You are looking for a top credit card processor solution? You might have heard the terms payment processor vs payment gateway. These are key elements of credit card processing. However, they are not one and the same. You’re not the only one confused about this distinction. To make informed purchasing decisions about whether your small business can accept credit card payments you must understand the nuances.
What is the difference between payment gateway vs. payment processor?
This guide will explain the basics of payment gateways, myths regarding payment processors, and how they work together. You will likely need both a Payment Gateway and a Payment Processor if you want to accept credit card payments online. Understanding each of these is crucial to making the best decision for your small business.
The key parties involved in a credit card transaction
Many things happen behind the scenes when a customer pays you using a credit card. You need to know who is involved in credit card processing.
- Issuer bank: This bank issued the customer’s credit cards. The issuing bank takes the amount of the purchase from the customer’s card and sends it to the acquiring bank.
- Acquiring Bank: Also known as the merchant account provider, or merchant’s bank, this bank deposits funds from credit card transactions into your merchant account. Interchange fees are deducted from the purchase amount by the acquiring bank and paid to the issuing bank.
- Credit card networks: These credit card brands include American Express, Visa, and Mastercard. They determine the interchange rate, which is the percentage of each transaction that you must pay to be able to accept credit cards.
- Credit card processor: This entity coordinates and transmits the purchase amount and merchant information to the issuing bank in order to pay the acquiring bank.
- Payment gateway: A payment Gateway is a technology that encrypts credit card information and sends it off to the credit card processor.
Also read: What is Facebook Pay: A Complete Guide?
What is a payment gateway?
The payment gateway allows online credit card payments, as well as other transactions that are not possible when the card is physically present. It’s the technology that establishes a secure connection between your website or browser and the credit card processing company. Virtual terminals are interfaces that allow you to manually enter credit card information in order to make phone sales.
How payment gateways work
- The buyer completes a purchase using a credit card via a virtual terminal or online e-commerce site.
- Secure connections to payment gateways are used to encrypt credit card payment information and send it to the acquiring banks.
- The payment gateway determines which credit card network is involved and sends the transaction information to the issuing banks.
- The issuing bank verifies that the transaction was authentic and determines whether the buyer still has sufficient credit to cover the transaction amount.
- You will receive the approval/rejection of the transaction from the issuing bank through the payment gateway.
You can generally set up a payment portal in partnership with your credit card processing company. Compatibility issues and other problems are less likely when you establish a payment gateway through a merchant account provider. This is the most economical way to set up a payment portal. You can usually avoid paying payment gateway setup fees if you work through your merchant provider.
Some credit card processors own their own payment gateways while others work with third-party payment gateways for their clients. Authorize.Net is one of the most well-known third-party payment gateways. Before setting up a payment gateway, you should read the terms and conditions. This will allow you to know how much it will cost upfront and on a per-transaction basis.
What is a payment processor?
Partnering with a payment processor is required if you wish to accept debit and credit card payments online, by phone, or at point-of-sale.
A payment processor is a company that processes credit and debit card transactions on behalf of a business. The payment gateway can move encrypted data around so that the payment processor can transfer funds from one account into another.
There are two types of payment processors: front-end and rear-end. Front-end processors are connected to card networks and settlement service providers and manage merchant accounts for their clients. They work with back-end processing companies that handle the actual money movement behind the scenes.
Back-end processors are responsible for settling transactions. They move money from the customer’s account to the merchant’s account and then transmit funds to the bank account of the business.
Pricing structures and fees for payment processors vary depending on the transaction value and model chosen. Payment processors generally charge a percentage for each transaction. They may also add a small monthly statement fee or an annual PCI compliance fee.
Difference between payment processor vs payment gateway?
What are the requirements for both a payment processor and a payment gateway?
In order to take credit and debit card payments online, you might need both a payment processor and payment gateway. If you are only accepting credit or debit card payments at a POS terminal, however, you can usually forgo the need to use a payment gateway. Although virtual terminals can be accessed via your computer, they require a payment gateway, even if you accept payment at the point-of-sale (POS) terminal.
Also read: What is a Payment Bond A Short Guide
Is PayPal a Payment Gateway or Payment Processor?
It a described as a payment processor PayPal and has its own payment gateway Payflow. Learn more about PayPal in our PayPal review. Payment aggregators don’t require that your business set up a merchant bank account. This is unlike traditional payment processors. Instead, aggregators combine your transactions with other merchants, effectively making you a sub-merchant in the aggregator’s merchant account.
Payment aggregators have a faster processing time than traditional payment processors and a quicker application process. Based on the transaction value and amount, aggregators have lower fees and are generally easier to use.
Payment aggregators are more cautious about taking risks. They may place a hold on your account if there is suspicious activity or an increase in chargebacks.
Aggregators offer fixed rates, which is a departure from payment processors. even though your transaction volume is increasing, the price that you pay doesn’t increase. Businesses with high transaction volumes and high-value transactions will typically get better rates from payment processors.
What’s the difference between a merchant account and a payment gateway
A merchant account is an arrangement between the bank and your business to hold funds for pending transactions. The funds will go to the merchant account before being credited to your bank account. This account is different from a payment gateway because it does not transmit encrypted data but only the funds associated with the transaction. As soon as the transaction is completed, the payment will be temporarily held in the merchant’s account. Once the transaction is complete, the funds will move through the merchant account to your bank account.
A payment processing gateway company will give you a merchant ID number to help you set up your merchant account. This number is linked to your merchant account. It holds your funds until settlement. If you’re operating as a sub-merchant for a payment facilitator like Square or Stripe, a merchant account is required to accept debit and credit card payments from customers. For more information, please read our complete review of Square or our Stripe Review. While merchant accounts are different from payment gateways, it is important to accept debit and credit card payments online.
Last Line — Choose the right payment processor and payment gateway provider?
It can be difficult to choose the right payment processor or set up a payment portal. There are many payment processing companies out there with different pricing models and fees. It can be difficult for entrepreneurs to navigate the ocean of available services, especially if they are concerned about the day-to-day operation of their business