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Difference between a payment gateway and a payment processor

Last updated on June 14, 2024

A payment processor is how a merchant processes credit and debit card payments. A payment gateway sends transaction data between the customer, merchant, and financial institution. Both are types of merchant services to help businesses accept different types of payment. 

In today’s digital world, business owners must accept debit and credit cards. These payment methods are the core of ecommerce business.

While processing a customer’s credit card might feel like it happens instantly, a lot happens behind the scenes. This includes coordination between the customer’s bank account, merchant’s bank account, and card network. Not to mention keeping personal information safe and secure.

Let’s explore how payment processors and gateways are essential when accepting digital payments.

What is a payment processor?

A payment processor allows you to accept customer debit and credit card payments. This way, you can securely collect payment information and conduct a financial transaction. 

You can’t process a payment without connecting to payment networks like Visa, Mastercard, and American Express. Plus, you need to coordinate with banks to route payment for the transaction.

A payment processor can help with all of this instantly. It can process transactions in person at your brick-and-mortar store or online.

Your processor will coordinate between you and the banks involved in the transaction. The acquiring bank (the merchant’s bank) and the issuing bank (the customer’s bank) receive the data. When both banks accept the transaction, the processor helps coordinate the payment. It also finalises the transaction for both the merchant and the customer.

What is a payment gateway?

A payment gateway allows you to collect customer credit and debit card information. It then securely sends payment information to be processed. Gateway technology makes it easy for customers to pay for their goods and services using a credit or debit card. Because customers interact directly with a gateway, it is often called “front-end” software. 

An example of a transaction using a processor and gateway

Imagine you are the owner of an online clothing store. A customer has selected an item and is proceeding to checkout with their credit card. Here is how their transaction would process using your payment processor and payment gateway:

  1. The customer enters their credit card information on your website, which then goes through your payment gateway.
  2. Your gateway immediately secures and sends the data to your payment processor.
  3. The processor sends payment info to the acquiring bank, representing you in the transaction.
  4. The acquiring bank sends information through the card network to the issuing bank on behalf of the customer.
  5. If approved, the funds get sent from the issuing bank to the acquiring bank.
  6. Payment confirmation comes back through the payment gateway.
  7. You and your customer receive a receipt of payment from your gateway, and the transaction is complete.

This process may sound long and difficult, but it only takes a few seconds to complete. Before you know it, your customer has completed their transaction, and their payment has reached your account.

A comparison

Payment processor

  • Connects merchant bank with customer bank

  • Can process a transaction and transfer funds from the cardholder’s account to the merchant account 

  • Relays transaction information between banks to process payment

  • Needed for both in-person and online transactions

Payment gateway

  • Encrypts and transmits information between merchants and customers

  • Relays whether a transaction has been approved or denied 

  • Requires a payment processor to carry out the final transaction 

  • Used mostly for online transactions

Do you need both?

The answer is yes if you want to accept online payments. A processor without a gateway will have no way to transmit payment information. Yet, a gateway without a processor can’t carry out a financial transaction.   

However, a payment processor and point-of-sale card reader will do the trick if you want to accept card payments for a brick-and-mortar store. Remember, you will have to implement a payment gateway if you decide to expand into online sales in the future.

What to look for when choosing a payment processor

1. Pricing

Processors generally charge a small amount to process each transaction. These transaction fees help to cover the costs for their role in the credit card transaction. If you conduct high business volumes, you can negotiate better terms on your credit card processing fee. Some processors may also charge subscription fees or other recurring fees. Make sure you understand all of the costs before getting started.

2. Chargebacks 

Unfortunately, credit card fraud is common. Without you knowing, you may process some fraudulent transactions. The process of reversing a fraudulent transaction is known as a chargeback. Payment processors can handle chargebacks differently. So, it’s important to understand the chargeback process.

3. International payments 

Do you handle payments outside of your own country? If so, you will want a processor that can handle international payments. Remember, global processing sometimes comes with a higher fee. It is also a good idea to check with your payment processor if they have Dynamic Currency Conversion (DCC). DCC allows your business to earn money on foreign exchange margins.

4. Accepting your business 

Some processors can’t or won’t do business with merchants in specific industries. This can be because of regulations in your country. Or it can be because of the high number of chargebacks in your industry. Make sure that whatever industry you’re in, the payment processor will have no problem accepting your business needs.

5. Fraud detection

Fraud is a hassle to deal with as a business owner. Luckily, payment processors can detect fraud before it happens.

Machine learning is one-way processors detect fraud. Security experts train algorithms to determine when a transaction is out of the ordinary. The transaction is then flagged for review or declined altogether. 

Another way to reduce fraud is by using multi-factor authentication (MFA). MFA can be a text message, email, or even biometric authentication like facial recognition and fingerprints. This security measure helps confirm a valid transaction before it is processed.

You may be liable for fraudulent transactions. So, processors that can detect fraud can help reduce your hassle and costs. 

What to look for when choosing a payment gateway

1. Pricing

Gateways can charge a small fee per transaction for their role in transmitting payment data. Plus, you might find additional fees for setup or an annual subscription fee. Depending on how many transactions you do each month, you can reduce the cost of your gateway by negotiating with your payment gateway provider. Another way to reduce expenses is to choose an all-in-one processor and gateway solution (more on that later).

2. Ease of use

As a merchant, you want to make it easy for your customers to make a purchase, especially at checkout. Therefore, your payment processor should be simple and intuitive for anyone to use. Your best bet is to find a payment processor with no downtime. And look for a gateway so simple your grandmother could use it. You will still need a PoS system and/or card reader to collect card information for in-person payments. 

3. Mobile support 

Some gateways don’t work as well with mobile payments. Others specialise in mobile transactions. If you think you’ll handle a lot of mobile traffic, look for a gateway that supports these transactions. 

4. Integrations 

Before starting, consider what other software systems your payment gateway will need to integrate. Look for integrations with your website or ecommerce store. Integrations with your PMS, OMS, POS or other systems can help too. 

Difference between how credit and debit card payments are processed

Processors and gateways work differently depending on whether you accept payments through a credit or debit card.

With a debit card, your processor collects the card information, which gets relayed to the issuing bank or financial institution. The financial institution then verifies that there are enough funds in the account to process the transaction. If there is, the bank approves the transaction, and you both get an approval notification.

With a credit card, the process is slightly different. Only the information gets relayed to the card’s issuing bank. The issuing bank determines if the cardholder has enough credit for the transaction. If the account has enough credit, the issuing bank approves the transaction. It then makes a transfer to the merchant’s bank. The merchant’s bank then deposits the funds into the merchant’s account.

All-in-one payment solutions

You need a payment processor and a gateway for successful payment processing. However, that doesn’t mean you need to use two different solutions. Finding all-in-one solutions for your payment needs is becoming more common. Many third-party vendors help you accept payments and securely transfer payment information between you and financial institutions. 

An all-in-one solution can help you reduce the number of systems for your business. It also makes it easier to accept and track payments. So, you may want to consider an all-in-one payment solution for your business.

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