Guide to Payment Gateways vs. Payment Processors — Backoffice (2022)

Let’s say that you are a dutiful grandchild sending your grandma a care package. You drop it in a UPS drop box, UPS collects the package, transports the goods, and sends both you and grandma a confirmation email when delivery is complete.

Think of the UPS distribution network as analogous to a payment processor—and the associated dropbox as a payment gateway. To make an online payment, customers initiate a transaction via a payment gateway, and a payment processor facilitates communication between parties and transfers funds into the merchant’s bank account.

Both payment processors and payment gateways are necessary for accepting credit card payments. They make payments convenient and secure for customers and save business owners time by decreasing payment processing labor.

What is a payment processor?

Payment processors function as an intermediary between a merchant’s bank account and a customer’s bank account. Online payments involve, at a minimum, five parties: the merchant, the customer, the merchant’s bank, the customer’s bank, and the payment processor, the entity responsible for communicating between the parties involved in the transaction.

For example, accepting credit cards requires business owners to partner with a third-party credit card processor. Once a customer submits a payment, the payment processor will communicate the transaction to the credit card network and to the customer’s bank. After the customer’s bank approves (or declines) the transaction, the payment processor will inform the merchant’s bank, either depositing funds into the merchant’s bank account, or informing the bank, merchant, and customer of a declined transaction.

Advantages of using payment processors

In theory, not all transactions require an intermediary. Consider cash payments, for example: your customer hands you $5, you hand her a bag of premium fish food, and you head your separate ways.

Most business owners choose to partner with a third-party payment processor so they can accept credit card payments. Most payment processors allow businesses to accept multiple payment methods (including online payments) and help increase the speed of transfers into their accounts.

What is a payment gateway?

A payment gateway is the virtual terminal, or point of sale (POS), for online payments. Similar to how brick-and-mortar stores have a physical credit card terminal for accepting card payments, online stores need a payment gateway to securely collect their customers’ payment information. For online payments, the payment gateway (ie, the virtual terminal) functions as the point of sale.

Payment processors and the payment gateways work together: payment gateway technology collects and authenticates digital payment information and transmits it securely to the vendor’s payment processing partner, and the payment processor communicates between to complete the transaction.

Advantages of using payment gateways

Using payment gateway technology offers business owners multiple efficient and secure payment methods.

  • Efficiency. Payment gateways are an efficient method of accepting credit card payments, allowing purchases to be completed in-store and online and enabling card-not-present transactions. They can also integrate payments with your existing accounting software, automatically recording sales data and saving you and your accounting team time.
  • Security. Payment processors and payment gateways work together to enable secure online payment processing. Most payment gateway technology uses SSL encryption to transmit personal information to payment processors. This data encryption secures your customers’ financial information from a possible data breach.
  • Options to pay. Payment gateways enable card-not-present transactions, allow a range of payment methods, and accept multiple credit card types. Offering a variety of payment options can increase customer satisfaction and reduce your rate of cart abandonment.

Payment gateways vs. payment processors FAQ

Do I need a payment gateway and payment processor?

If your business accepts only checks, cash, wire transfers, and in-person credit card payments, you don’t need a payment processor and a payment gateway—but you’ll also miss out on sales to customers who prefer other payment methods ( like credit cards).

Do I need a payment gateway and merchant account?

Accepting credit cards online requires businesses to have both a payment gateway and a merchant account, which is a specific type of business bank account that is set up to accept card payments. Many payment gateway technology partners provide additional merchant services, including merchant accounts.

What is the difference between a payment gateway and a payment service provider?

Payment gateways and payment service providers (also known as payment processors) work together to process transactions—but are not the same thing. Payment gateways collect a customer’s personal information and submit it securely to a payment service provider. The payment services provider then facilitates communication between the merchant’s bank account and a customer’s bank account, processes the transaction, and informs the merchant’s bank account of successful payment.

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