The business of accepting payments is a big one. In 2021, the global digital payment market was worth USD 89.5 billion. If you’re interested in opening your own business or start-up, you shouldn’t wait any longer. Thanks to new emerging technologies and APIs, setting up a website and enabling your website to accept payments online has always been challenging. You must set up payment processing when starting a business and selling your product or service online. But there are different options available for processing payments for your e-commerce platform.
You might have heard about payment gateway and payment processors and might be wondering how they differ. A payment gateway is a type of payment processor that allows you to accept payments from your customers in a secure way. But with so many different processors and gateways available, it’s easy to get confused about their differences. However, understanding the pros and cons of each can help you make an informed decision on what will work best for your business.
There are hundreds of Payment Processing and Payment Gateway solutions on the market today. When shopping for a new payment processor or gateway, knowing which is right for your business can take time and effort. Both services provide similar functionality in that they process payments digitally. However, there are some differences in their operations and the services they offer.
Whether you’re just starting a business, you need to understand the difference between a Payment Processor and a Payment Gateway to find the solution that best meets your needs and budget. While both services handle payments differently, there are key differences to keep in mind before deciding which service is best for your company.
Here we’ll explore the key differences between a Payment Gateway and vs Payment Processor and help you choose which is right for your business.
In this article, we will look at the critical differences between these two services so that you can choose the right one for your business needs.
What is a Payment Processor?
A payment processor is an organization that accepts credit/debit card payments on behalf of a business. It helps businesses to manage all transactions on their portal and ensure a seamless experience for customers. In other words, a payment processor is a middleman between your business and the card networks (e.g., Visa, Mastercard, American Express, Discover). A processor can be either an independent service or a third-party service provided by a company already part of your e-commerce platform.
When a customer makes a purchase, they are charged a certain amount they have agreed to in their contract with the credit card network. This amount is known as the “discount rate” and is set by the credit card network. The processor receives this money from the networks on behalf of the business and then transfers the funds to the business owner. They keep a percentage of the transaction as a fee for the service.
What is a Payment Gateway?
A payment gateway is a service that transmits payment information securely between a customer’s bank and your business. A gateway receives authorization from the customer’s bank to authorize and process a transaction. Payment gateways act as a “hub” in the e-commerce ecosystem. They are the central connection point for all parties involved in a transaction.
The gateway’s primary function is to securely transmit information between the customer’s bank and your business. It works as a go-between, transferring data from one party to another. A gateway securely sends payment information between a customer’s bank and your company.
Customers who place an order on your website will see an authorization request on their bank statement. It shows them that their card has been authorized for the transaction.
What is the difference between a payment processor and a gateway?
As we have seen, a payment gateway and a payment processor are used to process payments on your e-commerce store. However, they have some essential differences that you need to be aware of before you decide which option to choose for your business.
First of all, a payment processor doesn’t process anything. It simply connects your site to its secure gateway and facilitates payment transactions. The payment processor will only receive the money from the customer. It will keep a small percentage of the funds (usually around 3%) as a fee and send the rest to your business account. The payment processor will also manage the risk associated with each transaction by vetting your customers’ payment information.
On the other hand, a payment gateway is a software that processes payments. It will receive a payment from the customer’s bank account, convert it to your preferred currency, and then send the funds to your business account.
Simply put, a payment processor accepts card payments, and a payment gateway securely transmits these card transactions to the customer’s bank. While payment processors process payments, payment gateways are responsible for securely communicating the payment information through a network.
With this, many payment processors also act as a gateway by offering merchants a single “point-of-entry” for all transactions. It means that a single system manages the flow of information between all parties involved in a purchase (customer, gateway, and bank).
On the other hand, Gateways work independently and can be used with several different processors simultaneously. While payment processors accept payments directly from customers, payment gateways do not. The payment processor agrees with the amount on your behalf and then passes this information to the gateway.
Advantages of using an independent payment processor
– Access to various payment options — You can accept any payment method your customers prefer (e.g., credit cards, debit cards, gift cards, ACH payments).
– No upfront investment — If you go with an independent payment processor, there is no upfront investment. You will only pay a transaction fee based on the volume of transactions processed through the processor.
– Quick set-up — A quick set-up process and no integration fees make it easy to start with a payment processor.
– No integration required — You do not have to integrate a payment processor with your website or any platform.
Disadvantages of using an independent payment processor
– No control over customer experience — Your customers are redirected to another system when they purchase. It means you have no control over the customer experience.
– Inability to increase conversion rates — You can’t use your branding when accepting payments through a third-party payment processor.
– No room for growth — If your business grows and you need to accept higher payment volumes, you will have to switch to a different payment processor.
– Slow and expensive settlement — An independent payment processor does not guarantee that funds will be available to you instantly.
– Lower fraud protection — You have fewer fraud protection options when accepting payments through a third-party processor.
When to use a payment gateway?
A payment gateway is an excellent option if you want to accept payments from various payment methods. It can work with multiple payment instruments, including credit cards, debit cards, direct debit, and online money transfers.
So, a payment gateway might be the best option if you want to accept payments from many different payment methods or payment instruments.
Another great thing about payment gateways is that they help you avoid dealing with many secure data. That’s because they receive and send payments on your behalf. They can access your customers’ credit card and bank account information. If you opt for a payment gateway solution, you won’t need to host this information yourself. That makes it a great option if you want to avoid securing sensitive data.
Why use a payment processor?
The most significant advantage of using a payment processor is that you don’t need to worry about collecting payments. You have to provide the payment processor with your business information, and they will handle the rest.
Another great thing about payment processors is that you can accept payment from various payment instruments, including credit cards, debit cards, and online money transfers. You can even get other forms of online payments, such as PayPal.
So, a payment processor might be the best option if you want to accept payments from many different payment methods or instruments. The most significant disadvantage of using a payment processor is that you need to control the customer experience. That’s because the payment processor will handle the payments on your behalf.
It means that your customers will interact with the payment processor’s website. Usually, this can be problematic because your customers might feel uncomfortable using a website that isn’t yours.
Which one should you choose?
You should opt for a payment gateway if you want to accept payments from various payment methods. However, if you’re going to get prices from multiple payment instruments, you should opt for a payment processor. As you can see, each of these payment solutions has its advantages and disadvantages.
While there are no clear-cut rules when it comes to choosing between them, there are a few things that you should keep in mind. First of all, you need to consider the security of the service. You want to make sure that the payments are being processed securely. Also, it would help if you ensured that the service could easily integrate with your current e-commerce platform.
4 Key things you need to know when deciding between a payment gateway and a payment processor
- Payment gateway vs. Payment processor — It’s essential to know the difference between a gateway and a processor. A gateway, like a payment processor, receives a credit/debit card transaction. However, it then securely transmits this information and sends an authorization request to the customer’s bank.
- Settlement — This is different from the settlement process of a payment processor. With a gateway, funds will be available instantly and directly deposited into your account.
- Payment methods — Gateways are designed for online businesses that want to accept online payments. They accept all major credit cards, as well as ACH payments.
- Fraud detection — Gateways offer advanced fraud detection that can identify risk factors and help prevent fraudulent transactions.
Know your responsibilities when choosing a processor or gateway
- You are responsible for all customer service and dispute issues. Make sure you have a dedicated customer support team if you are using an independent payment processor.
- Make sure you have a plan in place in case you have to terminate the relationship with your processor. It could include finding a new processor, managing the customer experience during the transition and ensuring that no one is left without funds.
- When choosing a processor, find out how they deal with chargebacks. Your service provider must conduct a chargeback dispute if a customer disputes a transaction. Make sure you can trust your processor to handle this critical process.
Choosing a suitable payment processor or gateway can be a challenge. There are many options on the market, each with different benefits and drawbacks. It’s essential to choose the right payment solution for your business so you can focus on growing your sales and revenue. When it comes to accepting payments, you have a few different options.
You can use an integrated payment solution, an independent payment processor or a payment gateway. Whatever option you choose, make sure it supports your preferred payment types and comes with fraud mitigation features.
As you can see, there are some critical differences between a payment gateway and a payment processor. A payment gateway is a software that allows you to accept various payments online without hosting a merchant account. On the other hand, the payment processor is a TPSP that facilitates payment transactions.
A payment gateway is an excellent option if you want to accept payments from various payment methods. While a payment processor is an excellent option if you want to accept payments from various instruments. Moreover, you don’t have to worry about collecting payments, as the payment processor will handle the rest.