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Payment Gateway vs Payment Processor: Everything you need to know

Published May 20, 2021

For happy customers it pays to know the ins and outs of processing

Consumers want to be able to pay in whatever way they choose and that’s usually driven by ease and convenience. So having the ability to accept as many forms of payment as possible is essential. And that’s why it’s important to understand payment gateways and payment processors, the differences between the two, which one works best for your business or perhaps deciding that you need both.

How a payment gateway works

From the perspective of the customer, the process of paying for goods or services can seem simple. But after deeper inspection, there are a few more moving pieces than meets the eye. One of those pieces is a payment gateway. This technology is a payment service used by merchants to accept debit or credit card purchases from customers either through physical card-reading devices in-store or through payment processing portals found in online stores.

Payment gateways shouldn’t be confused with a virtual terminal which is a software that lets you take payments from any device by turning it into a point-of-sale terminal. Instead the payment gateway acts as the conduit, passing credit card transaction information from the merchant to the relevant banks either through credit card terminals in brick-and-mortar stores or through payment services and APIs for websites and mobile applications, as part of the payment process. It is the middleman between the customers and the merchant, helping secure a prompt transaction. Typically, having a payment gateway incurs an additional fee.

In order to understand how a payment gateway works, there are a few terms that you need to know:

Payment Processers – The entity that authorizes transactions, transmits transaction data to clear and settle the transactions for the merchant; in other words, the payment service that actually processes the payments with the card brands

Issuer – (Card Issuing Bank) The bank or financial institution that issued the buyers credit or debit card or other digital payment method

Acquirers – (Merchant Acquiring Bank) The bank or financial institution that holds the merchant account and settles the approved transactions

Merchant Account – The type of bank account needed for a business to accept and process card brand payments through credit or debit cards

Card brand association – Visa/Mastercard/Discover/American Express

The transaction flow is the same whether you’re using a physical or virtual payment gateway, but mobile and online payments use digital capture files to package the credit card information rather than output from a credit card reader. Now that you have the background, let’s take a look at all the steps involved in the payment process with a payment gateway:

  • The customer presents their card through the merchant’s credit card reader or ecommerce site
  • The payment gateway sends the transaction information to the payment processor
  • The processor sends this information to the card brand association involved
  • The credit card issuing bank receives the authorization request, verifies the credit or debit card in question, and sends back a response to the processor as either approved or denied; if denied, this code will include why the transaction was denied
  • The processor forwards the authorization response to the payment gateway and the gateway will take it and forward it to the interface used to process the payment (either online or in-store); this part of the process is called the authorization and it generally takes between 2-3 seconds
  • If online, the merchant fulfills the order and the entire process is repeated to ‘clear’ the authorization; this means the issuing bank moves the authorization hold to a debit and prepares to settle with the merchant acquiring bank
  • If using batch processing, the merchant will submit all their approved authorizations in a batch at the end of the day to their acquiring bank for settlement through its processor 

What is the role of the payment processor?

Payment processors help provide a way for businesses to accommodate customers by offering more payment methods that make payments safer and easier. As mentioned above, payment processors evaluate transactions in real-time by contacting the customer’s issuing bank.

A merchant can have a direct integration with a payment processor that would follow the same transaction process as mentioned above, but without the gateway as an intermediary. A processor is necessary for a business if they want to accept multiple payment methods.

Although businesses must pay to use a payment processor, the more payment methods a business accepts the more customers it can accommodate—potentially increasing revenue.

Direct integration with a processor is an opportunity to manage processing costs without the additional cost of a gateway provider but it’s important to understand the security provided by the processing platform. The industry has compliance requirements that are in place to protect the merchants and the processor like PCI Compliance.  

How to determine whether you need a payment gateway or payment processor

So, after learning about payment processors and payment gateways one thing has probably become clear: it’s important for businesses to be able to accept multiple payment methods and as new technology and payment methods are introduced, it's important that merchants understand the differences of direct integrations to a processor and what a gateway can support.

Choosing between a direct integration with a payment processor or using a gateway depends on your business strategy for expanding payment solutions. Choosing a provider that offers both gateway and direct integration options offers the expertise to create a payment solution that protects, manages and grows business built on the goals of the merchant.

On one hand, a direct integration minimizes the steps in your payment process and reduces fees. But a payment gateway is more than a tool for transferring money, it can also help with risk and fraud management and expanded solutions that may be available to you like gift cards, loyalty cards and the next new payment method.

The third option is to partner with a company that has both a payment processor and a payment gateway. This allows you to have both the processor and the gateway under one roof – providing a single source solution no matter which you decide to go with.

Finding a payment partner that meets your business requirements

Before integrating your system with a gateway or a processor, it’s important to choose the right solution for your business. Take a moment to lay out your goals as a company, including what payment methods you need right now vs down the line. Out of the box, easily integrated payment solutions often rely on higher fees that may cause issues as your business grows. Whereas a direct integration with a payment processor may be the best solution for a enterprise business that has developers available to customize the platform to their businesses specific needs and relies on the relationship to process payments.

When choosing a processor, consider what you value, such as rates, service and technology.

Here are some basic questions to use when gauging which payment company and payment solution works best for you:

  • How much are fees and other costs comparatively?
  • How long will it take to set up?
  • How quickly are new payment methods available?
  • Does it accept new payment technologies?
  • What is the approach to security – holistic from POS, eCommerce, gateway to processor?
  • What does the customer support channel look like—a single-source of support as opposed to multiple support teams based on the issue (gateway, processor, technical, or software)?

Equipped with information to choose whether you need a payment gateway or a payment processor (or going with a company that offers both) is all about deciding what’s best for your business. But there is one certainty every company must face: offering multiple levels of solutions that support all the various ways consumers want to pay is the new normal for owners and operators today. 

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