and point-of-sale terminals. This is rare but possible, so choose an established processor with a track record.
Do I need a separate merchant account to use a processor?
Most modern processors set up a merchant account for you as part of their onboarding. Some require you to have a business bank account, but they handle the merchant account paperwork. A few older processors require you to open a merchant account separately, but this is becoming less common.