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Business owners are often surprised to learn that payment processors and gateways aren’t the same and provide two entirely different services.
A processor works behind the scenes to facilitate funds transfer from a buyer to a merchant. In contrast, a gateway works on the front end to communicate transaction approvals and declines to merchants and their customers. In this post, we’ll explain what payment gateways and processors are and break down the key roles and differences between the two, so you can understand what online payment processing involves from start to finish.
Key payment terms you need to know
It’s essential to understand a few key terms before explaining payment gateways and processors and their role in the payments process.
Cardholder - the customer buying the product or service
Merchant - the business selling products or services
Issuing bank - the bank that issued the credit or debit card to the customer
Acquiring bank - a financial institution used by a merchant to accept customers’ debit and credit card payments.
Credit card networks - the card companies like Visa, Mastercard, and American Express
Merchant account - a business bank account for accepting and processing transactions that act as a holding account for payments.
What is a payment gateway and its role in the processing chain?
A payment gateway is a front-end software application on a website that enables merchants to accept online payments. When a customer pays for goods or services, a payment gateway captures and sends their credit card data to a payment processor and communicates approvals and rejections back to the merchant and the customer. Essentially, a payment gateway is in charge of the first and last step in the payment process. They securely pass customer payment data to the processor and communicate authorizations with merchants and customers.
Where does a payment processor stand in the processing chain?
Payment processors are intermediaries between an online business and the financial institutions involved in a transaction. They work to securely execute transactions by transmitting the card data received from a gateway between the merchant, issuing bank, and the acquiring bank. Ultimately, a processor's key role is to move money from a customer's account to a merchant's account. They also ensure that card issuers and networks receive their fees.
Short payment processing example
Payment processing is an essential part of every business. The good news is that understanding how online payment processing actually works behind the scenes isn’t as complicated as you may think. Here’s how it works:
- A transaction is initiated after customers enter their card details on a website to pay for something.
- The merchant gateway encrypts and transmits the card information to the payment processor.
- The payment processor transfers this transaction information to the credit card network, then sends the request to the card issuer, which either approves or declines the transaction.
- If approved, the card network then requests authorization to release the funds with the customer’s issuing bank. After checking for sufficient funds and verifying the transaction isn’t fraudulent, the issuing bank responds to the card network stipulating whether the transaction has been approved.
- This information is sent to the payment processor, which requests funds from the issuing bank. Funds are then transferred to the merchant account and then onto the business’s bank account by the payment processor.
How is a payment processor linked to a payment gateway?
Payment gateways and processors are linked directly to form the front and back ends of the processing chain. They connect all the critical parties, including customers, the merchant, issuing bank, and the acquiring bank. When a customer makes an online purchase through a website, the payment gateway transfers the transaction data to the processor to continue the payment lifecycle, which plays out in seconds.
What’s the difference between a payment gateway and payment processor?
Payment gateways and processors are often confused because the two systems can look quite similar. They are both critical components in the online payment processing chain, but gateways and processors actually provide two very different services.
Front end vs back end payment processing
As already explained, a gateway and payment processor carry out distinct functions. On the one hand, a payment gateway is a front-end software application that provides communication and data processing services. Gateways capture and send credit card data inputted by customers to a payment processor for clearing and settlement and communicate approvals or rejections to merchants and their customers.
On the other hand, payment processors are the back-end of payment processing. They execute transactions by transmitting card data from a gateway between the merchant, issuing bank, and the acquiring bank. They connect these parties and move money from a customer’s account to a merchant’s account.
What role does a merchant account play in an online payment process?
A merchant account is a type of business bank account that connects a merchant to the payment processor and acquiring bank (the financial institution used by a merchant to accept customers’ debit and credit card payments). The role of a merchant account is to hold payments before they are deposited into a merchant’s personal or standard bank account. To open a merchant account, merchants will generally need to provide the following information:
- Bank account and routing information
- Financial statements
- Company Tax ID
- Business License (if applicable)
- PCI compliance
- Additional supporting documents
What do you need to accept payments online?
You need both a gateway and a payment processor to accept payments online. The payment gateway is the customer-facing software that enables your customers to enter their information and receive transaction approval or denial. The payment processor handles the back-end facilitation of each transaction - moving funds from your customer’s bank to the acquiring bank and ensuring card issuers and networks receive their fees. Although not always the case, you’ll most likely also need to open a merchant account with a financial institution.
Choosing between payment gateway & processor for your business
You need to have both a gateway and a processor to accept payments online. However, today, gateways like Pay.com offer a range of services and make it quick and easy to integrate with many different payment processors.
Benefits of choosing an “all-in-one” solution
Setting up and managing payments can be complex and time-consuming. As a business owner, you need to keep things as simple as possible so you can stay focused on the most important things, such as getting new customers and growing your business. Choosing an all-in-one payment solution that bundles gateway and processing services together is usually the best and most efficient way to accept online payments and reduce headaches in the future.
Instead of integrating a payment gateway and payment processor from different providers, you only need to complete one simple integration, minimizing potential technical and interoperability issues. Even if a problem does occur, you’ll only have to call one provider, saving you time and a lot of stress. Furthermore, when using an all-in-one solution, it’s far easier to understand the fees you need to pay and your level of compliance.
How can Pay.com help as a secure payment gateway provider?
Pay.com provides a host of different services to help merchants accept, optimize, and process payments worldwide.
Customize your checkout: Pay.com enables merchants to create a smooth and seamless customer experience with a custom-designed checkout page that matches your branding across all platforms.
Accept multiple payment methods: Offer local payment methods for every region you operate and easily add new methods to keep your customers happy.
Smart payment routing: Dramatically increase your approval rates and boost your revenues with an intelligent routing system that selects the most optimal and cost-effective route for every transaction. Pay.com’s smart routing system also helps you reduce fraud rates and avoid high transaction fees that take a bite out of your profits.
Customer analytics: View advanced insights and real-time data on an easy-to-understand dashboard. Understand which areas need improvement and make informed business decisions that increase customer satisfaction, retention, and revenues.
Contact us to find out more about how Pay.com can benefit your business
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