Payment Gateway vs Merchant Account vs PSP (2022 Update)

Our small business expert explains all the different terms involved in payment processing works. Discover what you need to accept payments online.

If you are considering opening an ecommerce store or are new to the scene, you may have already heard terms like payment service providers, payment gateways and merchant accounts. And, you may be wondering what is the difference between them all, do you need them all, and how are you supposed to figure out what to do in order to set up your payment processing infrastructure

The short answer is that as a business that accepts online payments, you will need to have either a merchant account, a payment service provider or a payment gateway or some combination of the three. But, don’t worry - we are here to explain the differences and break down everything you need to know to get your business up and running so that customers can buy your products, and you can get paid. 

What is a Payment Service Provider (PSP)?

A payment service provider is the company that works behind the scenes to process the online payments that take place on a merchant’s website. Signing up with a payment service provider - also sometimes known as a payment aggregator - is generally thought of as the quickest and simplest way to start accepting payments online. A payment service provider essentially operates its own merchant account (more on that below), aggregating the transactions of all of its clients using that one account.

While it is definitely the easiest way to go, the easy way is not always the best way. When you work with a payment service provider, you are sharing the merchant account with hundreds of other merchants, and credit card networks do not differentiate between you and them. This means that if one or more of the other merchants are hit with a lot of chargebacks or fraudulent activity, there is no way to differentiate between them and you - so your business will also suffer the consequences and be at risk of refused charges. 

In addition, there is not a lot of flexibility when it comes to the terms and conditions, and you are unlikely to be able to negotiate, including the price (although the pricing is usually quite favorable for smaller merchants). 

PayPal and Stripe are the most popular payment service providers and could be a good choice if you decide to go that route. 

What is a Merchant Account & How Does it work (Merchant Services Provider)?

A merchant services provider offers merchant accounts, which are basically a special kind of bank account in which credit card and other online payments go before being transferred to your regular bank account. 

A merchant account is necessary because the money from a sale cannot be deposited in your personal (or business) account until it has “settled,” meaning that it has been verified that the customer actually has the funds or the credit line available to make the purchase. You are not allowed to sell anything online without a merchant account. 

Opening your own merchant account can be a bit of a bureaucratic process. As described above, if you prefer, you can work with a payment service provider and be part of an aggregated merchant account instead of having your own dedicated account. Even if you start out with a payment service provider, once your business is thriving, it will give you more options and flexibility to set up a merchant account of your very own. 

High and Low Risk Accounts

One thing to note about merchant account providers is that they divide potential account holders into two groups - high and low risk. 

  • High risk merchant accounts tend to be ones that: accept multiple currencies, have many transactions with countries known to have high rates of fraud, have an owner with a poor credit history, and/or sell goods or services that are considered high risk like some subscription plans, foreign exchange and more.
  • Low risk merchant accounts tend to be ones that: only accept one currency, are located in countries that are considered low risk such as the US, Canada, Western Europe and Australia, and/or have few chargebacks and returns. 

Falling into a high risk category does not mean that you cannot get a merchant account, but you may need to work with a specific merchant account provider that specializes in that area. 

Payment Service Provider Vs. Payment Gateway

In the same way that you need a payment gateway in addition to your merchant account, if you go with a payment service provider you also need a payment gateway for the same reason. It is the payment gateway that provides the method for the actual transfer of the funds, while the payment service provider sets up the aggregated merchant account.

Merchant Account Vs. Payment Gateway

While you do not need both a merchant account provider and a payment services provider, you do need a payment gateway regardless of which of those two options you go with. The merchant account and the payment gateway each provide a completely different service, both of which are necessary to complete the payment process. 

The payment gateway facilitates the actual transaction, routing the funds from the customer’s credit card to the merchant account. The merchant account, on the other hand, is the destination where the funds sit until the transaction is fully approved and the funds can be transferred to your business account. 

What is a Payment Gateway? 

A payment gateway works in collaboration with a merchant account and is the service that collects the details about the transaction (i.e. the card number, identifying details, etc.) and then passes that information on to the payment processor. It is purely a technological component that is necessary to be able to collect and share the transaction information securely. 

Many merchant account providers also offer an out-of-the-box payment gateway solution that you can use in conjunction with the merchant account. If the payment gateway offered does not offer all the customizable features you are looking for, you can always opt to purchase a separate payment gateway. 

How to determine if You Need a Merchant Account or a Payment Processor?

Some things to consider when deciding whether you are going to use a merchant account or a payment services provider include:

  • Your customers’ needs - consider your target audience and the types of payment methods they prefer to use. You will want to be sure you use a provider that works well with those payment methods.
  • Payment models - depending on the type of payment model you offer (such as one-off payments vs. recurring billing), fees and conditions may vary so be sure that you know what you are signing up for.
  • Local vs. international - if you have a local business, it may be easier to work with your local bank and open a merchant account with them, but if you expect to have a lot of international customers you may prefer to work with a larger international company. 
  • Compliance - make sure your website complies with requirements of major credit card providers like Visa and MasterCard - this will save you hassle in the future as most providers will want to be sure you meet certain requirements. 

Difference between Merchant Accounts Vs. Payment Service Providers

At the end of the day, both merchant accounts and payment service providers offer the same thing - the ability for an online merchant to process transactions. But they operate in slightly different ways:

If you opt for a merchant account, you create an agreement directly with an acquiring bank that opens the merchant account for you, which serves as a holding place for transaction funds before they settle. This also makes it easier for returns - if a product is returned before the money leaves the merchant account, it can go straight back to the customer instead of to your business bank account. 

As with any new clients, banks are taking on a risk when they offer you a merchant account, so they will require a vetting process to evaluate the risk level and determine the fee structure. Fees can include a monthly fee as well as per transaction fees and may vary depending on the provider. 

A payment services provider provides the same end result as a merchant account, but instead of giving you your own personal account, they aggregate the accounts of a number of merchants. The payment services provider then takes on the risk of accepting the payments and generally have simpler flat-fee pricing structures and do not have the same bureaucratic set-up process. 

Whether you use a merchant account provider or a payment services provider, you also need a payment gateway that transmits the payment details from your online store to the bank for approval. The payment gateway may come as part of the package with the payment service provider or the merchant account provider, or you purchase one separately. 

Here is a breakdown of the major differences between a payment service provider and a merchant account:

Feature Payment Service Provider Merchant Account
Setup Aggregated account shared by many merchants Dedicated account per merchant
Approval Process Instant (or very fast) Verification process can take several weeks
Stability Risk of account holds or termination based on behavior of other merchants in the pool Low risk of unjustified account holds or terminations
Fees Fixed flat-rate fees Variable fees, customized for business needs
Processing Volume Limits on volume and size of transactions Can negotiate the terms and limits on processing volume and transaction size

Pros and Cons of a Merchant Account Vs. Payment Service Provider

While the final decision is a personal one and depends on the specific circumstances of your business, there are a few clear pros and cons as to why you might consider a merchant account versus a payment services provider.

Payment Service Provider Merchant Account
Pros Cons Pros Cons
You work directly with the PSP’s customer service, and they handle all the details for you. Per-transaction fees (if relevant) can add up Can get lower rates, especially if you have high volume of transactions Long and complex approval process
PCI compliance Strict risk protocols can result in frozen funds and accounts Direct relationship with account provider More and higher fees
All-in-one platform for all your payment processing needs Less flexibility Ability to customize the service
Can be less expensive You don’t have your own dedicated merchant account Low risk of account being frozen

Merchant Account Vs. Payment Service Provider Vs. Payment Gateway FULL Comparison

By now, it should be pretty clear that the main decision you need to make is whether you will get your own merchant account or use a payment service provider. Then you can see whether the option you choose comes with a payment gateway that you want to use, or if you need to find another one. 

Following is a summary of the key features of each of the three components:

Feature Merchant Account Payment Service Provider Payment Gateway
Account Set Up Verification process can take a few weeks Memorandum of Association LLP Agreement
Integration Can integrate with payment gateway of your choice Generally need to use the out-of-the-box payment gateway that comes with the PSP Depends on the solution - look for one that offers easy integration
Stability Low risk of account freeze or termination Higher risk of account freeze or termination Depends on provider and whether you are using a merchant account or PSP
Merchant ID Your own dedicated Merchant ID Shared Merchant ID with other merchants Depends on whether you are using merchant account or PSP
Fees Flexible, depends on business model and processing volume Fixed, not negotiable Can have integration and usage fees
User Experience Can customize and optimize user experience Out-of-the-box, few options for customization Depends on if integrating with PSP or choosing your own gateway
Chargebacks Full ownership of account and will only be blamed for actual chargebacks Shared account and shared responsibility for chargebacks Some gateways allow optimization for fewer chargebacks
Transaction Volume Negotiable Limits on transaction size and volume Not applicable
Fraud Protection Includes customizable fraud filters Standardized, pre-defined fraud filters Highly customizable
Customer Support Direct contact with account representative Support queue Depends on if you use merchant account or PSP

Which One is Right for Your Business?

Only you can really answer the question of which option is right for your business. Remember that while a payment service provider may be simpler to set up, it is designed for smaller businesses and may not offer you all the flexibility and customization you want. 

Consider the pros and cons of each and what the impact on your business will be in order to make the right choice. 

If you are also given a choice of payment gateways, you will need to do some research and look at different options. Make sure you choose one that easily integrates with the payment methods that you want to offer and that works for your business in terms of the fees and support. 

These are important decisions and there is no need to rush into it!

Can You Accept Online Payments Without a Merchant Account?

The short answer is no, you cannot accept online payments without a merchant account. The longer answer is that while you do need a merchant account, you can choose to get one via a payment service provider rather than going through the entire verification and set-up process with a merchant account provider. 

For more information, check: How to Credit Card Payments Without a Merchant Account

Bottom Line Difference

Bottom line…in order to accept payments online, you need a merchant account that allows you to physically accept the money, as well as a payment gateway that provides the technology that makes that money transfer happen. You can get a merchant account either from a merchant services provider who will give you your own account or by signing up with a payment services provider and using an aggregated merchant account. 

Pay.com is an amazing Payment Gateway for your eCommerce business and is offers the best way to accept payments online. Check also our online payment methods

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FAQs

Is a PSP the same as a payment gateway?

No, a PSP is not the same as a payment gateway. The payment gateway facilitates the actual technical movement of money from the customer to the acquiring bank while the payment service provider is responsible for the infrastructure and makes sure that the transactions are handled smoothly and efficiently with the funds first going to a merchant account and then your business account.

Is a payment gateway a service provider?

A payment gateway is a software that facilitates the movement of money from a customer to the seller.

Is the payment processor and payment service provider the same?

Yes, a payment processor and payment service provider are generally used interchangeably.

How do I choose a merchant provider?

You should choose a merchant provider based on the unique needs and characteristics of your business. If you are a relatively new and small business looking to get your payment infrastructure up and running quickly, you may prefer to start with a payment service provider. If you are prepared to go through the longer and more complicated vetting process in order to get your own dedicated merchant account, then you should look into some different options to find the provider that best meets your needs.

Which payment service provider is the best?

There are many payment service providers, and it is important to look into different options so that you can find the one that best meets your needs.

Do I need both a payment gateway and a payment processor?

Yes. The payment gateway serves as the connection between the customer and the payment processor.

How to compare merchant account providers?

You can look at the different merchant account providers and compare the fee structures as well as the specific services that they offer in order to determine which will work best for your business.

Is a merchant account the same as a business account?

No. A merchant account is a holding place where funds go after a customer makes a purchase, but before the transaction is approved and the funds have settled. At which point, the funds are then deposited into your business account. You cannot withdraw or otherwise transact funds from a merchant account, unlike your business account.

Is it true that the same provider can offer a merchant account and payment processing service?

Yes, there are many full-service providers that offer merchant accounts as well as a payment gateway and processing solution.

Meet the author
Emily Kirschenbaum
Emily is a content writer with a special interest in fintech and business. She loves sharing her knowledge to help small businesses take their first steps towards success.

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