Payment Gateway vs Processor: What is the Difference? - Financesonline.com (2023)

What is the difference between payment gateways and payment processors?

The difference between payment gateways and payment processors is that the former acts as web-based mediators that handle transactions between your merchant accounts and payment processors. Meanwhile, the latter manages transactions between the merchant and their banks.

Digital is the way to go for business and this is evident in the boom that’s been happening with payment gateway apps that are proliferating worldwide. The COVID-19 pandemic has also driven online sales as people all over the world shifted their purchasing activities online and used different apps for several transactions.

In this article, we discuss the difference between payment gateway vs processor and how these two platforms combine with a merchant account to enable you to accept payments from your customers. These elements combine to transfer money from customers to the seller, so you need to get a good understanding of each platform’s role in the process.

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Payment Gateway Vs. Processor Table of Contents

  1. What is a Payment Gateway?
  2. What is a Payment Processor?
  3. What is a Merchant Account?
  1. Examples of Payment Gateways
  2. Examples of Payment Processors

The coronavirus pandemic had a negative impact on digital payments when lockdowns and stay-at-home advisories were first implemented globally. But as the economy recovers, it is projected that cash payments will be the least common means of payment and will be taken over by digital wallets by 2022.

Moreover, the COVID-19 pandemic has accelerated the rise of digital payments as consumers tried to avoid cash payments and preferred using contactless payments. This trend will continue and is expected to push the transaction value of the global digital payment market to $6.6 trillion by the end of 2021.

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If you are a seller who wishes to launch your online store, you need to grasp the basics of payment gateway tips for your online store. Therefore, it is essential to learn the difference between payment gateway and processor. To start, you need to configure the following items:

  1. Registering your domain
  2. A high-quality eCommerce platform (such as Bigcommerce or Shopify)
  3. Reliable web hosting (some solutions like Shopify include hosting, but not systems like Magento and WordPress).
  4. A shopping cart
  5. A method to accept payments – for this you need a combination of payment gateway, payment processor, and a merchant account.

What is a Payment Gateway?

A payment gateway solution offers a host of benefits to users. It enables you to sell online by allowing you to charge the purchase amount to your customer’s credit or debit card.

In this regard, payment gateway providers can be compared to the point of sales terminal used in brick and mortar stores as it enables you to take card payments on your website. The role of the payment gateway is to function as a mediator between the transactions placed on your online store and the payment processor. This has become a requirement because due to security protocols it is forbidden to send transaction details from your site to a payment processor. Payment gateway providers such as PayPal is, therefore, part of most web-based merchant accounts. If you wish to do international business, a payment gateway is essential and you need to learn how to integrate one into your business.

What is a Payment Processor?

Payment processors offer useful features that enable online merchants to accept payments, store funds, disburse payments, meet compliance needs, and more. In short, they are financial platforms that function in the background to offer payment processing services to online sellers. They are able to provide these services by entering into partnerships with other firms that deal directly with merchants or consumers.

One of the key benefits is the payment processor links to both the payment gateway and the merchant account, and quickly transmits information to and fro in a secure manner, facilitating instantaneous transactions for the end users.

Payment processors enter into reselling agreements with merchant account vendors or payment gateways to offer their services to online merchants. Some payment processors focus on providing direct merchant services, but most platforms specialize only in processing payments.

What is a Merchant Account?

Merchant accounts are bank accounts that allow merchants to accept credit and debit card payments on their online store. You need these accounts if you wish to utilize a payment gateway to facilitate transactions on your site. Merchant accounts are also termed MIDs (merchant IDs).

You can open merchant accounts from payment gateway and payment processing companies as well as big banks that offer these services. These accounts are also provided by Member Service Providers (MSPs) and Independent Sales Organizations (ISOs) that have treaties with payment processors. In addition, agents of ISOs and independent contractors also offer merchant accounts. In all the above cases, to get a merchant account you need to enter into an arrangement with a payment processor to accept credit and debit card payments from customers.

There are numerous companies that provide payment processing and payment gateway services. Each charges its own transaction costs and monthly fees. Do your homework to select the most affordable platform for your needs and scale to ensure your online store turns profitable.

Now, that you know the difference between payment gateway vs processor as well as the essential details of merchant accounts, let’s now look at how these three payment elements combine to enable you to take payments on your online store:

  1. Customer buys an item.Let’s say a customer visits your online store, finds a suitable product, and enters his credit card details to buy it. He waits for a few seconds and this is what occurs in those few seconds:
  2. The transaction details are transmitted to the payment gateway.The customer’s credit card and personal info are sent to the payment gateway which functions like a middleman between the consumer’s data and the banks. The sensitive details are securely transmitted from the payment gateway via the payment processor. The merchant’s ID number is referenced and the merchant account receives the transaction info. Thus, all three elements – gateway, processor, and merchant account are needed for this step.
  3. The seller’s (your) payment processor also receives the details.The payment processor not only sends the transaction info to the merchant account but also contacts the bank that issued the credit card to check if the card is legitimate and whether the customer is within their credit limit. This step is done via a credit card network that functions as a facilitator between the processor and the issuing bank. This credit card network is responsible for finding the correct bank that issued the card.
  4. The issuing bank authorizes or rejects the purchase.The accepted or declined decision of the issuing bank is transmitted via the credit card network to the payment processor.
  5. The seller’s payment processor transmits the details back to the payment gateway.Now, if the issuing bank approves the transaction, this info is relayed by the payment processor the gateway, which proceeds to store the details to enable the merchant’s online store to complete the sale.
  6. If the transaction is accepted, the sale can proceed.Once the seller gets the information about the approval, they can proceed to ship out the product.
  7. The seller gets paid.The card issuing bank releases funds to the seller’s bank which settles the accounts and transmits the money to the seller’s account.

Examples of Payment Gateways

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1. Melio

Melio is a payment gateway software that makes it easy for small and medium business owners to transfer payments via bank transfers or credit/debit cards. Melio is free to use and works on any digital device, which is perfect for entrepreneurs, freelancers, or professionals who need to process payments on the go. Bank transfers on Melio are free of charge while credit and debit payments will incur a 2.9% transaction fee. You can also pay via bank and card transfers to vendors who only accept check payments. Melio takes care of sending the check payments on your behalf.

Detailed Melio Review

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2. BlueSnap

BlueSnap is payment gateway software that processes online payments in over 180 countries. The software supports 110 payment types in 100 currencies and 29 different languages, making local and international payments easy and reliable. BlueSnap also provides the best currency conversion rates via an automatic connection to a global network of acquiring banks. BlueSnap is one of the legitimate payment gateway providers in the US and features a Subscription Billing Engine that helps customize user billing models for automated credit card information entry.

3. 2CheckOut

2CheckOut is a relatively new payment gateway offering powerful capabilities for businesses worldwide. Since its inception in 2006, it has been utilized by thousands of businesses from different industries. With it, you can securely process online and mobile payments through a multitude of payment methods. It also supports multiple languages and currencies for easier transaction localization. For pricing, 2CheckOut charges 2.9% + 30¢ per successful transaction. If you process a large number of payments, they also offer a quote-based plan.

Detailed 2Checkout Review

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To learn more about this platform’s capabilities, you can sign up for a 2CheckOut free trial.

4. Authorize.Net

Launched in 1996, Authorize.Netdeveloped its business and client base in an impressive way over the years. Today, it is used by over 400,000 merchants across the world to accept online payments via electronic checks and credit cards. The charges are $49 for setup fees and $29 for monthly gateway fees. Authorize.Net is especially recommended for Magento stores and shopping carts like osCommerce.

Detailed Authorize.Net Review

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5. PayPal

PayPal started operations in 1999 and today it is a popular payment gateway that accepts both debit and credit card payments. Buyers can use this service for free. Store owners need to pay transaction fees of 3.4% + $0.30 USD to accept credit card payments. However, there are no issues as merchants need to pay only after the sale is completed. PayPal has become popular because it does not charge any setup, gateway, or monthly fees. More than 340,000 websites utilize PayPal as their payment gateway.

Detailed PayPal Payments Pro Review

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6. SecurePay

SecurePay gateway was launched in 1997. It accepts mobile payments and offers electronic check services as well as online shopping cart. To process credit card transactions, online sellers need to first register on SecurePay.com. The charges are .25%-1% plus $0.25 per transaction. The drawback is you need to pay $400 if you wish to terminate the services before the expiry of the service agreement with this company.

Detailed SecurePay Review

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Examples of Payment Processors

Payment processing companies come in different varieties that can be a little confusing to know. First, there are card companies that are not card issuers, but they facilitate and process transactions between the other players. Second, there are banks that coordinate with merchants as well as banks that issue credit cards to their customers. There are also processors that offer services to sellers and also transfer funds between banks. Many large companies have entered the payment processor market and offer a full stack of services.

1. Card Networks

Card networks such as MasterCard, Visa, Discover, and American Express facilitate transactions between buyers, merchants, banks, and processors. These companies provide the electronic networks that enable all parties to process transactions and communicate with each other. Card networks make profits by taking fees from the financial companies involved in transactions. These fees are based on total transaction volume and not on a per-transaction basis.

2. Card Issuers

Card issuers provide credit and debit cards to customers. For instance, Citibank may issue a MasterCard credit card. These institutions also pay the merchant bank (also termed the acquiring bank) on behalf of consumers who use their card for purchases.

3. Merchant Acquirers

Merchants need to coordinate with financial companies to accept payments. These institutions are termed merchant acquirers and they can be either Independent Sales Organizations or payment processors.

4. Processors

Processors are technology platforms that coordinate with card networks and banks to enable merchants to process debit and credit card as well as prepaid payments. Their job involves performing anti-fraud procedures, ensuring money is available, and verifying transaction details. Processors may be linked with banks, like Bank of America or Chase, or they can be independent entities such as Vantiv and First Data. Each processor is distinguished by the technical capabilities they offer to facilitate financial transactions.

Digital Payments for Your Business

We hope this article has helped you understand the difference between a payment gateway and payment processor and how they function together to help merchants accept payments on their online store. This knowledge is essential if you wish to venture into ecommerce and have plans to launch an online store. You can also learn more about ecommerce trends to prepare your business.

As we learned about the impact of COVID-19 on consumer payment preferences and how cash will not be king in the future of payments, it becomes even more important that you embrace digital payments, learn as much as you can about online payment statistics, and start looking into integrating payment gateways into your business.

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By Shaun Baker

With 5 years of experience in digital marketing and retail strategy under his belt, Shaun Baker is the resident eCommerce expert at FinancesOnline. A contributor to Entrepreneur, The Atlantic, and other business portals, he has spoken and written about various eCommerce subjects, from AI and headless commerce to the economics of Black Mirror’s “Fifteen Million Credits”. His (highly) opinionated pieces on the ebbs and flows of eCommerce as an industry remain both a dynamic resource of talking points and entertainment in itself.

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