Payment Processing Explained: Who’s Behind Every Transaction in 2025

Did you know that every time a customer swipes their card, there are up to six different players working behind the scenes to ensure the payment goes through? In this episode, join Frank as he unpacks the complex world of payment processing by shedding light on who’s really behind your payments. You’ll learn about the various players involved in a transaction, what they do, and how you can leverage this knowledge to your advantage. By the end of this episode, you should have a clear understanding of the key players involved in processing payments, including acquiring banks, payment processors, ISOs, and more.

In this episode these questions and topics will be covered:
• 1:54 - Who are the 8 key players in payment processing?  
• 7:51 - Benefits of working with Retail ISOs: a wide network of payment solutions, negotiating better rates, streamlining the underwriting process, and providing ongoing merchant support.  
• 12:12 - The transaction flow explained in six steps: from cardholder initiation to merchant receipt of funds.  
• 13:41 - Fees breakdown: who takes a cut during the process and when these fees are deducted.  
• 15:00 - Episode in review: key players in every transaction and their responsibilities.

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Have a question about something in the episode? Send your questions to Info@PayDiverse.com and check out our FAQ page https://paydiverse.com/faq

Connect with PayDiverse:
Instagram: https://www.instagram.com/paydiverse
Website: http://www.paydiverse.com
LinkedIn: https://www.linkedin.com/in/franksena

Transcript

UNKNOWN: 0:00

Thank you.

SPEAKER_00: 0:05

Hey, welcome to The Payments Guy, your ultimate guide to demystifying the confusing world of merchant payments. I'm Frank Sena, your host, a merchant payment specialist with nearly a decade of experience. In each episode, we'll break down the toughest challenges in the payment space so you can be better informed when navigating payments for your own business. From minimizing the impact of chargebacks, avoiding funding issues, and ensuring you're never stuck without the ability to process payments, we'll help you make smarter decisions and grow your business. Let's get started. Did you know that every time a customer swipes their card, there are up to six different players working behind the scenes to make sure that that payment goes through? For most merchants, it's a mystery who these players are and what they actually do. But that's what we're breaking down today. Understanding the flow of payments and the role each player plays can help you avoid surprises, negotiate better terms, and make sure you're getting the most out of your payment setup. In today's episode, I'll show you exactly who's involved in a transaction, what they do, and most importantly, how you can use this knowledge to your advantage. By the end of this episode, you'll have a clear understanding of the key players involved in processing payments, like acquiring banks, payment processors, ISOs, and more. We'll also walk through a flow of a transaction, from when your customer clicks pay to when the funds land in your account. Having this knowledge will help you make smarter decisions for your business, whether it's avoiding hidden fees or choosing the right partners for your payment processing needs. Before we dive into the flow of a transaction, let's get clear on the key players involved and what they do. You've likely heard some of these terms thrown around, but here is a simple and clear breakdown for you. So first, we've got the cardholder. Pretty self-explanatory, right? This is the custom. the individual making a purchase using their credit or debit card. They're the cardholder. Next, we've got the merchant. The merchant is the business or the individual accepting the cardholder's payment for goods or services. Next is the payment processor. The payment processor handles the technical side of processing transactions. They move payment data between the cardholder, the merchant, the banks, and the card brand networks. Payment processors always charge a merchant discount rate or an MDR, which is just a percentage of the total transaction amount plus a per transaction fee for every payment processed. One thing to note is that the term processor is often misused. Sometimes merchants will refer to their acquiring bank or their ISO as their processor, but technically the payment processor is the company responsible for routing and securing the transaction data. They're not the bank. They are a totally separate entity. So the acquiring bank is the merchant's bank. It's the financial institution that provides the merchant with a merchant account. And remember a merchant account is what any merchant or seller needs to accept credit card payments. The acquiring bank works with the processor to settle funds into the merchant's account after deducting their fees. The acquiring bank also plays a role in underwriting, which assesses the risk of working with the merchant. So when you apply for a merchant account, you're going through an underwriting process with the acquiring bank. And they're basically taking a look at all the details around your business and assessing the risk associated with going into business with you. So next we have the issuing bank. This is the cardholder's bank. If you think about it, they're issuing the credit card to the cardholder. So that's why they're called the issuing bank. They're the institution that issued the credit or the debit card. The issuing bank is responsible for approving or declining the transaction based on the cardholder's available funds or credit and security checks. They take their own cut but known as interchange fees for assuming the risk of the transaction. For merchants who pay for traffic to drive customers to their sites, transaction declines can be a huge issue. You may have heard about this if you work in the affiliate marketing space. Every time a transaction is declined, your cost per acquisition increases, meaning it takes more money to generate a successful sale. So declines aren't always because of insufficient funds. due to fraud prevention triggers and this can significantly impact a merchants bottom line because basically if a merchant is spending all of this money to drive traffic to their site and get someone to the point where they're ready to make a purchase and check out and then the transaction is declined it's very disappointing and it makes the cost of the transactions that actually do go through higher because you now have to advertise more and spend more on advertising in order to get those successful sales going through. So next we've got the card networks like Visa and MasterCard and they serve as the intermediaries between the issuing and the acquiring banks. So the card networks job is to root the transaction data securely between the issuing bank and the acquiring bank. They charge assessment fees for facilitating this process and maintaining their infrastructure. So as you can see all of these parties are each charging small fee for whatever service that they're providing within this whole transaction loop here. So next we've got the independent sales organization or the ISO. So an ISO works as an intermediary between merchants and acquiring banks helping merchants to find the best payment solutions. There are registered ISOs who underwrite and assume some risk for the merchant accounts and then they there are retail ISOs like my company, PayDiverse, that act as brokers to connect merchants with the registered ISOs and acquiring banks. The registered ISOs are registered with the acquiring banks, and basically you can think about it like the ISO is getting hired by the bank to handle the underwriting, to handle finding new merchants to bring in for using the acquiring bank's services. So that's what a registered ISO does. ISOs are sometimes incorrectly referred to as the merchant or the processor by sellers and merchants, but it's just a misnomer. The ISO's role is distinct. They facilitate the relationships and help negotiate better terms. Let's talk about the role of a retail ISO, also known as a merchant services broker. This is the role my company As a retail ISO, we act as a middleman between merchants and acquiring banks or processors, helping you find the best payment solutions for your business. But we do a lot more than help you find the solutions. Here's how we make a difference for our merchants. So first, yes, we help you find the best payment solutions. It can be really hard for merchants to know which banks that they should approach to work with and apply for a merchant. an account with. If you are not familiar with the high risk space, then you probably don't know which banks to go to. And that's where a retail ISO like myself can help come in and identify a submission strategy. We take a look at what your business is selling, details of the business, and then we can determine which banks will be the right fit and really understand your business's needs. So my company has a a huge network of relationships across every major merchant bank. So we can basically match you with a bank that understands your business and meets your needs. We can also help negotiate lower fees, faster funding, or anything else to kind of help you get going and that your business might need. So we use our relationships and our expertise to negotiate better rates and terms for you, often securing lower transaction fees, more flexible reserves, or enhanced support compared to what you'd get working directly with the bank. Navigating the underwriting process can be really complicated and time consuming, especially for people who aren't familiar with it. So what my company does is we anticipate what the merchant banks are going to ask for, and we get all that information from you right up front so that we can expedite getting you through the underwriting process. process. We also will move the process along quickly because we get this information directly from the bank. We pass it along right away. We're going to call you, we'll text you, message you, and we'll help you get the information that you need to get approved quickly. We can also manage multiple applications simultaneously so that we can help you get approvals faster and avoid the bottlenecks that can happen if you were dealing directly with one ISO and their inside sales team, which is often understaffed and under-resourced. So working with us ensures a much smoother experience and helps you get approvals a lot faster. I think something that offers huge value to our merchants though, is helping you with support after you've gotten that account approved. So if you're just working directly with the ISO, you're probably given a general generic customer service number that you can call, or sometimes they don't even give you a number. They just have an email address. and you have to kind of passively wait for someone to check your response. My job doesn't end once your account is approved. We continue to support you long after the approval, leveraging our connections and our relationship to quickly escalate and resolve any issues you might face, whether it's funding delays, chargeback issues, or account holds when the bank might hold your money because they saw some red flag or their system might to flag something that says, oh, let's hold on to this merchant's money until we get this resolved. So instead of having to rely on the generic support team of the ISO, you can count on us to get things handled quickly and going directly to the right people. We also have escalation points. So if you get stuck, if you have a problem, talk to me. We're going to get it resolved really quickly. Because we have really good relationships with the ISOs that we work with, We're almost like a client of theirs, right? We have like a portfolio of dozens of merchants with each of these banks. And so they need to kind of service us to keep us happy and keep us bringing more merchants to them. And to be honest, we only want to work with the ISOs who are going to be responsive and who are going to not try to screw over our merchants. So it's really beneficial to work with a retail ISO like my company because we can help get things resolved in a fast manner and using our relationships to help get that done. So now that we've defined the key players, let's walk through the flow of a transaction from start to finish. And I guarantee it's a lot more complicated than you thought it was. So the first thing is the cardholder initiates the payment. The cardholder or the customer enters their payment details either online or in the store or maybe over the phone to make a purchase. So now the payment process takes that data from the merchant and securely sends it to the card network for processing. So now the card network, and again, this is like Visa or MasterCard or Amex or Discover, the card network will route the transaction information from the processor to the issuing bank. And remember, the issuing bank is the cardholder's bank. They issued that credit card to the cardholder. So now the issuing bank has to verify that the cardholder's credit or available funds are there and they will approve the transaction or they will decline the transaction. If the transaction is approved, then that issuing bank sends the funds to the acquiring bank, which manages the merchant's account. So finally, the merchant receives the funds from the acquiring bank minus any applicable fees. So the merchant bank is going to collect the funds from the issuing bank, they hold on to whatever fees that they need to pay out, and then they deposit the remainder in the merchant's bank account. Now let's explain who's taking their cut during this process and when these fees are deducted. So we touched on this a little bit already, but the payment processor takes their cut when they process the transaction. They charge a merchant discount rate, or what you might see on your merchant statement is an MDR, merchant discount rate, which is a percentage of the transaction amount plus a per transaction fee. The card networks, again Visa or MasterCard, they take their cut which is known as an assessment fee for routing the transaction through their network. Then we've got the issuing bank. They need their piece of the pie too. This is the cardholder's bank, and they take their cut in the form of interchange fees, which you'll probably see on your merchant account statement as well. This is the fee that they collect for assuming the risk of approving a transaction. Okay, now the acquiring bank. This is the merchant's bank. They have the merchant account for the merchant. They collect all of these fees, including the processors fees, the card network fees, and the interchange fees when they settle a transaction. And they deduct these fees all at once from the transaction amount before depositing the remaining balance or the net amount into the merchant's bank account. So before we wrap up, let's quickly review the key players involved in every transaction and what they do. The acquiring bank is the merchant's bank, the one that provides your merchant account They handle the funds coming from your customers and assess the risk of working with you through the underwriting process. So now we've got the payment processor who is responsible for the technical side of the transaction, making sure payment data moves securely between all of the players, like the issuing bank and the card networks. Remember, this term is often misused, but the processor specifically handles the movement of the transaction data. So we've also got the issuer. Remember, the issuing bank is the cardholder's bank. They approve or decline transactions based on the available credit or funds, and they take their cut, called interchange fees, as compensation for taking on the risk. The card networks act as the middlemen, routing transactions between the issuing and the acquiring banks. They charge assessment fees for maintaining the infrastructure that makes these transactions possible. The key takeaway here is that having a clear understanding of all of the players involved in the transaction flow gives you the knowledge to be more savvy and confident when making decisions for your business. Knowing who does what each step of the payment process can help you optimize your payment setup and ultimately make smarter and more informed choices that benefit your business.