Payment Gateway vs. Payment Processor

Learn all about the distinction between a payment gateway and a payment processor in this informative, in-depth guide, including which types of business need which kind of infrastructure.

 

Payment processors oversee the transaction process from start to finish, whereas payment gateways only approve or decline transactions. E-commerce businesses should opt for payment gateways; in-person retailers whose point-of-sale terminals aren’t virtual can use payment processors. Excellent payment processors include Clover, Merchant One, Fattmerchant, ProMerchant and Payment Depot. This article is for small business owners interested in obtaining a payment gateway or payment processor for their credit card transactions.

In 2019, credit cards comprised 23% of transactions, which was 2% more than in 2017. It’s probable that this figure will continue to increase, making your business’s need for robust credit card processing infrastructure all the more important. As you research your credit card processing choices, you’ll also encounter the option of payment gateways. What exactly is the difference between payment gateways and payment processors? Learn all about the two options below.

What is a payment gateway?

A payment gateway securely delivers transaction data to a payment processor to ensure the transaction runs smoothly. When a payment gateway approves a transaction between your business and a customer, the payment process can begin. Payment gateways essentially function as digital points of sale, making them great for credit or debit card transactions that don’t require tangible cards. 

How does a payment gateway work?

It’s often easiest to understand payment gateways through the eyes of the issuing bank (the bank behind the customer’s card) and the acquiring bank (your bank). Here’s how these banks are involved in the payment process:

The customer makes a purchase using their credit or debit card. The payment gateway encrypts the customer’s card data and sends it to the acquiring bank. The payment gateway identifies the credit card network behind the card and sends transaction data to the issuing bank. The issuing bank determines whether the transaction is valid or fraudulent. The issuing bank checks the customer’s available credit, if applicable, to see whether the transaction can be verified. The issuing bank approves or declines the transaction. The payment gateway conveys the issuing bank’s decision to the acquiring bank, which informs you that the purchase is paid.

How can you set up a payment gateway?

Typically, your credit card processing company can set up a payment gateway. Experts recommend this route because compatibility issues are rare when your credit card processing and payment gateway infrastructure overlap. Additionally, going in-house for your payment gateway often means you’ll avoid setup fees.

Sometimes, your credit card processor will have its own payment gateway. In other cases, your credit card processor will maintain a relationship with a third-party company. Either way, you should read your contract’s terms and conditions closely to see how much you’ll pay for payment gateway access.

What is a payment processor?

A payment processor transmits data among three parties crucial to a transaction: your business, the issuing bank and the acquiring bank. Payment processors typically provide your physical infrastructure for accepting payments. They can also help set you up with a merchant account, which you’ll need before accepting credit and debit card payments. 

Payment processors can be divided into two categories:

Front-end payment processors connect with credit card networks and transaction settlement services to manage merchant accounts.  Back-end processors oversee the actual movement of funds among accounts. Front-end payment processors typically contract with back-end processors to provide full services to clients.

Like payment gateways, payment processors charge fees for their use. Read your contract’s terms and conditions closely to determine whether you owe the following fees:

Flat per-transaction fees Variable percent-based fees per transaction Monthly statement fees Monthly minimum fees  Annual Payment Card Industry (PCI) compliance fees

Payment gateway vs. payment processor: What’s the key difference?

The above payment gateway and processor information is full of potentially confusing language that can obscure what is, in fact, a relatively straightforward difference between the two. Payment processors link customers, merchants and banks using data that a payment gateway captures. Payment gateways also determine whether transactions are approved or declined.

Key TakeawayKey takeaway: Payment processors oversee the entire transaction process, whereas payment gateways are solely for approving or declining transactions.

There are additional differences between payment gateways and processors based on the kinds of sales you make and the data encryption needed. These distinctions can help you determine whether you need a payment gateway, a payment processor or both.

How to determine if you need a payment gateway or a payment processor

If you accept in-person sales only (a restaurant is a great example), you need a payment processor. An exception arises if your point-of-sale terminal is virtual and can be accessed via computer only. In this case, the digital infrastructure that comes with a payment gateway is required.

The digital makeup of payment gateways also explains their most common use; namely, payment gateways facilitate almost every online purchasing platform you’ve ever used. Any time you’ve typed your credit card information into a website when buying something, you’ve encountered a payment gateway. 

Payment gateways govern all online transactions, which are typically called “card-not-present transactions.” Phone and e-commerce sales also fall into this category, so any online business should have a payment gateway. However, any business with a payment gateway should also have a payment processor. As explained above, a payment gateway can’t work without a payment processor.

Both payment gateways and processors offer excellent data encryption. You can also use both to send transaction data for processing. The below table explains where processors and gateways do and don’t overlap: