Online merchants often find the process is full of obstacles, but many of these challenges can be avoided by taking time to appreciate some of the vital parts of eCommerce. This article reviews the primary differences between payment processors and payment gateways.
The Parties Involved In A Business’s Payment Transaction
To better appreciate both payment processors vs. payment gateway, you should appreciate the parties routinely involved in standard transactions. This helps to better understand what separates payment gateways from processors.
After a customer pays a merchant, several different parties will likely be involved in the payment process, which includes:
- Acquiring bank. An acquiring bank enters into a contract with a merchant’s business to accept funds processed by credit or debit cards. Funds are placed in a merchant account and then passed to the merchant’s bank account.
- Issuing banks. This category are the banks that issue credit cards to customers. When customers utilize credit cards, the issuing bank deducts the transaction amount from the customer’s account and then transfers these funds to the acquiring bank.
- Card networks like American Express, MasterCard, or Visa set their interchange rates, which are a percentage of each transaction a customer pays for using a credit or debit card
- Defined. Payment gateways are a type of software utilized by eCommerce businesses for online and physical sales. Process gateways are viewed as the online version of point-of-sale terminals found in retail stores. Gateways encrypt all sensitive payment information, which makes the process safe and secure.
- Types. Two types of payment gateways are routinely utilized by businesses. These two gateways include:
- Integrated payment gateways are built into a website, which means that customers are not required to leave the business’s website. Sometimes referred to as “white-label” payment gateways, this type of gateway is built and managed by third-party placement services, but integrated into a business’s website’s existing layout.
- Third-party payment gateways are sent to external payment gateways so orders can be completed. Card details are then placed into another secure platform and redirected to a seller after payment has been finalized.
- The best payment gateways. A few of the best payment gateways include:
- Helcim is a popular payment gateway provider that comes with many APIs
- Stax is a great option for businesses with a high volume of transactions because the provider offers low costs for transactions.
- How payment gateways work. In short, payment gateways make it easier to transfer confidential data between smartphones or websites. Gateway operations involve the following steps:
- Payment. Customers enter credit card details on the business’s website and submit the items for purchase.
- Encryption. The customer’s confidential information is then encrypted and relayed to the merchant’s website server.
- Data transfer. The payment gateway forwards all this confidential data to the payment processor, which then relays the information to the credit card issuing bank.
- Verification. After receiving a request for authorization and sending its reply to the processor with a response code, the processor sends its response to the payment gateway. The payment gateway then receives the response and sends it back to the website for verification and then to the cardholder and merchant within a few seconds.
- Approval. The merchant sends all approved authorization in batch form to the acquiring bank for settlement through the processor. The acquiring bank then places all approved funds in the merchant’s account.
- Reason. If businesses do not use a payment gateway, they greatly increase the chances of fraud occurring because fraudsters will have an easier time accessing confidential customer data. Payment gateways function as “gatekeepers” of customer information by heavily encrypting it before passing the data through several channels. Payment gateways protect merchants from other things besides fraud too, like expired cards, inadequate funds, and closed accounts.
- Advantages. Some of the advantages that companies realize with payment gateways include:
- Gateways are the most common way for businesses to connect to payment systems.
- Businesses that use gateways can better address risks connected with accepting online payments.
- Transaction fees are small.
- The best payment gateways offer merchants customizable reporting options, which help merchants better manage their business. This also provides merchants with increased access to connect and a better ability to process payment methods.
- Defined. Payment processing services work together with all involved payment process parties to make it easier for customers to purchase goods or services. Businesses that receive various payment options like credit or debit cards need payment processors to make sure that merchants receive funds when transactions do not involve money. Payment processing services validate customers’ data and then send funds to merchants.
- How payment processing occurs. Payment processing occurs through authorization, funding, and settling a purchase. After a customer purchases a good or a service from a merchant, the merchant sends a request to the payment processing system to authorize the purchases.
- The payment processing systems finished several steps. Next, the payment processing service submits the purchase to the issuing bank connected to the customer’s card, accepts or rejects the purchase, and sends an approval or rejection to both the merchant and the merchant’s bank.
- Advantages. Several benefits exist in utilizing payment processors including:
- Payment gateways offered heightened security as well as increased speed when it comes to payment processing.
- It’s inexpensive to establish a payment gateway, but gateways are often worth it. Additionally, the set-up cost of most gateways is highly affordable.
- Payment gateways provide businesses with easier transactions, which are less likely to include obstacles.
- Online payment gateways help businesses to save a substantial amount of time. Only a few seconds are required to perform payments with an online payment gateway as opposed to more traditional payment methods, which often take a much longer time to utilize.
- Situations where payment processors are needed. Whether a business is online or has physical store locations, the operation will likely require a payment processor if the business plans on accepting either ACH or credit card payments. Some examples of situations where a business might decide to utilize a payment processor include:
- A physical location store that operates a website
- A pop-up shop that travels to various locations to sell products or services
- A storefront where a permanent point-of-sale (POS) system is installed
- Some of the best payment processors. Various kinds of payment processors exist, which include both ACH and credit card processors. Because most businesses receive credit card payments, some of the best credit card processing providers include:
- Square transits funds to a business’s account in one to two working days with rates between 2.6% and 3.5%
- Stripe offers rates between 2.7% and 2.9% a transaction and accepts various types of ACH and mobile wallet payments
The Differences Between The Two Payment Processing Services
Now that you appreciate the various aspects of payment processing and payment gateways, you likely have a much better understanding of how these two payment systems work together.
In short, payment gateways exist to help transmit credit card information to payment processors, who communicate whether transactions have been approved or rejected. While gateways are the main hub, processing providers work behind the scenes to make sure that details are accurately transmitted and that the authentication proceeds without any substantial obstacles.
Not All Online Businesses Need Similar Services
Not all online businesses are the same. Instead, the type of payment processor that a business selects is influenced by various factors including what degree of security is needed, the associated fees, the involved risks, and what specific services the business needs.
There is simply no telling what your business needs until you begin to review the unique factors of your operation. There is no universal solution and not all businesses need payment gateways and payment processors.
If you’re a business without an online existence, for example, and only accept physical payment, you might not require payment gateways. Physical locations that accept electronic payments utilizing a virtual terminal, however, still require a gateway.
Situations also exist where merchants can utilize payment aggregators, which are a combination of payment gateways and processors. Unlike traditional processing companies, aggregators do not require businesses to open their merchant accounts. Instead, a business’s account is combined with various other merchant accounts under the aggator’s “umbrella” account. Aggregators frequently have easier-to-complete application processes and more simplistic fixed payment rates.
Advice on Selecting A Payment Gateway and Processor
Selecting a payment processor can be an enlightening process, but at first, might end up seeming too complex. When selecting a payment services provider, you must make sure that the provider specializes in your business’s industry. Some of the following issues to consider while looking for a payment service provider (PSP) include:
- The associated fees
- What services the PSP offers
- What types of currency your business accepts
- The security of services offered by the PSP
- How quickly your application with the PSP will be approved
Obtain the Payment Processing and Gateway Services You Need
If you’re a business owner looking for assistance related to payment processing or a payment gateway, we can help. With affordable rates, we can help your company realize its full potential today. If you are interested in any of the services that we provide, do not hesitate to either contact us or fill out our easy-to-complete application.