Payment processing can feel like a black box, but understanding it is key to running a smooth and secure business.
This is especially true today, as digital payments have become more prevalent than ever. Research by McKinsey found that in the United States, 92% of consumers reported making some form of digital payment, with in-store digital wallet usage rising from 19% in 2019 to 28% in 2024.
Whether you’re accepting payments in a brick-and-mortar location, through your eCommerce site, or on the go, knowing how the system works empowers you to choose the right tools, avoid hidden costs, and deliver a better experience for your customers.
This guide breaks down payment processing systems in plain terms so you can feel confident navigating your options.
What is a Payment Processing System?
A payment processing system is the technology that enables businesses to accept card payments from customers. It acts as the bridge between your point of sale, the customer’s bank, and your business account.
Whether in-store or online, this system captures card details, verifies the transaction, and ensures the funds land in your account—minus processing fees. For businesses, a reliable payment processor is essential to delivering seamless customer experiences and getting paid quickly and securely.
How a Payment Processing System Works
The term “payment processing” refers to the sequence of authenticating and approving a customer transaction. Afterward, the proceeds are transferred to the merchant.
The credit card processing transaction sequence
Each credit card transaction follows a multiple-step sequence. This process ensures that the transaction is complete and all parties receive the funds due from the sale.
- The cardholder provides the merchant with credit card information at checkout. This occurs through a card terminal, a mobile card reader, or an online payment page.
- The payment information travels through a payment gateway to the payment processing company.
- The payment processor sends the transaction to the card network (Visa, Mastercard, etc.) for approval.
- The card network approves or declines the transaction based on the customer’s available credit.
- The merchant completes the approved transaction, and the customer receives their merchandise. If the transaction is declined, the customer will be asked to provide an alternative payment method.
- The payment processor remits the interchange fee to the issuing bank and card network. The processor tells the customer’s bank (the card-issuing bank) to forward funds to the merchant’s bank (the acquiring bank).
- The net proceeds are deposited into the merchant’s bank account.
Types of Payment Processing Systems
Businesses have more ways than ever to accept payments—and choosing the right payment processing system can have a big impact on your cash flow, fees, and customer experience.
Traditional Merchant Account + Payment Gateway
This setup is common for established businesses and high-volume sellers. It involves two key components:
- A merchant account is where funds from credit card transactions are held before being transferred to your business bank account.
- A payment gateway, which securely transmits credit card details from your site or terminal to the payment processor.
This model gives businesses more control and customization but may involve a more complex setup, tiered pricing, and higher interchange fees depending on the accepted payment methods and sales volume.
Pros:
- Greater control over fees, since you choose the payment provider to work with
- Customizable for large or growing businesses
- Better support for international transactions and currency conversion fees
Cons:
- More setup steps and contracts
- May require managing multiple vendors (e.g., separate payment processing companies and gateways)
All-in-One Payment Processing Platforms
All-in-one platforms combine the payment gateway, payment processor, and merchant account into a single solution. They simplify the process of accepting card payments, bank transfers, and digital wallets like Apple Pay, helping businesses accept credit or debit card payments quickly.
This type of payment solution is ideal for small businesses, startups, or merchants that prioritize ease of use and a clean checkout user experience.
Pros:
- Fast setup and onboarding
- Single provider for all payment processing work
- Supports a wide range of payment methods, including mobile payments and recurring payments
Cons:
- Less control over pricing models
- May offer fewer customizations or enterprise-level features
Peer-to-Peer and Link-Based Payment Systems
Some payment platforms let you send payment links directly to customers or receive money through peer-to-peer systems. These are useful for service providers, freelancers, or businesses that don’t have a full checkout flow.
Pros:
- No website or eCommerce site required
- Great for collecting in person or remote payments
- Easy to use and accessible
Cons:
- Not ideal for high-volume credit card transactions
- May come with higher transaction fees or limited reporting tools
Embedded and Integrated Payment Systems
More and more businesses—especially SaaS platforms—are embedding payment processing directly into their products. This lets users accept payments within the software they already use, while the platform manages things like fraud protection, data security, and chargeback fees.
Pros:
- Streamlined for both the business and customer
- Improved customer satisfaction with fewer steps at checkout
- Built-in support for digital payments, electronic payments, and interest-free installments
Cons:
- Often requires development resources for integration
- Fee structures may be less transparent
POS (Point of Sale) Systems with Built-in Payment Processing
Retailers and restaurants often use POS systems with integrated card network access to handle credit and debit card transactions directly at the point of sale. These systems are hardware + software combos that handle everything from inventory to payment processing.
Pros:
- Seamless in-person checkout
- Combines sales tracking with payment information collection
- Ideal for brick-and-mortar setups
Cons:
- Usually limited to business hours and physical store locations
- May charge fixed fees or additional interchange fees
Choosing the right payment processing system depends on how your customers pay, where you sell, and how much control you want over fees and the actual transfer of funds. Each model has trade-offs, so take time to evaluate your needs
Common Payment Processing Methods
Today’s customers expect flexibility at checkout—and the more payment methods you support, the better your chances of closing the sale. From credit cards to digital wallets, here’s a breakdown of the most common ways customers pay, and what each one means for your payment processing system, fees, and customer experience.
Credit card processing
Credit cards are one of the most widely used payment methods—and for good reason. They offer convenience for customers and quick access to funds for businesses. When a credit card transaction is processed, it passes through your payment processor, card network, and issuing bank before being approved. Expect interchange fees, but also higher average order values and broad customer appeal.
Debit card processing
Debit cards pull funds directly from the customer’s bank account, making them a lower-risk option compared to credit cards. For businesses, this typically means lower processing fees and interchange rates. Debit transactions can be authorized via PIN or signature, and they’re great for everyday purchases like food, fuel, and convenience items.
Contactless payments
Fast, secure, and increasingly popular, contactless payments use NFC (near-field communication) technology to complete transactions with just a tap. Customers can pay using a card, smartphone, or wearable device—no physical contact is required. This method speeds up checkout and supports a cleaner, more seamless experience in-store.
ACH payments
ACH payments are direct bank-to-bank transfers, often used for larger payments, recurring billing, or online payments. They’re a cost-effective option with lower transaction fees than cards, but transfers may take a few business days to settle. ACH is commonly used for subscriptions, payroll, and ecommerce payouts.
Device-based digital wallets
Digital wallets like Apple Pay, Google Pay, and PayPal allow customers to store credit card details securely on their devices. These wallets enable mobile payments in-store or online with added layers of fraud protection and data security. They simplify checkout, especially on mobile, and improve customer satisfaction with fewer steps.
Gift cards
Gift cards can boost cash flow and drive repeat business. They’re easy to set up through most payment processing platforms and act as both a revenue stream and a marketing tool. Whether physical or digital, gift cards offer flexibility while increasing brand loyalty and spend-per-visit.
Buy Now, Pay Later (BNPL)
BNPL options let customers split purchases into interest-free installments, helping them manage cash flow while increasing average order value. For merchants, these services are typically funded upfront by third-party providers—though they may come with higher transaction fees. BNPL is especially popular for eCommerce and higher-ticket items.
How to Choose the Right Payment Processing System
With so many options available, picking the right payment processing system isn’t just about price—it’s about finding a solution that fits your business model, growth goals, and customer experience. Here’s what to consider as you make your decision.
1. Nature of the business
The best payment processing solution depends on how and where you operate. A retail store may need a POS system with in-person checkout capabilities, while a subscription-based SaaS platform benefits from a provider that supports recurring payments and ACH transfers. If you’re selling internationally, look for support for multiple currencies and payment methods like digital wallets and credit cards. Your operational model should guide the tools you choose.
2. Pricing structure transparency
Clear, upfront pricing is key to avoiding surprise charges that eat into your cash flow. So, set your sights on providers that break down their fee structure—including interchange fees and chargeback fees—rather than bundling everything into a single rate. For example, tiered pricing may seem simple but could cost more if you process a high volume of low-ticket transactions.
3. Transaction fees
Every credit or debit card transaction comes with a cost. These transaction fees vary based on card type, payment method, and sales volume. If you accept a lot of debit card payments, go for a processor with lower debit rates. And if you handle high-ticket sales, a provider that offers volume-based discounts or custom pricing could significantly reduce your costs.
4. Software integrations
Your payment processor should work seamlessly with the tools you already use—like your eCommerce platform, accounting software, or CRM. For instance, if you’re using a platform like WooCommerce or Xero, ensure your processor supports direct integration to streamline reporting and reconciliation. The right integrations simplify operations and save time on manual tasks.
5. System and data security
Protecting credit card details and payment information is non-negotiable. Choose a provider that offers end-to-end encryption, tokenization, and robust fraud protection. If you’re accepting online payments, features like 3D Secure and real-time fraud monitoring add an extra layer of safety—for both you and your customers.
6. Customer support
When issues arise—whether it’s a failed payout or a chargeback—you’ll want a responsive customer support team on your side. Look for payment processing companies that offer support via phone, chat, or email. Bonus points if they have a dedicated onboarding team to walk you through setup or troubleshoot technical integrations.
Common Payment Processing Industry Terms
A typical transaction sequence will become clearer once you understand the meaning of certain payment processing terms. Here are six common terms pertaining to a credit card transaction that you may often come across.
Payment gateway
A payment gateway is an internet-based communications conduit. During a credit card transaction, issuing banks, acquiring banks, credit card associations, and other entities send information through a payment gateway.
Payment processor
A payment processor (or payment processing company) executes credit card payments and other digital transactions. These credit card processing companies are merchants’ links to card-issuing banks, acquiring banks, and credit card networks. The processor ensures that merchants receive the funds from completed transactions.
Point-of-sale
A merchant’s point-of-sale (or POS) system is the business’ payment operations nerve center. Together, a POS system’s hardware and software enable merchants to begin accepting payments.
POS systems commonly accept credit cards and debit cards. Contactless payments, mobile payments, and online payments are other payment methods.
Issuing bank
The issuing bank (or card-issuing bank) is the financial institution that provides the customer with a credit card. Essentially, the issuing bank extends a revolving loan to each cardholder. The acquiring bank (or acquirer) facilitates credit card processing services for the merchant.
Merchant services provider
A merchant services provider is a payment processing company that oversees payment transactions. The merchant services provider also ensures that merchants receive their net proceeds.
Some merchant service providers assign each business a separate account. Other providers pay each merchant’s net proceeds from one combined account.
Merchant account
The merchant services provider’s merchant account serves as the temporary repository for credit card transaction proceeds. The net funds are transferred to the merchant’s business bank account.
Best Payment Processors for Small Businesses
Now that you know what to look for in a payment processing system, let’s explore some of the top options that small business owners should consider. Each offers a different approach to pricing, features, and flexibility—so you can find the right fit based on your goals and growth stage.
1. Payment Depot
Payment Depot now uses an interchange-plus pricing model, giving small businesses greater transparency into the true cost of credit card transactions. Great for various types of businesses, Payment Depot provides cost-effective rates on top of wholesale interchange fees.
- Interchange-plus pricing for cost transparency
- Access to virtual terminals, POS hardware, and eCommerce integrations
- Ideal for businesses processing moderate to high sales volumes
Great for: Small businesses that want clear, predictable payment processing fees.
2. Stax Pay
Stax is a payment processor that offers subscription based pricing, making it a smart option for small businesses that process a high volume of transactions. It combines transparent pricing with access to analytics and invoicing tools.
- Flat monthly fee + direct-cost interchange fees + a small cents per transaction
- In-person, online, and mobile payment solutions
- Integrated tools for invoicing, inventory, and analytics
- Scalable for both brick-and-mortar and eCommerce businesses
Great for: Small businesses ready to scale and seeking a unified platform for managing payments directly.
3. CardX by Stax
CardX offers a unique way for businesses to offset credit card processing fees by passing them on to customers—while staying compliant with state and card network rules.
- 0%* processing costs on credit card transactions (*Where eligible, the credit card discount rate is offset by the surcharge)
- Fully compliant surcharging solution
- Turnkey implementation for in-store and online payments
- Transparent pricing and detailed fee breakdowns
Great for: Businesses looking to reduce overhead without increasing prices on debit or cash-paying customers.
Choosing the Best Payment Processor
The right payment processing system does more than handle transactions—it powers your customer experience, supports your growth, and keeps your cash flow running smoothly. Whether you’re just starting out or scaling fast, take time to compare your options and prioritize what matters most to your business. From fees and features to support and security, the right fit will help you accept payments with confidence—online, in-store, and everywhere in between.
