What Are the Major Differences with a Payment Processor Versus a Payment Gateway?

If your business is trying to decide between applying to a payment gateway or a payment processor, confusion might have set in about how they’re different? Unsurprisingly, you’re not alone in this confusion either.

To help with solving the payment gateway vs processor question, this article covers some of the significant differences to be aware of.

Payment Gateways Deal with the Payment Data

A payment gateway is there to take credit or debit card information entered through a website (in this example), encrypt it, initially verify its authenticity, and then send it onto a payment processor.

The information is passed securely to the credit or debit card payment processor for actual processing. Furthermore, the information is also passed to the card network for the bank card (VISA, Discover, etc.), the issuing bank and your business bank account too.

Payment gateways do not process the transaction themselves. Instead, they act as a conduit. Compatibility and cooperation are required between a payment gateway and a payment processor, therefore, two must be chosen that can work in harmony when using both.

Payment Processors Process the Transaction

The payment processor processes financial transactions. They use the encrypted transaction information provided by the payment gateway and work to settle (complete) the transaction.

Once a transaction has been completed, the payment processor is responsible for requesting the funds from the payee and transferring the funds to the business account.

They’re the money movers.

What About Merchant Accounts?

A merchant account is usually required with your bank. It is there to provide a space for approved credit or debit card transactions to sit before they have final approval. At which point, the funds are cleared into the business account.

With most business accounts, a merchant account is required to receive credit and debit card payments from customers. However, there are some instances where one is not necessarily needed.

For instance, PayPal has its own payment gateway (Payflow) with PayPal effectively acting as a payment facilitator where you as the customer are effectively a sub-merchant. This gets around the need to have a merchant account when going through a third-party facilitator (Square, Stripe, and PayPal all qualify in this category).

Why Are Different Operators Needed to Process a Single Payment?

The system developed out of a need to separate the approval of the transaction from the processing of it (and transfer of approved funds). By having this separation, a payment gateway has its special area of focus and a payment processor does too. By not trying to cover all aspects of the transactional world, it creates greater efficiency and speed.

It depends on what you’re needing to do whether your business will require a payment gateway, a payment processor or a merchant account. Small businesses may determine that using Stripe or PayPal to facilitate online payments is sufficient. Stores using POS equipment may be able to find an all-in-one solution provider too. Others may find that Rebilly payment processor is the best option.

Nevertheless, when you want more control over your payment experience, having a merchant account, a payment gateway and a payment processor setup is optimal. There are different types and levels of fees with each – some are fixed regardless of the transaction value whereas others are a percentage – but they each provide benefits to using them. And the business is at far less risk of a company like PayPal shuttering their account suddenly ending their ability to receive credit or debit card payments too.

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