Here at CardSwitcher we understand that at the heart of every organisation is the customer. We also understand that you want to give them the best, most streamlined service possible.
So, you’ve got a golden business idea and know exactly what product or service you want to give to your customers. But how will you accept payments?
Internet guidebooks are full of jargon. You find yourself confused and asking the question, “what’s the difference between a payment gateway and a merchant account?”
The words payment gateway and merchant accounts often blend into one in a new business owner’s mind, but if you are a business that accepts and/or relies on card payments you must understand that these are two very different things, but you need both.
But worry not! We’re here to translate and help you understand the difference between these two key terms.
If you’re starting from scratch and need to understand the entire procedure of card processing, we have created a detailed breakdown of what and who is involved.
What is a Merchant Account?
A merchant account is a particular type of bank account that operates behind the scenes to receive and temporarily store the payments made by customers via the payment gateway.
It is uniquely different from a business bank account, as you (the business owner) have access to all the information but possess no control over the account.
Merchant accounts are seen as a temporary holding place for transactions (seen as deposits), to allow for customers to change their minds and refunds to be processed easily. The temporary holding period is typically 1-7 days, after which the funds are transferred to your business account.
You and your business will likely see various advantages to having a merchant account, such as improved cash flow, an increase in sales and increased ability to remain competitive within challenging markets.
How to set up a Merchant Account:
There are a few variations of merchant accounts to choose from. The two basic types of merchant accounts are:
- Dedicated: An account opened exclusively for a single merchant. Since this is open solely for your business, there is room for negotiation in relation to the payment processing fees.
- Aggregate: An account essentially shared by multiple merchant accounts. They are easier to acquire but the result is less control over the account.
Once you have determined whether you need one or multiple accounts, you then need to choose between the two variations:
- Payment Service Providers (PSPs): Ideal for SMEs, as they are easily set-up and are typically low maintenance.
- Independent Sales Organisations (ISOs): Better suited to larger corporations who handle huge volumes of transactions, as they have lower transaction costs.
You could also investigate merchant services, which is a catch-all financial service covering merchant accounts, payment gateways, POS systems, and card terminals, all in one.
To delve further into all the details of a merchant account, read our explanation of what a merchant account is and everything your business needs to know.
What is a Payment Gateway?
In layman’s terms, a payment gateway is the online equivalent of a physical card terminal. So, when a customer purchases your products or services, the money is transferred from their bank account to your chosen merchant account via the Payment Gateway.
More specifically though, it’s the digital background technology that allows you, the business owner, to process your payments by connecting your customers’ bank accounts to your own merchant account.
Let’s visualise it.
The gateway is essentially a non-existent space where data is securely transferred, shared, checked and sent back – resulting in a payment. Considered to be a crucial component of any e-commerce business, payment gateways are not exclusive to online transactions, but they do help to bridge the gap between your online sales and your chosen payment processor.
The gateway occurs when a customer completes a transaction by entering in their details (name, address and card number), and the online store sends these away to be checked, authorised, and processed. Once confirmed, the payment is approved and the specified amount is transferred from the customers own account, to your chosen merchant account.
How to Set up a Payment Gateway?
The setting up of a Payment Gateway is a pretty painless affair, but can be overwhelming for any new or existing business owner looking to change. So, take your time reading and understanding all the details of how the integration of a Payment Gateway works.
When it comes to selecting a Payment Gateway, there are a few decisions you need to make. Firstly, a classic or modern gateway; then hosted or integrated gateway.
Classic Payment Gateway:
This is the traditional payment gateway that requires a merchant account. The per-transaction fees are typically lower, but compared to modern options the classic gateway can be more technically difficult to set-up and take longer to acquire.
If you opt for a classic gateway, as the business owner you will need to source a bank that offers merchant services, and apply; approval can take up to six weeks and varies per bank.
Modern Payment Gateway
It used to be that you couldn’t have a merchant account without a payment gateway, and vice-versa.
But now, there are multiple big name payment gateways that don’t require a merchant account; hence why they’re known as modern.
Without a merchant account, this gateway process essentially works by extracting funds from the customer’s bank account, validating them, and depositing them into your business account. Modern gateways are easily set up, but over time can incur greater per-transaction fees, which is not beneficial for smaller vendors as their business grows.
Hosted Payment Gateway:
Hosted Payment Gateway’s redirect the customer to a hosted platform, where the buyer inputs their details (cardholder name, number and address). In terms of integration, this particular type is often easier and more compatible with your website, but can take longer due to the various platforms involved.
Integrated Payment Gateway
The second option for payment gateways is the integrated payment gateway, which uses an application programming interface (API). This is a program which allows for direct payments through the online store, eliminating the need for customers to be re-directed elsewhere. However, there is a greater security risk when opting for this option.
Once you have determined your chosen gateway, the integration process is determined by your choice of host. This is an equally important decision as your choice of host is important to ensuring the best service for your customer. The more reliable your choice of gateway, the more streamlined and secure your service is going to be.
Choosing a gateway is usually a question of compatibility from both parties; you must choose one best suited for your business needs, and some providers actively avoid working with entire industries so may not be available to you.
Security is important to all of us. If you want to know more about the security risks involved with payment gateways, you can read our comprehensive payment gateway guide to find out more.
Elements to Consider when Choosing Merchant and Gateway:
There are various fundamentals to consider when selecting your chosen merchant account and payment gateway. We’ve rounded up the essentials that you must consider before making your decision.
- Compatibility: As above, the choice of both merchant and gateway, is mostly the business owner’s decision to make. However there is duality in the compatibility factor, as you have to choose the right provider for your business, but you will only be approved by your choice if they feel that you are a compatible fit for their services. Something which can be frustrating, but ultimately results in the best service being provided to your customers.
- Reputability: The reputation of who you choose to invest your time and money in matters when it comes to selecting who to use as a payment gateway and merchant account; either together or separately. It goes without saying, do your research and ensure you choose someone who is secure and protects both you and your customers data. This can be done by checking their PCI DSS Compliance level.
- Currency: This is particularly important for those operating on an international scale. Ensure that if you operate across various currencies, that you have a payment gateway and merchant account that is compatible according to each country or location.
So, in this post we’ve defined what a payment gateway and a merchant count are, the differences between the two, the different types of each, and how to go about finding the right ones for your business.
Understanding the difference between the two allows you to serve your customer and business needs better, and gives you leverage in heavily saturated and competitive markets.
But the biggest takeaway from this article is that you should make sure to choose a provider for each entity that is both affordable and secure. At CardSwitcher, we help SMEs to cut their various card processing costs with ease. Compare payment gateway prices today and find the perfect provider for your business.