Understanding the Difference Between Payment Gateways and Payment Processors

Any new entrepreneur is faced with countless decisions regarding the betterment of their business. Given the increasingly digital nature of today’s businesses, one aspect that they have to think carefully about is their checkout process. Of course, not everyone is savvy with jargon like payment gateways or payment processors, so we are here to help you out. 

It is easy to confuse the two, especially when you are new to the idea of online payment processors. While these may have overlapping features, it is important that you are able to distinguish the two when you implement payment solutions on your e-commerce platform or website. 

Both of these are crucial for the success of online transactions. In every checkout process, the same players are involved: customer, merchant, issuing bank of your customer’s card, and the bank that acquires the money from the issuing bank.

Payment gateways and payment processors work together in many cases, but understanding the distinctions will help you make informed decisions about what exactly your business needs to succeed. 

Payment Gateways

You can think of a payment gateway as you would the checkout terminal at a brick-and-mortar store. Payment gateways are ideal for mobile or virtual transactions, mimicking this point-of-sale (POS) terminal, albeit online. This technology ensures that the connection between a credit card processing company and your e-commerce shop remains secure during the transaction proper.

Card data is encrypted during the transaction to protect sensitive information. This will also help maintain authenticity throughout the transaction process. The data that has been encrypted will then be sent over to a credit card processor and both the issuing and acquiring bank. Afterward, the money will be transferred into your account without the additional fees.

Usually, credit card processors allow you to set up payment gateways with the help of your merchant account service. These processors either have their own proprietary payment gateways or third-party gateways. Typically, if it is the former, there are little-to-no setup costs. 

Payment gateways are most often found in online transactions where the card is not present as it takes the place of the POS terminal. Before they even send transaction data to the payment processor, payment gateways will verify your customer’s information and credentials. 

There are always possible security threats during online transactions, therefore secure socket layer (SSL) encryption is used by payment gateways to keep sensitive data secure at all times. SSL makes sure that your customer’s data remains unreadable and undecipherable as it’s sent to an issuing bank. The gateway will decode the data as it reaches the issuing bank.

Many banks also increase security by looking at customers’ recent activity and the location of the computer where the transaction has come from. Again, SSL encryption will transmit the transaction’s details to the payment processor to finalize the transaction.

There are a few limitations when it comes to payment gateways. Some of them are unable to accept every kind of card or payment method. If you have international buyers, you will also need to double-check if your payment gateway is able to accommodate cross-border transactions. Keep in mind that these may also come with their own additional fees. 

You can deploy multiple payment gateway options on your site to give your customers more choices. Giving your customers more payment gateway options during transactions will ensure seamless and convenient checkout processes. 

One other great thing about payment gateways is that they allow customers who do not have credit cards to make purchases. This can broaden your reach and allow you to tap into a wider audience.

Choosing a Payment Gateway

When choosing a payment gateway, you can first look into the existing payment methods your customers already use. This way, you can be sure to give them exactly what they need or want. Fees for payment gateways must always be considered—some of these already factor in security concerns such as fraud detection. 

It is imperative that your chosen payment gateway also have PCI compliance for utmost security. This can give you peace of mind that they use only the most advanced encryption methods to safeguard your transactions. Have a look at some of the customer reviews and ratings so that you have an idea of what their reputation is in the industry.

Some common payment gateways include:

• PayPal
• Authorize.Net
• Stripe
• Amazon Pay
• SecurePay
• Apple Pay
• BlueSnap
• 2CheckOut
• Adyen

Payment Processors

On the other hand, payment processors are understood as the company in charge of your business’ transactions made through debit and credit cards. It is the payment processor that handles the movement of funds from one bank or account to the recipient. 

Front-end payment processors will take care of your merchant accounts. They will facilitate the relationship between card networks. In contrast, back-end payment processors straighten out the actual transactions and transfer money from your customer’s issuing bank to yours. There are usually fees for every transaction. Some processors also have monthly or annual fees. 

A payment processor is ideal for increasing your business’ income and giving your customers a pleasant user experience. Physical cards do not need to be present when you have a payment processor. However, if the transaction is made in a brick-and-mortar store, and the actual card is used, the terminal will verify its authenticity.

Most of today’s credit cards have EMV chips that already encrypt data as it is encoded. Upon authentication, the issuing bank will receive the details of the transaction from the payment terminal. If approved, the processor will send this data to the payment terminal and acquiring bank.

As a business owner, you can either choose to work with one payment processing company that handles both the POS system and actual processing service. You can also choose to work with a payment processing company that has a separate POS solution.

Choosing a Payment Processor

Costs may be one of your top factors to consider when you choose a payment processor. For payment processors, in particular, these fees are common:

• Interchange: What your customer’s bank will charge you
• Markup: What your merchant bank will charge (usually a percentage)
• Processing: What your payment processor will actually charge
• Assessment: What the credit card association will charge (a percentage that has already been negotiated)

Aside from the fees, you can also choose a payment processor depending on your business’ size and the volume of your transactions. Some payment processors have lower rates in their pricing structure for businesses with higher volumes. 

Alternatively, other payment processors do not look into your transaction volume and simply charge based on a fixed rate or fees depending on your industry and the nature of your transactions.

No matter how secure your checkout process, credit card fraud remains ubiquitous. Your chosen payment processor should have stringent security practices and protocols. If your business or industry is considered “high-risk,” there are also payment processors that will specifically cater to your needs. 

Additional things to look into when deciding on a payment processor are a timeline of the turnover of funds, transparency in terms and fees, as well as the level of customer service, should you need any assistance. 

Some common payment processors include:

• Helcim
• Stripe
• PaymentCloud
• Square
• National Processing
• Stax by Fattmerchant
• CDGcommerce

Are Both Payment Gateways and Payment Processors Necessary for Your Business?

You do not necessarily need a payment gateway if your business has a POS terminal—but this mostly applies to those who have a brick-and-mortar store. However, given that most businesses now have online platforms, payment gateways and payment processors are both needed to be able to accept debit or credit card transactions on your virtual terminal.

Conclusion

At the end of the day, you can pretty much look at the same factors when choosing both a payment gateway and payment processor for your business. Check for reputation, reliability, security, and pricing structure. Both of these payment solutions should make your life easier. 

Do not hesitate to speak directly with providers to get a better understanding of what they can do for you. You should be able to offer your customers many alternatives and options to certify that all transactions are seamless and secure. 

When customers witness firsthand that you have carefully thought out your payment gateways and processors for a pleasant checkout process, you can build both loyalty and credibility. Once you implement these payment solutions, you will soon notice the difference in your sales and business outcome.

Do some further reading on e-commerce software that will help your business. Because customer feedback is an important consideration when choosing solutions like payment gateways and processors, we’d love to know what you think. Leave us a comment below!

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