Opening up a business is more than just hanging a sign near the front door. To maximize your earning potential while improving customer service, you also need to consider how you accept payments. In the process, you may come across the terms ‘payment gateway’ and ‘payment processor.’ You need to understand the differences to properly decide which of these is best for your business.
A payment gateway is used to collect and verify credit card information. Meanwhile, payment processing refers to the service that handles fund transfers and communicates between the parties involved, including the credit card company, merchant, and bank. Payment gateways require a payment processor, but payment processors don’t require anything else.
This article will go into more detail about the differences between payment gateway vs. payment processor and how to choose between them.
Payment Gateway: What It Is and How It Works
Payment gateways refer to the technology used to capture customers’ card information. The technology may include card readers, POS systems, and other software that collect and verify customer information. The gateway doesn’t process the payment; instead, they make sure the credit or debit card used by the customer is valid in a similar way to a physical credit card slip being checked by a point-of-sale terminal.
A payment gateway is used to encrypt and then safely transmit your customer’s credit card details to a payment processor to verify and authorize them. When the card network approves these details, payment gateways start the settlement process to transfer funds to the merchant’s account.
Currently, there are various types of payment gateways used by businesses, including the following:
Third-Party Payment Gateways
A third-party payment gateway allows merchants to accept card-based payments without setting up a merchant account with the service. In other words, when a customer is ready to check out, they are sent to a third-party website to enter their credit card information. When the customer completes the transaction, he or she is sent back to the merchant’s website.
Integrated Payment Gateways
By contrast, integrated payment gateways are part of the e-commerce platform, so the customer stays on the website. The customer enters their credit card information right on the merchant’s website, and that is where the transaction takes place. You may also hear these referred to as white-label payment gateways.
There are many instances when using a payment gateway makes sense. Some of these may include the following:
- Collecting phone payments, and the physical card isn’t present
- Creating a store online
- Not wanting to buy a POS system and needing to collect in-person payments
Overall, payment gateways are essential when a card isn’t present, including e-commerce online payment solutions.
You technically don’t need to have a payment gateway, but having one improves efficiency. It does so by letting you complete transactions both in-store and online. It also allows for integration with your accounting software for further efficiency. Payment gateways also give your customers more payment options while improving security.
Payment Processor: What It Is and How It Works
Payment processors ensure that a customer has enough funds to cover a transaction. They provide security measures, ensure payments are transmitted and settled securely, and facilitate chargebacks. They also provide analytical tools that merchants can use to study sales performance.
In other words, the answer to the question, “What is a payment processor?” is that it is the party that executes the transaction. It transmits the data between your company as the merchant, the bank that issues the credit card (the issuing bank), and your bank (the acquiring bank). As part of payment processing services, many companies include credit card readers or POS terminals, although these may come with additional fees. Expect a virtual terminal for online transactions or phone payments to be included.
Importantly, you typically need to set up a merchant account to use a payment processor. This will let all of your payments be directly delivered to your account. However, there is also the option of a third-party payment processor. This processor will store the payments for various businesses, allowing for lower fees.
Having a payment processor comes with a significant benefit—the ability to accept card-based payments. The service is essential whether your customers buy in the store, online, over the phone, or via a mobile app. You will notice that several of those include card-not-present transactions.
Without a payment processor, you would essentially be limited to cash transactions. That may work for some small businesses, but it is far from ideal for most, especially in the modern world. Even at a farmer’s market or pop-up stores, people expect to be able to pay with their credit card and few people carry cash.
So whether you own a pop-up store that travels to various locations, a storefront with a permanent POS system, or a brick-and-mortar store with an e-commerce counterpart, you need payment processing services to accept card payments and ensure a convenient shopping experience for customers.
Are Payment Gateways and Payment Processors the Same?
No, payment gateways and payment processors are not the same. The payment gateway verifies the payment information, and the payment processor takes care of everything behind the scenes, ensuring you receive your funds.
Yet another way to think about the difference between a payment processor and a payment gateway is that the payment gateway connects your website to the payment processor. Meanwhile, the processor authorizes and processes electronic payments.
Which One To Choose?
Many modern businesses discover that they do best with both of these services. If you plan to accept online payments, you need both a payment gateway and a payment processor.
When deciding which of these types of online payment solutions you need, keep the following factors in mind. You will also want to consider these factors when choosing a provider for either your payment gateway or processor.
Consider Your Business Model and Transaction Volume
Start by considering your business model. As mentioned, not every store will need a payment gateway, but most modern stores will want one so they can accept card-based payments. That’s especially true if you have an online store, which most companies do.
Take this a step further and consider what types of transactions you accept or want to accept. Do you just collect payment in-store and online? Or do you want to accept payment over the phone or even by mail?
Next, consider your transaction volume. Some payment processors and payment gateways specialize in smaller volumes, while other services can facilitate a larger volume of transactions. Yet others can handle any volume of transactions and let you easily adjust your plan to accommodate those changes.
This is also the time to consider whether you would prefer a native payment gateway or a third-party one. Third-party gateways can be more affordable, but native payment gateways tend to provide a better user experience and decrease the cart abandonment rate.
Assess Your Budget and Payment Needs
Your budget is a crucial consideration for payment gateways and payment processing services. You want to carefully compare pricing and the features included in the different packages and plans you’re considering.
Pay attention to monthly rates as well as transaction fees. Expect most transaction fees to be both a fixed amount and a percentage of the transaction. If you have a higher volume of transactions, you may be eligible for lower rates. Business owners should think about their current business needs as well as their future needs.
Don’t forget to consider your payment needs as well. Confirm that your chosen payment gateway and processor accept the types of cards you need. If you want to accept American Express in addition to Visa and MasterCard, look for a service that does so.
Think about international clients as well. Not all payment processors will accept international credit cards or payments in other currencies, but many will. Don’t just check whether your chosen payment processor accepts these cards; check the relevant fees as well. Is there a higher transaction fee? What is the currency conversion rate? Is there an additional currency conversion fee?
You may also want to check if your chosen payment service provider also offers merchant services. Getting a merchant account through the same company that handles your credit card processing can be more affordable.
Look for Integrations and Features
Pay attention to the various features of your payment gateway and processor. What analytics and data do they provide? If you already have a point-of-sale system that you want to keep using, can these payment tools seamlessly integrate with the system?
You also want to make sure that the payment gateway or payment processor can integrate with your accounting software. Such integration capabilities make it easier for you to analyze your business’ sales performance.
Prioritize Security
Security is crucial for both your payment processor and payment gateway. After all, they will be handling sensitive data, including your customers’ credit card information and your business’ bank account details. You don’t want to put any of this private data at risk, so ensure that you choose a system that has strong security measures. Look for SSL encryption at a minimum.
