What Is Payment Processing?

The simplest way to describe payment processing is the act of getting money in or out of a business. This can happen in many ways, but there are two primary methods: cash and electronic. Cash transactions rely on the physical exchange of bills and coins, while electronic transactions use checks, credit cards, direct deposit, PayPal, ACH (Automated Clearing House), or other forms of money transfer that do not require the physical movement of funds.

Traditionally, payment processing was a difficult job because it involved the receiving and disbursing of large amounts of cash. Cash must be counted, transported, stored securely, insured, etc., so businesses needed employees to handle these tasks. Credit cards and checks made the job easier, but businesses still had to find a way to get cash deposited into their accounts (and out quickly to pay suppliers), and they needed employees for this, too.

Today's payment processing is much different. Cash is more easily handled with automated teller machines (ATMs) or by using a bookkeeper to deposit it at the bank. Petty cash is now handled with digital tools such as Square, and businesses looking for a quick way to transfer funds can use PayPal or Xoom.

Most companies that process their own payments no longer need someone dedicated full-time to handling physical money. The term payment processing now applies more generally to the electronic processing of credit and debit cards, checks, ACH payments, and other money transfers. Businesses will normally outsource this function to a payment processor because it involves complex federal regulations as well as specialized knowledge of the banking industry.

Quick Facts About Payment Processing

Financial institutions handle most payment processing in North America. The Federal Reserve, a quasi-governmental entity, regulates many of the rules these institutions must follow.

1. Payment processors charge fees for their services. The rates vary depending on the size and type of business, the method of payment processing used, and whether additional services such as check guarantees or research are required. In addition to a per-transaction fee, there may be a monthly or annual fee.

2. Payment processors often provide additional services such as inventory management, invoicing, and payroll services to businesses that lack the technological sophistication to handle these functions alone. It is also common for companies of all sizes to outsource their entire finance and accounting departments to third-party providers such as Intuit.

3. Payment processing is a competitive industry with several large players, including Elavon, First Data Corp., Heartland Payment Systems Inc., and TSYS. These companies have been consolidating in recent years along with the rest of the financial services industry. Smaller companies that process payments include Connexus, Merchant e-Solutions, Paysafe, and Spree Commerce.

4. The merchant account providers that process payments are themselves paid by the customers who use credit cards to buy products or services, so they have an incentive to keep transaction fees low. Companies like Visa and Mastercard publish interchange rates (the fees they charge to merchants) for all types of transactions. Generally, smaller merchants pay higher fees, while large retailers get lower rates.

5. Payment processing jobs are available with all of the companies that handle payments. They typically do not require a background in finance or accounting, but knowledge of how credit cards work is valuable because many payment processors specialize in one type of transaction. For example, some focus on e-commerce, while others handle telephone or mail order payments. If you want to become a merchant services account manager, it is a good idea to start out in a customer service role and learn the basics of payment processing.