Payment Gateway vs Payment Processor: Everything You Need to Know

Payment Gateway vs Payment Processor: Everything You Need to Know

Payment processing is one of the most complex aspects of being a business owner. This is particularly true if you have an ecommerce store and a physical storefront. Choosing between all of the different merchant account options isn’t easy. 

Customers today fund their transactions with a wide range of payment methods. So, you’ll want your POS system or online checkout to accept as many payment methods as possible to maximize sales.

Contrary to popular belief, payment gateways and payment processors are not the same. Many small business owners don’t know the difference between payment gateways and payment processors. Fortunately, you won’t be one of them because we’re about to break it down for you in this article.

Let’s review the key points you need to know about payment gateways vs payment processors. We’ll cover what they are, how they work, their differences, and how you should go about choosing between them. 

Key parties involved in credit card payment processing

The checkout process is a lot more complicated than it may seem. The customer’s money passes through a few different entities from their issuing bank to get to you. When it comes to payment gateways vs payment processors, note that most retailers will need to use both.

Let’s look at debit card transactions first. Each ecommerce transaction starts with the payment gateway and travels to the payment processor. The payment processor interfaces between your request and the financial institution and then ends up at your bank.

Credit card payments work the same way but travel to your customer’s card networks –– Mastercard, Visa, etc. –– for validation. Your customer’s credit card network verifies the transaction through their payment processor. The funds are deducted from their bank account and deposited into yours –– aka the merchant bank or acquiring bank.

Transactions made at a physical point-of-sale system work similarly. Your customer swipes, taps, or holds their info up to the card reader and the verification process begins. However, payment gateways do provide an additional layer of security for online payments.

What is a payment gateway and what role does it play?

Damage from ransomware attacks is expected to hit $21 billion this year. Fortunately, your payment gateway protects your customer’s credit card information when they make a purchase at your online store. Payment gateways work with online transactions only, but you also need a payment processor to process online transactions.

Just think of your payment gateway as the gatekeeper for all your customers’ online transactions. It communicates between you (the merchant), your customer’s card network, and your customer’s bank.

Here’s where virtual terminals differ from traditional POS terminals. Your payment gateway encrypts the cardholder’s data during credit card payments and debit transactions. In other words, it sends data in the form of a one-time use code that’s nearly impenetrable to hackers.

You’ll usually work with your chosen credit card processor to choose a payment gateway. Doing so right away avoids compatibility issues during credit card processing. The payment gateway sends the encrypted payment data to the acquiring bank. Then, it verifies your customer’s payment information with the card network and your customer’s issuing bank.

What is a payment processor and what role does it play?

Payment processors fulfill the role of payment gateways, but for physical transactions. Your payment processor moves money from your customer’s account to your (merchant account) during debit card or credit card transactions. However, your physical POS station, not your online payment gateway, is the entity that approves the transaction during physical sales.

You’ll work with your payment processing company (aka payment service provider) to choose POS stations for your physical store. It interfaces between your merchant account and payment gateway before depositing funds when customers buy from your ecommerce website. Some payment processors, such as Payment Depot, even ensure PCI compliance for subscribers.

A few quick tips. POS stations and mobile card readers accept different payment options. So, you want to choose a payment solution provider that works with your customers’ preferred forms of payments. For instance, to accept PayPal, Square, Stripe, or any other API, you need access to an API-compatible POS station.

Payment processors use tokenization instead of encryption to protect your customers’ transaction information. Tokenization substitutes sensitive data, like your customers’ payment information, with non-sensitive data to shield it during the verification process. This prevents your business from incurring chargebacks on fraudulent or funds-not-present transactions.

If you’re still wondering about payment gateways vs payment processors, it’s good to note that most merchants will need both to process transactions.

Where does a merchant account come in?

You can’t run a whole retail business through your personal bank account. Only a merchant account will have the processing bandwidth and capabilities necessary for a small to mid-sized business. Your merchant account is the bank account you use for your business to process transactions through your payment processing company.

Merchant accounts are also called “merchant IDs.” They’re the go-between for your bank, the acquirer, and your customer’s issuing bank. Once funds are approved in your merchant account, they can be transferred to your business’s main bank account. That’s right, it’s another odd but necessary “middleman” situation.

Your merchant account holder provides “merchant services,” which is another term you’ll see volleyed around quite a bit in the payment industry. “Merchant services” refers to all of the services provided by your payment processor. This can refer to PCI compliance, credit card processing, customer service, equipment set-up, and more.

Here’s how they work:

  • Your payment processor sends payment data from your merchant account to the issuing bank of your customer’s credit card company.
  • Your customer’s bank verifies with your processor that they have the funds or credit necessary for the transaction.
  • Funds are transferred to your merchant account through your payment processor.
  • You can then access and utilize the funds for your business.

There is a wide range of fee structures available for payment processing through your merchant account. Choosing the one that’s right for your small business will help you reduce transaction fees and build margins over time.

Payment gateways vs payment processors: Similarities and differences

The bottom line? You will work with a payment processor whether your store is fully online, or you also have a physical location. The payment processor is the necessary middleman for all retail transactions.

If you process online credit card transactions, chances are you’ll need both a payment gateway and a payment processor. You need a payment processor whether customers pay with a physical card or key in their transactions online.

On the other hand, you only need a payment gateway if you have an online store or use a virtual terminal. Think of it as the online gatekeeper for all ecommerce transactions. Whatever your unique business needs, you’ll want to research what fee structure is the best fit for your business.

How to choose a payment gateway and payment processor for your business

In the end, the question isn’t “payment gateways vs payment processors.” The question is: Which combination of solutions is right for your business needs? 

Payment Depot’s award-winning customer service team helps retailers like you find the best payment processors and payment gateways for their business. But beyond that, our wholesale pricing model is excellent for small to mid-sized companies. We’re the highest-rated credit card processor in the retail business. 

We take pride in helping retailers like you save an average of $400 a month on credit card processing. Learn how to benefit from our award-winning support team and innovative pricing structure today!

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