Payment Processors

Last Updated: 2025-12-18

Status: Complete

Changes Log:

2025-12: Initial comprehensive notes with PayFac context and payment-critic review

Payment processors are the technical backbone of the card payment ecosystem. They provide the infrastructure that routes transactions between merchants, card networks, and banks. Understanding processors is essential for anyone building a PayFac platform.

Overview

A payment processor is a company that provides the technical infrastructure and services to move transaction data between merchants, card networks, and banks. Think of processors as the "plumbing" of the payment ecosystem.

Function	Description
Technical Infrastructure	Network connectivity, transaction routing, PCI-compliant data handling
Business Services	Underwriting, fraud detection, chargeback management, reporting
Financial Services	Settlement coordination, reserve management, currency conversion

Key Distinction: Most third-party processors are NOT banks and don't hold banking licenses to move money independently. They must partner with acquiring banks (sponsor banks for PayFacs) that hold regulatory licenses and settlement accounts. However, some major processors are bank-owned entities (Chase Paymentech, Elavon, Wells Fargo Merchant Services) with direct access to banking infrastructure.

What a Payment Processor Does

+-----------------------------------------------------------------------------+
|                     WHAT A PAYMENT PROCESSOR DOES                           |
+-----------------------------------------------------------------------------+
|                                                                             |
|  TECHNICAL INFRASTRUCTURE:                                                  |
|  * Connects merchants to card networks (Visa, Mastercard, etc.)             |
|  * Routes authorization requests in milliseconds                            |
|  * Batches and submits transactions for settlement                          |
|  * Maintains PCI-compliant data security                                    |
|  * Provides APIs, SDKs, and terminals                                       |
|                                                                             |
|  BUSINESS SERVICES:                                                         |
|  * Merchant underwriting and onboarding                                     |
|  * Fraud detection and prevention                                           |
|  * Chargeback management                                                    |
|  * Reporting and reconciliation                                             |
|  * Customer support                                                         |
|                                                                             |
|  FINANCIAL SERVICES:                                                        |
|  * Settlement and funding coordination                                      |
|  * Reserve management                                                       |
|  * Currency conversion (for multi-currency)                                 |
|                                                                             |
+-----------------------------------------------------------------------------+

Historical Evolution

The payment processing industry has evolved through distinct eras:

1950s-1970s: Manual Processing

Merchants used manual imprinters ("knuckle busters")
Made carbon copies of embossed cards
Called issuers for voice authorization
Mailed paper receipts to acquiring banks
Settlement took weeks
High error rates and fraud

1970s-1990s: Electronic Authorization Era

Key innovations:

1973: Visa develops VisaNet - first electronic authorization network
1975: Magnetic stripe cards standardized (ISO 7813)
1979: Electronic terminals replace manual imprinters
1980s: Point-of-sale (POS) networks proliferate
1987: ISO 8583 standard for transaction messages

Impact:

Authorization: Weeks -> Seconds
Settlement: Weeks -> Days (T+1 to T+3, modern processors offer T+0 or T+1 standard)
Major players emerge: National Data Corporation (NDC), First Data Corporation (1971)

1990s-2000s: Internet Era & Consolidation

E-commerce revolution:

1994: First secure online transaction (Cybersource)
1998: PayPal founded (payment aggregator model)
Late 1990s: Payment gateways emerge (Authorize.Net, CyberSource)
Card-not-present (CNP) processing becomes significant

Industry consolidation:

Banks acquire processors for "end-to-end" control
Processors acquire competitors for scale
2002: Chase acquires Paymentech
2008: Worldpay spun out from RBS

2010s-Present: Fintech Disruption

New players emerge:

2006: Adyen founded - unified commerce
2009: Square founded - mobile payments for SMBs
2010: Stripe founded - developer-first payments

Mega-mergers (2019):

Fiserv acquires First Data for $22B
FIS acquires Worldpay for $43B
Global Payments acquires TSYS for $21.5B

2024-2025 reshuffling:

2024: FIS sells 55% Worldpay stake to GTCR for $18.5B (implying ~$34B total valuation, down from $43B paid in 2019)
April 2025 (announced, expected close Q4 2025/Q1 2026): Global Payments acquiring Worldpay for $22.7B
April 2025 (announced, expected close 2025-2026): Global Payments selling TSYS/Issuer Solutions to FIS for $13.5B

Front-End vs Back-End Processing

Payment processing involves two distinct functions, often performed by different companies:

Front-End Processing (Authorization)

+-----------------------------------------------------------------------------+
|                      FRONT-END PROCESSING                                   |
+-----------------------------------------------------------------------------+
|                                                                             |
|  FUNCTION: Real-time authorization routing and response                     |
|                                                                             |
|  RESPONSIBILITIES:                                                          |
|  1. Transaction Acceptance                                                  |
|     - POS terminals, payment gateways, APIs                                 |
|     - Accept card swipe/dip/tap/keyed data                                  |
|     - Validate data format                                                  |
|                                                                             |
|  2. Routing to Card Networks                                                |
|     - Identify card type from BIN                                           |
|     - Route to appropriate network (Visa/MC/Amex/Discover)                  |
|     - Format message in ISO 8583 standard                                   |
|                                                                             |
|  3. Fraud Screening                                                         |
|     - Real-time fraud checks (velocity, geolocation, BIN)                   |
|     - AVS/CVV verification                                                  |
|     - Machine learning models for risk scoring                              |
|                                                                             |
|  4. Response Handling                                                       |
|     - Receive approve/decline from issuer                                   |
|     - Return response to merchant                                           |
|     - Store authorization data for later settlement                         |
|                                                                             |
|  TIMING: Milliseconds to seconds                                            |
|                                                                             |
+-----------------------------------------------------------------------------+

Examples of Front-End Processors: Stripe, Adyen, Authorize.Net, Braintree

Back-End Processing (Settlement & Clearing)

+-----------------------------------------------------------------------------+
|                      BACK-END PROCESSING                                    |
+-----------------------------------------------------------------------------+
|                                                                             |
|  FUNCTION: Batch settlement, clearing, and funding                          |
|                                                                             |
|  RESPONSIBILITIES:                                                          |
|  1. Batch Processing                                                        |
|     - Collect day's authorized/captured transactions                        |
|     - Sort by card network                                                  |
|     - Create settlement files                                               |
|                                                                             |
|  2. Interchange Calculation                                                 |
|     - Determine exact interchange rate for each transaction                 |
|     - Based on: card type, MCC, entry mode, data quality                    |
|     - Calculate network assessment fees                                     |
|                                                                             |
|  3. Clearing Submission                                                     |
|     - Submit files to Visa, Mastercard, etc.                                |
|     - Receive clearing responses                                            |
|     - Match settled transactions to authorizations                          |
|                                                                             |
|  4. Settlement & Funding                                                    |
|     - Calculate net positions                                               |
|     - Coordinate with acquiring bank                                        |
|     - Fund merchants (T+1 to T+3)                                           |
|                                                                             |
|  TIMING: Daily batch cycles, overnight processing                           |
|                                                                             |
+-----------------------------------------------------------------------------+

Examples of Back-End Processors: First Data (Fiserv), TSYS (now part of Global Payments)

Full-Stack vs Specialized Processors

Type	Description	Examples
Full-Stack	Handle both front-end AND back-end	First Data (Fiserv), Worldpay, Global Payments, Chase Paymentech, Adyen
Front-End Only	Focus on merchant experience, outsource settlement	Authorize.Net, Many ISOs
Back-End Only	Infrastructure for front-end processors	Rare in modern market; FIS focusing here

Technical Flow: Front-End to Back-End

+------------------------------------------------------------------------------+
|            TECHNICAL FLOW: FRONT-END -> BACK-END PROCESSING                  |
+------------------------------------------------------------------------------+

PHASE 1: AUTHORIZATION (Front-End Processor)
============================================

   Terminal/API          Front-End            Card               Issuer
                        Processor           Network
       |                    |                   |                   |
       |  POST /charge      |                   |                   |
       |------------------>|                   |                   |
       |                    | 1. Validate       |                   |
       |                    | 2. Tokenize       |                   |
       |                    | 3. Fraud check    |                   |
       |                    |                   |                   |
       |                    | ISO 8583 message  |                   |
       |                    |------------------>|------------------>|
       |                    |                   |                   |
       |                    |<------------------|<------------------|
       |<-------------------|   APPROVED        |                   |
       |  {auth_code: 1234} |                   |                   |
       |                    |                   |                   |
       |                    | Store auth data   |                   |
       |                    | in database for   |                   |
       |                    | later settlement  |                   |
       |                    |                   |                   |

PHASE 2: CAPTURE & SETTLEMENT (Hand-off to Back-End)
====================================================

 Front-End              Back-End             Card             Acquiring
 Processor             Processor            Network             Bank
     |                     |                   |                  |
     | End of day batch    |                   |                  |
     | (all captured txns) |                   |                  |
     |------------------->|                   |                  |
     |                     |                   |                  |
     |                     | 1. Calculate      |                  |
     |                     |    interchange    |                  |
     |                     | 2. Format         |                  |
     |                     |    settlement     |                  |
     |                     |    files          |                  |
     |                     |                   |                  |
     |                     | Submit to network |                  |
     |                     |------------------>|                  |
     |                     |                   |                  |
     |                     |                   | Clearing process |
     |                     |                   |                  |
     |                     | Funding           |                  |
     |                     | instructions      |                  |
     |                     |<------------------|                  |
     |                     |                   |                  |
     |                     | Request funds     |                  |
     |                     | from bank         |                  |
     |                     |---------------------------------------->|
     |                     |                   |                  |
     |<--------------------| Settlement report |                  |
     |  (for merchant)     |                   |                  |
     |                     |                   |                  |

How Processors Connect to Card Networks

Processors must be certified by card networks to route transactions. This is a multi-year, multi-million dollar process.

Direct Network Connections (Tier 1)

What it means:

Processor has direct connection to Visa, Mastercard networks
They are a "member" or "principal member" of the network
Can submit both authorization and settlement messages

Requirements:

Network Certification
- Pass extensive technical testing
- Prove system reliability (99.9%+ uptime)
- Demonstrate PCI DSS Level 1 compliance
- Timeline: 12-24 months
Financial Requirements
- Sponsor bank relationship (if not a bank itself)
- Reserves/collateral (millions of dollars)
- Financial audit requirements
Ongoing Compliance
- Annual recertification
- Security audits (quarterly)
- Network rule updates (continuous)

Who has direct connections: First Data (Fiserv), Worldpay, Global Payments/TSYS, Chase Paymentech, Elavon, Adyen, Stripe

Gateway Connections (Tier 2/3)

What it means:

Processor routes through ANOTHER processor's network connection
They are a "gateway" or "third-party processor"
Don't directly touch card networks

   Merchant
      |
      v
+------------------+
|  Payment Gateway |  <-- Encrypts data
+------------------+
      |
      v
+------------------+
| Payment Processor|  <-- Routes to issuer
+------------------+
      |
      v
+------------------+
|   Issuing Bank   |  <-- Approves/declines
+------------------+

Trade-offs:

Advantages	Disadvantages
Lower infrastructure cost	Higher per-transaction fees
Faster time-to-market	Extra latency (additional hop)
No certification burden	Dependent on upstream processor
Focus on merchant UX	Limited control over routing

Network-Specific Requirements

Network	Key Protocol	Certification	Special Programs
Visa	VisaNet, ISO 8583 variant	Visa Global Acquirer Processing	Visa Token Service (VTS), Visa Direct
Mastercard	Banknet, ISO 8583 variant	Mastercard TPP or Member	MDES (tokenization), Mastercard Send
American Express	Proprietary (moving to ISO 8583)	OptBlue or Direct	Higher MDR (2.5-3.5%), three-party model
Discover	ISO 8583	Discover Network Alliance	Discover Global Network partnerships

Major Payment Processors (2025 Landscape)

Fiserv / First Data

History:

1971: First Data Corporation founded
1980s-2000s: Aggressive acquisition strategy, becomes #1 processor
2007: Taken private by KKR for $29B
2015: IPO, returns to public markets
2019: Fiserv acquires First Data for $22B

Market Position (2025):

Largest processor by transaction volume (45% of US card transactions)
Processes 6,000+ transactions per second
Serves 6 million+ merchant locations

Key Products:

Product	Description
Clover	POS system for SMBs, competes with Square
Carat	Omnichannel commerce platform for enterprise
North	Traditional enterprise acquiring
Star Network	4th largest US debit network

PayFac Relevance: Many PayFacs use Fiserv/First Data. Offers PayFac-in-a-Box solutions and sponsor bank introductions.

Global Payments / Worldpay (Post-2025 Deal)

Corporate History:

Global Payments: Spun out from National Data Corp (2001), acquired TSYS (2019) for $21.5B
TSYS: Founded 1959, leader in issuer processing, 40% of US card issuing market
Worldpay: Founded 1989, spun out from RBS (2010), acquired by FIS (2019) for $43B

2025 Mega-Deal:

Global Payments acquiring Worldpay from GTCR for $22.7B
Global Payments selling TSYS/Issuer Solutions to FIS for $13.5B
Becoming pure-play merchant acquirer with global scale

Market Position (Post-2025):

2nd largest merchant acquirer globally
Processes $4 trillion+ annually
Strong in: Integrated software, vertical SaaS, e-commerce

PayFac Relevance: Major provider for PayFac platforms. Worldpay has strong PayFac-as-a-Service offering.

FIS (Post-Worldpay Exit)

History:

1968: Founded as Systematics
2019: Acquires Worldpay for $43B - THE BIG BET
2024: Sells 55% Worldpay stake to GTCR for $18.5B (implies ~$34B total valuation) - ADMITTED FAILURE
2025: Announced acquisition of TSYS/Issuer Solutions from GPN for $13.5B (pending close)

The Worldpay Failure - What Happened:

Cultural clash between FIS (bank software) and Worldpay (payments)
Worldpay lost market share to Stripe, Adyen, Shopify
Technology modernization stalled
FIS paid $43B in 2019, sold 55% stake at implied ~~$34B total valuation in 2024 (~~$9B+ loss)

Post-2025 Strategy: Refocusing on core strength: ISSUER PROCESSING

#1 in issuer processing (manages 3 billion+ cards)
#1 in bank core systems (7,000+ bank clients)
Exiting merchant acquiring

Key Lesson: Just because you're big doesn't mean you can succeed in every payments vertical. Merchant acquiring requires different DNA than issuer processing.

Bank-Owned Processors

Chase Paymentech (JPMorgan Chase)

Position: 4th largest US processor
Strength: Vertical integration (bank + processor + treasury services)
Focus: Enterprise merchants, Chase banking clients
PayFac Use: Can act as sponsor bank + processor (one-stop shop)

Elavon (US Bank subsidiary)

Position: 5th largest US processor
Strength: International reach (strong in Europe, Canada)
Focus: Mid-market merchants
PayFac Use: Offers PayFac solutions via US Bank sponsorship

Why Banks Own Processors:

Advantages	Challenges
Vertical integration (deposits + acquiring)	Bank compliance culture slows innovation
No sponsor bank fees	Risk-averse (won't serve high-risk)
Regulatory licenses in place	Often lag in technology

Fintech Processors: Adyen & Stripe

Adyen

Founded: 2006 in Amsterdam

Unique Model:

Built full-stack from scratch (no legacy systems)
Single platform for all channels (online, in-store, mobile)
Direct network certifications (250+ payment methods)
Own payment terminals (hardware + software)

Market Position:

Processes EUR 500B+ annually
Enterprise focus (Uber, Spotify, Microsoft, eBay)

Strengths:

True omnichannel (one platform, all channels)
Transparent pricing (interchange++)
High authorization rates (smart routing)
Modern tech stack (built for cloud)

PayFac Relevance: Offers "Platforms" solution for PayFac model. Used by Uber, Shopify, DoorDash.

Stripe

Founded: 2010 by Collison brothers

Unique Model:

Developer-first approach (7 lines of code to accept payments)
PayFac model from day 1 (instant merchant onboarding)
Initially used third-party processors, now direct connections
Expanded to full financial services (Treasury, Issuing)

Market Position:

Processes $1 trillion+ annually
Millions of businesses (long tail + enterprise)
Dominant in tech/SaaS/startups

Strengths:

Easiest integration (best developer experience)
Instant onboarding (Express, Connect for platforms)
Global reach (46+ countries)
Continuous innovation

PayFac Relevance: Stripe Connect is the PayFac platform leader. Powers thousands of SaaS platforms.

Why Adyen & Stripe Are Winning

Factor	Legacy Processors	Fintech Processors
Technology	Legacy mainframes	Modern cloud platforms
Developer Experience	Complex integrations	Easy APIs
Pricing	Hidden fees	Transparent pricing
Innovation Speed	Multi-year cycles	Quarterly releases
Global Coverage	Fragmented regional	Single platform for all markets
Mindset	Bank/ISO legacy thinking	Merchant-first

Payment Gateway vs Payment Processor

This is a common point of confusion:

Payment Gateway

Definition: Technology platform that accepts, encrypts, and routes payment information. Modern gateways provide merchant-facing APIs, tokenization, fraud screening, and can route to multiple processors.

Function:

Collects and encrypts customer payment data
Customer-facing interface (APIs, hosted checkout)
Acts as a bridge between parties
Modern capabilities: Tokenization/vaulting, fraud screening, routing logic, retry logic, multi-processor orchestration

Examples: Authorize.Net, Braintree, NMI, Spreedly (orchestration), Primer.io

Payment Processor

Definition: Company that facilitates electronic transactions by processing and authorizing payments.

Function:

Moves money between banks
Verifies transactions
Operates on the back end
Ensures compliance with industry standards

Examples: First Data (Fiserv), Worldpay, Global Payments

Key Differences

Aspect	Payment Gateway	Payment Processor
Primary Role	Collects and encrypts data	Moves money, authorizes transactions
Position	Customer-facing	Back-end operations
Security Function	Encrypts sensitive data	Verifies compliance
Services	Secure data transmission	Fraud detection, chargeback management
Typical Fees	Monthly fee	Transaction fees

How They Work Together

Customer enters card info
         |
         v
+------------------+
|  Payment Gateway |  <-- Encrypts data
+------------------+
         |
         v
+------------------+
| Payment Processor|  <-- Routes to issuer
+------------------+
         |
         v
+------------------+
|   Issuing Bank   |  <-- Approves/declines
+------------------+

Do You Need Both? For most businesses, yes. Many modern providers (Stripe, Square, PayPal) bundle both services into one.

Processor Selection Criteria

1. Pricing & Economics

Pricing Models:

Model	Description	Best For
Interchange-Plus	IC + Network Fees + Processor Markup (e.g., IC + $0.20 + 0.25%)	Mid-large merchants, PayFacs
Flat-Rate	Single rate (e.g., 2.9% + $0.30)	Startups, low volume, simplicity
Tiered	Qualified/Mid-qualified/Non-qualified buckets	AVOID - predatory pricing

Key Questions:

What are per-transaction fees?
Monthly/annual platform fees?
Chargeback fees?
Reserve requirements?
Volume discounts at what thresholds?

2. Integration Capabilities

Technical Requirements:

REST API quality (documentation, SDKs, support)
Webhook reliability (idempotency, retry logic)
Tokenization/vault options
PCI scope reduction tools:
- Hosted fields / iframes
- Point-to-point encryption (P2PE) for card-present
- Network tokenization (VTS, MDES)
- Link-based checkout (redirect flows)
Mobile SDKs (iOS, Android)
Testing/sandbox environments

PayFac-Specific Needs:

Sub-merchant onboarding APIs
Split payment/marketplace functionality
Automated underwriting hooks
Payout scheduling flexibility

3. Settlement Timing

Factor	Consideration
Standard funding	T+1 vs T+2 vs T+3
Next-day funding	Available? What fee?
Instant payouts	Available? What fee?
Reserve release	When are reserves released?

Why it matters: Cash flow for sub-merchants affects churn.

4. Geographic Coverage

Domestic-only vs international
Which countries/currencies supported
Local acquiring vs cross-border
Multi-currency settlement options

5. Risk Appetite & Merchant Categories

Processors vary widely in risk tolerance:

Type	Merchant Categories	Chargeback Tolerance
Conservative (Banks)	Low-risk only	<0.5%
Moderate (First Data, Global Payments)	Most standard MCCs	~1%
Aggressive (High-risk specialists)	CBD, adult, crypto	2%+

Critical: Match processor's risk appetite to your target merchants.

6. Support & Partnership

Account manager quality
Technical support responsiveness
Underwriting team accessibility
Compliance/legal support
Roadmap alignment

PayFac Implications

How PayFacs Work with Processors

   Sub-Merchant --> PayFac Platform --> Processor --> Card Networks
                         |                    |
                         |                    |
                         v                    v
                   Master Merchant       Sponsor Bank
                      Account

PayFac Handles:

Sub-merchant onboarding
KYC/KYB verification
Underwriting decisions
Platform features
Payout scheduling
First-line support
Fraud monitoring

Processor Handles:

Network connectivity
Authorization routing
Settlement/clearing
Interchange calculation
Chargeback lifecycle
PCI infrastructure

Aspect	Sponsor Bank	Processor
Who	Licensed bank (Chase, Wells Fargo)	Technology company (Stripe, First Data)
Role	Master merchant account, regulatory licenses	Technology infrastructure
Fees	Platform fee ($50K-$250K+/year) + basis points	Interchange-plus pricing + platform fees
What they provide	Licenses, regulatory oversight, reserves	APIs, routing, settlement, reporting

Bundled vs Separate:

Bundled: Chase Paymentech (processor + bank in one) - simpler but locked in
Separate: Stripe (processor) + Wells Fargo (sponsor) - flexible but two relationships

Why Processor Choice Matters for PayFacs

You can't easily switch - Integration takes months; this is a 5-10 year decision
Processor limits = your limits - Geographic reach, MCCs, funding speed all constrained
Processor economics = your economics - Small fee changes = big margin impact
Uptime is your reputation - If processor goes down, YOU look bad
Compliance risk is shared - If they lose certification, your platform shuts down

Processing Agreement Key Terms

Pay attention to:

Pricing & fee escalation provisions
Reserve requirements and release terms
Termination clauses (notice period, early termination fees)
Data portability (can you export your data?)
SLAs with financial penalties
Liability caps
Volume commitments and minimums

Red Flags:

"Qualified/Non-qualified" tiered pricing
Auto-renewal without opt-out window
Processor can terminate without cause on 30 days notice
Huge early termination fees
No data portability

Processor Economics & Revenue Models

Understanding how processors make money helps you negotiate better and understand their incentives.

Primary Revenue: Processing Margins

Interchange-Plus Model (Most Common for PayFacs):

Processor charges: Interchange + Network Fees + Markup
Example: $100 transaction
  - Interchange: $1.80 (goes to issuer)
  - Network fees: $0.15 (goes to Visa/MC)
  - Processor markup: $0.30 (processor keeps)
  - Merchant pays: $2.25 total

Blended/Flat-Rate Model (Stripe, Square):

Processor charges fixed % (e.g., 2.9% + $0.30)
Processor keeps difference between their rate and actual costs
Higher margin for processor, simpler for merchant

Secondary Revenue Streams

Revenue Stream	Description	Typical Amount
Monthly fees	Platform, gateway, PCI compliance	$10-$100/month
Chargeback fees	Per-chargeback handling fee	$15-$25 per dispute
International fees	Currency conversion markup	1-3% above mid-market
Premium features	Instant payouts, advanced fraud tools	0.5-1.5% per payout
Hardware revenue	Terminals, card readers	$50-$500 per device

Volume Economics

Processors have high fixed costs (infrastructure, compliance) and low marginal costs:

Break-even: Typically $5-10B annual processing volume
Profitable scale: $50B+ annually
This is why consolidation happens - scale is survival

Authorization Rate Optimization

Why This Matters: Authorization rate directly impacts revenue. A 2-5% difference in approval rates can mean millions in additional or lost revenue.

Industry Benchmarks

Transaction Type	Average Auth Rate	Top Performers
Card-present (CP)	95-98%	98%+
Card-not-present (CNP)	80-85%	87-90%+
Recurring/subscription	85-90%	92%+

What Drives Higher Auth Rates

Direct network connections - Fewer hops = faster authorization
Smart retry logic - Automatic retry with different parameters
Network tokenization - Visa/MC tokens update automatically
3DS optimization - Reduce friction while maintaining compliance
Account Updater - Automatically update expired cards
Machine learning - Predict and avoid soft declines

Revenue Impact Example

PayFac processes $1B annually
Auth rate: 85% vs 90% = 5% difference
5% of $1B = $50M in additional approved volume
At 2.5% take rate = $1.25M additional revenue

Key Point: Authorization rate should be a key processor selection criterion for PayFacs.

Market Landscape Summary (2025)

Processor	Market Position	Strength	PayFac Offering
Fiserv/First Data	#1 (45% US)	Scale, full-stack	PayFac-in-a-Box
Global Payments/Worldpay	#2 globally	International, vertical SaaS	PayFac-as-a-Service
FIS	#1 issuer processing	Bank software	Exiting merchant acquiring
Chase Paymentech	#4 US	Bank integration	Bundled processor + sponsor
Elavon	#5 US	International	PayFac via US Bank
Adyen	Enterprise leader	True omnichannel	Platforms solution
Stripe	Developer leader	APIs, instant onboarding	Stripe Connect

Self-Assessment Questions & Answers

Question 9: A merchant says they use "Stripe for payments." What roles is Stripe actually playing?

Answer:

Stripe is playing multiple roles simultaneously:

Payment Gateway - Provides APIs and hosted checkout to collect card data
Payment Processor - Routes authorization requests to card networks
Payment Facilitator (PayFac) - Acts as master merchant, onboards sub-merchants instantly
Acquirer-lite - Works with sponsor banks but handles acquirer-like functions

Key Point: Modern fintechs like Stripe have vertically integrated the payment stack. The merchant says "Stripe" but they're actually using:

Stripe's APIs (gateway function)
Stripe's direct network connections (processor function)
Stripe's master merchant account (PayFac function)
Stripe's sponsor bank relationships (acquiring function)

This is why Stripe can onboard merchants instantly - they ARE the PayFac, not just a processor.

Question 12: What is the key difference between a payment gateway and a payment processor?

Answer:

Aspect	Payment Gateway	Payment Processor
Primary Function	Securely collects and transmits payment data	Routes transactions and moves money between banks
Position in Flow	Customer-facing, front-end	Back-end, between gateway and card networks
What It Does	Encrypts card data, sends to processor	Authorizes transactions, handles settlement
Security Role	Protects data in transit	Ensures compliance, fraud detection
Examples	Authorize.Net, Braintree (standalone)	First Data (Fiserv), TSYS, Worldpay

Analogy:

Gateway = The secure mailroom that receives and packages letters
Processor = The postal system that actually delivers the letters

Modern Reality: Many providers (Stripe, Adyen, Square) bundle both into one service, which is why the distinction can be confusing. But understanding the difference helps when architecting payment systems or negotiating contracts.

Key Takeaways

Processors are the plumbing - They're the technical infrastructure connecting merchants to card networks
Front-end != Back-end - Authorization routing is different from settlement/clearing
Direct network connections are expensive - Certification costs millions and takes years
The industry is consolidating - 2019-2025 saw massive M&A reshaping the landscape
Fintechs are disrupting - Stripe and Adyen built modern platforms and are eating market share
For PayFacs, processor choice is critical - You're locked in for years; their capabilities become yours
Gateway != Processor - Gateways collect data; processors route transactions and move money
Sponsor bank != Processor - Banks provide licenses and accounts; processors provide technology
The FIS/Worldpay failure teaches - Not all payments businesses are the same; $43B can disappear
Read the fine print - Processing agreements have gotchas in termination, reserves, and SLAs

References

Network Requirements

Visa Core Rules - Official Visa rulebook
Mastercard Rules - Mastercard standards

Topic	Description
The Four-Party Model	Interchange economics and fee structures
Card Network Role	BIN routing and network certifications
Transaction Lifecycle	Authorization, settlement, and chargebacks
Debit Networks & Routing	Processor-owned networks (STAR, NYCE)
Payment Gateways	Gateway vs processor distinction
Acquiring Banks	Sponsor banks and processor relationships
ISOs	ISO/processor distribution model
ISVs	PayFac model and embedded payments

Overview​

What a Payment Processor Does​

Historical Evolution​

1950s-1970s: Manual Processing​

1970s-1990s: Electronic Authorization Era​

1990s-2000s: Internet Era & Consolidation​

2010s-Present: Fintech Disruption​

Front-End vs Back-End Processing​

Front-End Processing (Authorization)​

Back-End Processing (Settlement & Clearing)​

Full-Stack vs Specialized Processors​

Technical Flow: Front-End to Back-End​

How Processors Connect to Card Networks​

Direct Network Connections (Tier 1)​

Gateway Connections (Tier 2/3)​

Network-Specific Requirements​

Major Payment Processors (2025 Landscape)​

Fiserv / First Data​

Global Payments / Worldpay (Post-2025 Deal)​

FIS (Post-Worldpay Exit)​

Bank-Owned Processors​

Chase Paymentech (JPMorgan Chase)​

Elavon (US Bank subsidiary)​

Fintech Processors: Adyen & Stripe​

Adyen​

Stripe​

Why Adyen & Stripe Are Winning​

Payment Gateway vs Payment Processor​

Payment Gateway​

Payment Processor​

Key Differences​

How They Work Together​

Processor Selection Criteria​

1. Pricing & Economics​

2. Integration Capabilities​

3. Settlement Timing​

4. Geographic Coverage​

5. Risk Appetite & Merchant Categories​

6. Support & Partnership​

PayFac Implications​

How PayFacs Work with Processors​

Processor vs Sponsor Bank​

Why Processor Choice Matters for PayFacs​

Processing Agreement Key Terms​

Processor Economics & Revenue Models​

Primary Revenue: Processing Margins​

Secondary Revenue Streams​

Volume Economics​

Authorization Rate Optimization​

Industry Benchmarks​

What Drives Higher Auth Rates​

Revenue Impact Example​

Market Landscape Summary (2025)​

Self-Assessment Questions & Answers​

Question 9: A merchant says they use "Stripe for payments." What roles is Stripe actually playing?​

Question 12: What is the key difference between a payment gateway and a payment processor?​

Key Takeaways​

References​

Market Research & Industry Analysis​

Recent M&A Activity​

Gateway vs Processor Education​

Processor Technical Information​

Network Requirements​

Related Topics​