The card payment processing process (what a mouthful) is a complex one. When you’re first starting out, there are so many elements you need to consider. Some have such similar names that you might not even be sure if they are actually the same thing.
Whether you are an established business or new to the game and have been doing some research, then you’ll have heardthe terms “payment gateway” and “payment processor”.
You may have found yourself confused about the differences between the two and if you are, then you’ve come to the right place. This article explores the differences and similarities of a Payment Gateway vs a Payment Processor, how they apply to your business, and how you go about getting each one.
What is a Payment Gateway?
Both a payment gateway and payment processor share equal importance in the success of an online transaction. But, firstly we’ll discuss the Payment Gateway, as it provides the fundamentals for understanding elements of the payment processor.
Focusing on eCommerce transactions only, the payment gateway is sort of like a virtual card terminal. The payment gateway is a non-physical space that’s engaged when a customer purchases goods or services and shares their details (name, address and card number), and the online store sends away said details to be assessed and authorised.
The money from the transaction is stored in the merchant account for 1-7 days after the purchase to act as a protective fall back in the instance the customer requires a refund or changes their mind. Additionally, if the funds are removed and transferred to the merchant account, money is continuously stored within the payment gateway to streamline the refund process.
Do you need a payment gateway?
If you operate a business on an e-commerce basis, then yes you will need a gateway as you will need somewhere protected and secure in order to check the validity of your customers’ details and authorise their payment, in order to receive an accurate payment for your goods or services.
As a business owner, incorporating a payment gateway into your business operations can be pretty straightforward depending on which variation of gateway you opt for (there are many).
Types of Payment Gateway
There are essentially four variations of Payment Gateway, with each one having interlinking relevance to one another i.e. they come in pairs, so if you pick one you almost automatically pick its adjoining partner.
The variance in type can be categorised by classic or modern, and then further by hosted and integrated payment gateways.
Classic Payment Gateways are the traditional payment gateways, and require an accompanying merchant account. The set up of this gateway can be slightly complex, as you need to source and contact a bank offering merchant account services to businesses like yours, and approval of this can take from four to six weeks.
Modern Payment Gateways are the contemporary version of payment gateways, and do not require a separate merchant account. Modern gateways remove the need for a merchant account, as they complete the process themselves i.e. they extract funds from the customer’s bank account, validate and authorise their details, and then deposit the earnings into your chosen business account in one process.
With multiple big name vendors available to attach to your organisation, modern gateways are straightforward to integrate, but after time can become unsustainable for smaller businesses as per-transactions fees continue to increase.
Hosted Payment Gateways essentially redirect customers to a specific external host platform, where they will input their details (name, address and card number) to complete their transaction. In relation to integration, this gateway is straightforward to incorporate into your business and website, but can be time consuming to do so as there are multiple platforms needing to be interconnected.
Integrated Payment Gateways is another choice for your business, and it uses an application programming interface (API). It sounds complex, but this is simply a program that allows your customers to complete transactions on your online store, eliminating the need for customers to be re-directed elsewhere to finalise their purchase. It must be noted however, that this method of integration can pose greater security risks for both you and your customers.
This is just a brief overview of the payment gateway - if you’re looking for more and need to know all the details to get a better understanding - we have an entire article dedicated to explaining payment gateways.
What is a Payment Processor?
As we said, when a customer makes a purchase, the payment gateway transfers the transaction data to be authorised, and either accepts or declines the sale. The payment gateway can be appreciated as a virtual space, but it doesn’t deal with the purchase itself - that’s where the Payment Processor comes in.
The Payment Processor is a financial company or institution chosen by the merchant (you) to process various online payment methods, including credit and debit cards (Visa, Mastercard, Amex, etc.) and other alternative payment methods (Apple Pay, Google Pay etc.).
Your chosen processor, aka payment service provider, typically offers their own proprietary software that would be integrated into your eCommerce site, where it will process, analyse, authorise and archive transactions and their data.
The development of multiple payment processors has increased the safety and security of processing online payments, meaning you and your customers' data is safe. Oftentimes, the chosen payment processor also assists with an adjoining merchant account, either in-house or third-party. An in-house merchant account, if available, will help streamline integration as multiple platforms need not be coordinated.
Much like the entire purchasing process, there are many players in the payment processor system. They act as a mediator between the cardholder (the customer), merchant (you), the acquiring bank (yours), the payment gateway, and the issuing bank (theirs). Therefore, choosing the right provider is not only about providing a good customer experience, but is a chance to increase your conversion rate.
Payment Processor Fees
As with any service, the pricing structures of payment processors vary depending on the quantity and value of the transactions that your business processes.
Payment processors do generally charge a percentage of each transaction for you to use their services, and usually add other various card payment processing fees such as: monthly statement fees, a monthly minimum fee, a modest per-transaction fee and, of course, an annual PCI compliance fee.
These various fees are something to research and be mindful of when selecting a payment processor.
What's the difference between a Payment Gateway and Payment Processor?
Simply, if the payment gateway is the invisible tool that moves the encrypted data around for authorisation, the payment processor essentially moves the funds from one account to another.
However, if you are going to operate an eCommerce business, or provide your customers with the ability to purchase your goods or services online, then you are required to have both a payment gateway and processor in place.
These two tools play different roles in the transaction process but communicate data to one another behind the scenes; the gateway works towards determining the approval or rejection of the purchase, and the processor uses the data to move funds around.
Why do you need both?
The payment gateway works as the beginning and end of the transaction, as we know it works to approve or reject the customers card details once they have been entered.
The payment processor then coordinates the information between the issuing bank and acquiring bank.
You need both.
If that still sounds a bit complicated, then the process works as follows:
- A customer makes a purchase of your products or services using their bank card and enters in their respective details.
- Their information is then sent through the payment gateway. (The gateway encrypts the data for security purposes, and this is shared with the payment processor)
- The payment processor then sends a request to the issuing bank (the customer’s), in a bid to assess that they have enough funds to pay for the desired purchase.
- Issuing bank offers approval or denial, which is communicated with both customer and merchant.
- In the instance of approval, the payment processor then credits the funds into the merchant account.
Choosing a Payment Processor and Gateway
Hopefully you now understand all the ins and outs of Payment Gateways and Processors. Understanding what the differences and similarities between the two are, and equally how important it is to have both implemented into your business, will set you in good stead going forward!
Choosing a provider of both has never been easier. With more and more companies offering an all-in-one solution (payment gateway, payment processor and merchant account), implementation of these tools is streamlined.
If you’re looking to find a good deal for your business, you can compare a range of deals for payment gateways with CardSwitcher..