Short answer: Payment processing is the system that moves money from a customer’s card or bank account to your business bank account. When a customer pays, a payment gateway captures the details, a payment processor routes the transaction through the card network to the customer’s bank for approval, and the funds settle into your account within a few business days. Each party in that chain takes a fee.
This guide explains how payment processing works step by step, who the players are, what it costs and how a new LLC, including one owned by a non-US resident, gets approved for a merchant account.
Payment Processing at a Glance
| Question | Answer |
|---|---|
| What it does | Approves a card or bank payment and moves the money to your business account |
| Who is involved | Customer, card issuer, card network, payment gateway, payment processor, acquiring bank and your business |
| How long approval takes | A few seconds at checkout |
| When you receive the money | 1 to 3 business days after the sale for most accounts |
| What it costs | A percentage of each sale plus a fixed per-transaction fee, set by your pricing model |
| What you need to apply | A registered business, an EIN, a business bank account and a website or storefront with clear policies |
Who Is Involved in a Card Payment?
| Party | Role |
|---|---|
| Customer (cardholder) | Pays with a card, digital wallet or bank account |
| Issuing bank | The customer’s bank. It approves or declines the charge and bills the customer |
| Card network | Visa, Mastercard, American Express or Discover. It connects the banks and sets interchange rates |
| Payment gateway | The software that captures and encrypts card details at your checkout |
| Payment processor | Routes the transaction between your gateway, the card network and the banks |
| Acquiring bank | Your merchant bank. It holds your merchant account and deposits your sales |
| Merchant | Your business |
How Does Payment Processing Work? 5 Steps
Step 1: The Customer Pays
The customer enters card details online, taps a card or phone in person, or authorizes a bank payment. Your payment gateway encrypts the data and sends it to your processor.
Step 2: Authorization
The processor sends the request through the card network to the issuing bank. The issuer checks the available balance and fraud signals, then approves or declines. The answer comes back to your checkout in a few seconds.
Step 3: Authentication and Fraud Checks
Fraud tools compare the address, the security code and the customer’s behavior with known patterns. For higher-risk online payments, the issuer asks the customer to confirm the purchase through 3D Secure, such as a code sent to their phone.
Step 4: Clearing
At the end of the day, your approved transactions go out in a batch. The card network calculates what each bank owes and deducts interchange fees.
Step 5: Settlement and Funding
The issuing bank sends the funds through the network to your acquiring bank, which deposits them into your business bank account after subtracting processing fees. Most accounts receive funds 1 to 3 business days after the sale.
Payment Processor vs. Payment Gateway vs. Merchant Account
These three terms get mixed up, but each one does a different job.
- Payment gateway: the front end. It collects and encrypts card details on your website or terminal.
- Payment processor: the engine. It moves the transaction data between the gateway, the networks and the banks.
- Merchant account: the holding account at your acquiring bank where card sales land before they move to your business bank account.
Many providers bundle all three into one product. For a list of gateways that support several currencies, see payment gateways with multi-currency support.
PayFac vs. Dedicated Merchant Account
There are two ways to get a merchant account, and the difference decides how stable your account is.
| Payment facilitator (PayFac) | Dedicated merchant account | |
|---|---|---|
| How you join | Sign up online and start accepting payments the same day | Apply and go through underwriting before the account opens |
| Whose account | You share the PayFac’s master merchant account with thousands of other businesses | The account is issued in your business’s name |
| Underwriting | Light at signup, with reviews after money starts moving | Full review of your business model, volume and history upfront |
| Pricing | Flat rate on every transaction | Interchange-plus or a custom rate based on your volume |
| Main risk | Fund holds or account closure after a later review | Slower setup |
| Best for | New businesses with low, steady volume | Subscriptions, high-ticket sales, growing volume and industries PayFacs restrict |
A business that a processor closes for excessive chargebacks or fraud can end up on Mastercard’s MATCH list, which makes it hard to open a new account anywhere. Read more about MATCH list removal.
If your business has outgrown a PayFac or keeps getting flagged, BusinessAnywhere partners with Easy Pay Direct for payment processing with a dedicated merchant account that is underwritten before setup.
How Much Does Payment Processing Cost?
Every card sale carries three layers of fees:
- Interchange: paid to the customer’s issuing bank and set by the card network. It is the largest part of the cost and depends on the card type and how the card is used. Rewards cards and online payments cost more than debit cards swiped in person.
- Network assessment: a small fee the card network charges on each transaction.
- Processor markup: what your processor charges for its service.
Processors package those layers into one of three pricing models:
| Pricing model | How it works | Who it suits |
|---|---|---|
| Flat rate | One percentage plus a fixed fee for every transaction | New and low-volume businesses that want simple statements |
| Interchange-plus | The actual interchange cost plus a fixed markup you can see on the statement | Businesses with steady or high volume |
| Tiered | Transactions grouped into qualified, mid-qualified and non-qualified rates | Hard to compare, so check the full rate sheet before you sign |
Watch for other costs too: monthly account fees, chargeback fees, PCI compliance fees, early termination fees and currency conversion fees on international cards.
How a New LLC Gets Approved for Payment Processing
Processors approve businesses, not individuals. Before you apply, have these in place:
- A registered business. Form your LLC or corporation with the state. See our guide on how to start an LLC.
- An EIN. Processors use it to verify the business and to report your sales to the IRS on Form 1099-K. Read about Form 1099-K reporting rules for payment processors.
- A US business bank account in the LLC’s name for deposits.
- A business address that matches your state filing and bank records.
- A website or storefront with clear product descriptions, prices, a refund policy, terms of service and contact details.
- Owner identification. Processors verify every owner with 25% or more of the business.
Non-US residents can get US payment processing through a US LLC with an EIN and a US bank account. Some providers ask for extra documents from foreign owners. See how to set up a US Stripe account as a non-resident founder and how to accept online payments as a new LLC.
Payment Security and PCI Compliance
Any business that accepts cards must follow the Payment Card Industry Data Security Standard (PCI DSS). The simplest way to stay compliant is to use a hosted checkout or a gateway that tokenizes card data, so card numbers never touch your own servers. Your processor gives you a self-assessment questionnaire to complete each year.
To reduce chargebacks, use clear billing descriptors so customers recognize the charge, send receipts, answer refund requests quickly and keep records of delivery.
FAQs
What is payment processing?
Payment processing is the system that approves a customer’s card or bank payment and moves the money into a business’s bank account. It involves a payment gateway, a payment processor, the card network, the customer’s bank and the business’s acquiring bank.
How long does payment processing take?
Authorization takes a few seconds at checkout. Settlement into your business bank account takes 1 to 3 business days for most merchant accounts. New accounts and high-risk accounts can have longer payout schedules or a rolling reserve.
Is Zelle considered a payment processor?
No. Zelle is a bank-to-bank payment network that moves money between US bank accounts. It does not process card payments, and payments sent through Zelle cannot be disputed like card payments.
What is the difference between a payment processor and a payment gateway?
A payment gateway captures and encrypts card details at checkout. A payment processor routes that transaction between the card network and the banks. Many providers offer both in one product.
Why do payment processors freeze accounts?
Payment facilitators approve businesses quickly and review them later. A spike in volume, a high chargeback rate, a large single sale or an industry they consider high risk can trigger a fund hold or account closure.
Can a non-US resident get US payment processing?
Yes. Form a US LLC, get an EIN and open a US business bank account in the LLC’s name. Processors then underwrite the LLC like any other US business.
