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What is payment processor?

The single most important facility of an eStore is the payment processor, an eStore is not an eStore without one. When a visitor likes an item and decides to buy it, imagine his frustration when he finds out that he has to send you a check or money order. He may simply move to another site which sells the same item and enables him to pay online instantly. Fortunately now there are some free online payment processors as listed here, so you can send and received money online!

A payment processor is a company (often a third party) appointed by a merchant to handle credit card transactions for merchant banks. They are usually broken down into two types: front-end and back-end.
Front-end processors have connections to various card associations and supply authorization and settlement services to the merchant banks merchants. Back-end processors accept settlements from front-end processors and, via The Federal Reserve Bank, move the money from the issuing bank to the merchant bank.
In an operation that will usually take a few seconds, the payment processor will both check the details received by forwarding them to the respective cards bank issuing bank or card association for verification, and also carry out a series of anti-fraud measures against the transaction.
Additional parameters, including the cards country of issue and its previous payment history, are also used to gauge the probability of the transaction being approved.
Once the payment processor has received confirmation that the credit card details have been verified, the information will be relayed back via the payment gateway to the merchant, who will then complete the payment transaction. If verification is denied by the card association, the payment processor will relay the information to the merchant, who will then decline the transaction.