A payment processor is a system that enables financial transactions between a merchant and customers from various channels such as credit cards, debit cards, or bank accounts. Payment processors manage the logistics of accepting card payments and shuttle card data from wherever customers tap, swipe, or enter their card details to the payment networks and banks involved in the transaction. Payment processors play an important role in the electronic payment ecosystem, enabling businesses to accept and process various forms of payment from customers. They also ensure customer bank accounts have adequate funds or that credit cards have adequate lines of credit, and they ensure customers’ sensitive financial information is safeguarded against access by nefarious third parties.

The payment processing industry is being driven by an increase in vertical-specific processors, the accelerated adoption of contactless payment methods, and the trend toward customer choice and autonomy, particularly in western cultures. Payment processors use advanced algorithms and tools to monitor transactions for fraudulent activity, helping businesses minimize their exposure.

The payment processing process looks like this:

1. A customer gives the merchant their card information. This can be at a terminal in a store, a payment page online, or through another method.
2. The information is submitted through the payment gateway, which is a payment processing portal that sometimes comes bundled with payment processing services.
3. The payment gateway sends the information to a payment processor, which initiates the transaction by sending the information to the card network, such as Mastercard or Visa, for approval.
4. The card network approves or declines the transaction and sends the response back to the payment processor.
5. The payment processor sends the response back to the payment gateway, which communicates the response to the merchant and customer.

Different payment processors offer different services, such as equipment for card acceptance, security solutions, PCI compliance assistance, customer support, and other value-added payment processing services. Payment processors also relieve the responsibility of the management of recurring payments from the merchant and maintain safe and secure payment information, passing back to the merchant a payment "token" or unique placeholder for the card data. Through Tokenization, merchants are able to use this token to process charges, perform refunds, or void transactions without ever storing the payment card data, which can help reduce the risk of data breaches.