Looking to find out the difference between payment gateways and payment processors?
You’ve come to the right place. In this blog post, I will explore the differences between the two. Payment gateways allow customers to make payments directly on your website. This allows you to accept credit cards online.
In contrast, payment processors process those payments in real time, making them secure and convenient for you as a merchant and your users.
I spent many years working at a large payment processor. As part of our services, we offered integrations with different gateways, as needed by our merchants. As a result, I am well-versed in the differences between the two.
Discover how these two technologies work together seamlessly so you can get paid quickly and securely without fuss or confusion about which one does what. Plus, understand how it’s beneficial for businesses who want to keep up with evolving digital payment processing technology trends.
Payment Gateway vs. Payment Processor
Payment gateways are online services that act as intermediary points between customers and merchants, facilitating card-not-present transactions like those that take place during online shopping.
Payment processors verify and authorize payments, then facilitate the transfer of funds between banks. This is done in collaboration with merchants and banks to ensure all criteria for a transaction are met prior to processing it.
Continue reading to learn the difference between payment gateways and payment processors.
Key parties involved in a credit card transaction
When purchasing with a credit card, several parties are involved in completing the transaction.
- The customer
- The merchant
- The issuer bank that issued the customer’s credit or debit card
- The acquiring bank that collects the funds from the issuing bank (the merchant’s bank)
Here is an overview of the credit card transaction:
- The customer initiates the transaction by providing the information needed to purchase.
- Payment gateways, if a card-not-present or online transaction, verify that the card is valid and manage communication between the beginning of the transaction to the payment processor.
- Payment processors validate and transmit the information required to complete a sale between banks and the merchant’s account.
- The issuer bank is responsible for authorizing the payment and submitting it to their card network (Visa, MasterCard, Discover, and American Express) for processing.
- The acquiring bank is responsible for settling the payment with the merchant and collecting funds from the issuer bank on behalf of the customer. The acquirer bank will then deposit the funds into the merchant’s account.
By working together in this way, each party plays a vital role in allowing credit card purchases to happen securely and efficiently.
Payment gateway vs. payment processor: What’s the critical difference?
While payment gateways and payment processors are both crucial components of the payment processing system, they serve different functions.
A payment gateway is an online service that acts as a virtual point-of-sale device, serving as a go-between for customers and merchants. Payment gateways are primarily used for card-not-present (CNP) transactions, such as those that occur in online shopping. They help to ensure that the customer’s card is valid and that their card data is encrypted and verified. The gateway also communicates the approval or decline status of the transaction to the customer. In addition, payment gateways are typically used with payment processors to facilitate the movement of funds between the customer’s bank and the merchant’s bank.
On the other hand, a payment processor is a service that handles the transaction, processes the payment, and facilitates the movement of funds between the customer’s and merchant’s banks. Feature-packed payment processors are necessary for all card-based transactions, whether in-person (card-present) or online (card-not-present). They communicate between the issuing and acquiring banks, card networks, and merchants. Processors usually use in-person POS terminals to verify the card’s validity and authorize card-present transactions.
In summary, payment gateways are online services that facilitate secure card data transmission for online transactions. In contrast, payment processors handle the processing and movement of funds for card-based transactions. Payment gateways are often used with payment processors to provide merchants a comprehensive payment processing solution.
Payment Processor vs. Payment Gateway
|Encrypts and verifies online customer’s card info
|Handles communication between merchant, card networks, and banks
|Must be used with a payment processor
|Can be used without a gateway
|Intermediary between business and customer
|Intermediary between customer’s issuing bank and merchant’s acquiring bank
|Online POS to make sure card is valid
|In-person POS terminal to make sure card is valid
|Best for online (e-commerce or CNP transactions)
|Best for in-person (CP) transactions
Understanding Payment Gateways
Understanding how payment gateways work is essential to ensure successful transactions and secure payments. Payment gateways are online services that act as virtual point-of-sale devices, serving as a go-between for customers and merchants. They are primarily used for card-not-present (CNP) transactions, such as those that occur in online shopping. A payment gateway must be used with a payment processor to process payments.
Payment gateways play an essential role in the security of online transactions by ensuring that the customer’s card is valid and by encrypting and verifying their card data. They also help to protect against fraud by detecting suspicious activity and stopping fraudulent transactions.
For online businesses, a reliable payment gateway is crucial for facilitating seamless transactions and ensuring customer satisfaction. In addition, payment gateways are essential for merchants operating in industries at higher risk for fraud, such as online retail and e-commerce.
Understanding Payment Processors
A payment processor is responsible for processing credit card payments, making it an essential part of any transaction. Therefore, payment processors are necessary for all card-based transactions.
Payment processors validate payments, authorize them, and transfer funds between banks. To do this, they work with merchants and banks to ensure all transaction requirements have been met before processing it.
Payment processors are crucial in card-based transactions, whether in-person, online, or through a mobile app. In addition, payment processors are vital for card-present transactions that occur in person, as they help to ensure that the card is valid and that the transaction is authorized.
Payment processors act as a communication link between the issuing and acquiring banks, card networks, and the merchant. They play an essential role in verifying the customer’s card details and ensuring that the transaction is processed correctly. Payment processors are also responsible for facilitating the movement of funds between the customer’s and merchant’s banks.
For card-present transactions, payment processors often use in-person point-of-sale (POS) terminals to ensure that the card is valid and the transaction is authorized. These terminals can be directly connected to the payment processor without needing a payment gateway. This makes them ideal for businesses primarily operating in physical locations, such as retail stores, restaurants, and other brick-and-mortar establishments.
Payment Processor vs. Payment Gateway–When to Use Which?
You may need clarification on using a payment processor or payment gateway for your transactions. Both have features that allow merchants to accept customer payments securely, so deciding which is best suited for a particular business model can be challenging.
If you handle card-not-present transactions (online or over the phone), you need a payment gateway.
You will need to work with a payment gateway if you are processing online credit card transactions. This gives you secure online payment processing.
Do you only offer in-person transactions (like with a restaurant or retail store) with an in-person POS system? Then you can use just a payment processor.
Do I need a payment gateway and merchant account?
Businesses need a payment gateway and merchant account to process payments efficiently. A payment gateway allows companies to securely process card-not-present transactions, such as those made through a website. It connects the business to its payment processor or bank, ensuring the customer’s data is safe and secure.
A merchant account is a bank-held account that allows businesses to hold credit card payments until they are transferred into their bank account, allowing them to access their funds quickly and securely. The merchant account also processes the transactions by verifying the customer’s information, approving or rejecting the transactions, and transmitting it back to the business.
Payment gateways and merchant accounts provide businesses with the necessary tools to accept payments, whether they are taking orders online or in-store. In addition, they protect customers’ data and help ensure merchants get paid on time so they can focus on providing excellent products and services.
Have Questions? We Have Answers.
In summary, payment gateways and processors are two different services that work together to provide merchants with a secure and seamless way of accepting payments. Payment gateway providers offer data encryption and card validation for online transactions. In contrast, payment processors facilitate the movement of funds between customers’ banks and merchants’ bank accounts.
By partnering with a payment processor and gateway provider, you can benefit from comprehensive solutions that enable you to accept payments securely with minimal complexity.