Payment Processing
Definition
The end-to-end handling of electronic payment transactions from initiation through authorisation, clearing, and settlement. Payment processing involves multiple parties — merchants, payment gateways, acquiring banks, card networks, issuing banks, and payment processors — coordinating in real time to validate, authorise, and settle funds. The payment processing industry generates significant technology and customer relationship intangible assets, with value driven by transaction volumes, reliability, speed, and regulatory compliance capabilities.
Complementary Terms
Concepts that frequently appear alongside Payment Processing in practice.
A technology service that authorises and processes electronic payment transactions between merchants and acquiring banks or payment processors. Payment gateways encrypt sensitive payment data, route transactions to the appropriate card networks, and return authorisation responses in real time.
A branch of artificial intelligence concerned with enabling computers to understand, interpret, and generate human language. NLP powers applications such as chatbots, sentiment analysis, document classification, and automated contract review.
An EU legislative framework (PSD2, Directive 2015/2366) governing payment services and payment service providers across the European Economic Area. PSD2 introduced requirements for strong customer authentication, mandated open access to payment account data for authorised third parties (enabling open banking), and created new categories of regulated payment institutions.
A financial institution licensed by card networks to issue payment cards (credit, debit, or prepaid) to consumers and businesses. The issuing bank extends credit or provides access to deposited funds, bears the cardholder's credit risk, and receives interchange fees on each transaction.
A financial institution licensed by card networks (Visa, Mastercard) to process payment card transactions on behalf of merchants, also known as a merchant acquirer. The acquiring bank maintains the merchant's account, underwrites the merchant's credit risk, settles funds from card transactions, and ensures compliance with card network rules and PCI DSS security standards.
The total fee charged to a merchant for processing a payment card transaction, expressed as a percentage of the transaction value plus a fixed per-transaction fee. The MDR comprises three components: the interchange fee (paid to the issuing bank), the card network assessment fee (paid to Visa/Mastercard), and the acquirer's markup.
A fee paid by the acquiring bank to the issuing bank each time a payment card transaction is processed, representing the largest component of the merchant discount rate. Interchange fees are set by card networks (Visa, Mastercard) and vary by card type, merchant category, transaction method (card-present vs card-not-present), and jurisdiction.
A regulatory authorisation granted to financial technology companies permitting them to offer specific financial services such as payments, lending, investment management, or insurance. Licencing requirements vary by jurisdiction and activity — in the UK, the FCA regulates fintech firms under frameworks including the Payment Services Regulations, the Electronic Money Regulations, and the FCA Regulatory Sandbox.
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