One thing is certain: consumers appreciate having a range of options when it comes to making payments. Whether it’s using a credit or debit card, a mobile wallet, or a contactless payment solution, flexibility is critical to guaranteeing a great paying experience for your customers.
In fact, as of 2022, credit cards (including charge cards) continue to be the most popular payment method in the US (40%), followed by debit cards (31%), mobile or digital wallets (12%), cash (12%), prepaid cards (3%), and POS financing (1%).
If you’re an eCommerce merchant, then it’s likely you’ve come across the terms payment gateway and payment processor when looking for a payment service provider.
In this article, we’ll take a look at everything you need to know about these entities, including the differences between the two, how they can work together, and how to make sure you have the right credit card processing solution for your small business.
TL;DR
- A payment processor is a financial institution that handles transactions between a buyer’s bank and a seller’s bank. A payment gateway is a technology that authorizes and processes payments between a buyer and seller by securely transmitting payment data.
- In short, a payment processor handles the transaction and a payment gateway facilitates the transaction by securely transmitting data.
- Some factors to consider when selecting a payment processor and payment gateway include: favorable pricing, integrations with your existing solutions, supported payment methods, and more.
Payment Terminology
Understanding payment processors and payment gateways starts with getting familiar with commonly-used terminology and the parties involved in payment processing. They include:
Issuing Bank. This is the financial institution providing your customer’s payment card. The issuing bank is generally a commercial bank, such as Bank of America or Wells Fargo.
Acquiring Bank. Also called the merchant account provider, an acquiring bank is the bank hosting your credit card processing account, and will deposit funds from the transaction into your account.
Card Network. These are the credit card brands you’re familiar with, such as Visa, American Express, or Mastercard.
Now that we’ve gone over these terms, let’s first dive into payment processors.
What Is a Payment Processor?
Payment processors are companies or financial institutions that handle credit and card transactions and are used for both brick-and-mortar and online store sales. Without a payment processor, your business won’t be able to accept card transactions.
Let’s start by looking at physical sales.
Payment processors work by transmitting the customer’s credit card information between the acquiring bank, the issuing bank, and the business owner. They also communicate the approval or rejection of the transaction, and ensure that the funds are withdrawn from the customer’s bank account and deposited into the merchant’s account.
Payment processors will often provide the physical equipment you need to accept payments, such as the POS terminal. A point of sales terminal reads the data via the EMV (Europay, Mastercard, and Visa) chip on the customer’s physical card. Equipped onto cards such as chip and signature or chip and PIN cards, EMV chips help minimize the chance of fraud by creating a one-time code.
When to use a payment processor
If you’re looking to accept credit card payments (whether in-store, online, or any other method), you’ll need to work with a payment processor. As mentioned above, payment processors facilitate card payments between customers, merchants, and businesses—regardless of where those payments take place.
As such, all merchants that take credit cards must work with a payment processor.
What Is a Payment Gateway?
While payment processors are necessary for in-person transactions such as those facilitated by a credit card reader, you’ll also need a payment gateway for card-not-present transactions (CNP transactions), such as online payments via your eCommerce store. (For transactions that are done via phone or mail, a virtual terminal is used.)
How does a payment gateway work?
When a customer is done with putting items into their virtual shopping cart and goes to the checkout page to enter their payment information, the payment gateway enters the game. The gateway makes sure that all the data that’s entered—such as the cardholder’s credit card information—is securely encrypted and then routed accordingly.
Through the payment gateway, a secure connection is created between your online store, your customer’s Internet browser, and their credit card company.
The acquirer, or your bank, will send a request to the issuer (which goes through the payment processing service provider) and if the transaction is determined to be legitimate and the customer has enough funds, the payment gateway will finalize the sale and relay approval.
In other words, a payment gateway is essentially an online POS terminal for your business. And it’s pretty much impossible to operate a successful online store without a payment gateway. Technically you could take orders with cash or check via mail, but it’s the 21st century—no one is going to purchase from you like that.
It’s also good to know that you’ll most likely also need a Secure Sockets Layer (SSL) certificate if you want to accept payments through your online store. This will improve the security of the connection on your eCommerce site and your customers’ browsers. On the customers’ side, they’ll see an extra “s” in the “http” part of the URL (such as “https://staxpayments.com/“).
By using an SSL certificate, you’ll be providing your customers an extra stamp of security, signaling that your online store is safe to use and that you can be trusted with your customer data.
Types of Payment Gateways
Depending on how a payment gateway is integrated into your site or online store, they may be categorized into the following three types.
On-site payment gateways. These are typically used by large businesses where payments are entirely managed on their own servers including checkout and processing. This gives the merchant greater control over their payment experience but it comes with greater responsibilities and costs as well.
Hosted payment gateways (or redirects). In this method, customers are redirected to a third-party site for checkout and payment processing e.g. PayPal. While these are generally easier to implement, the merchant has very little control over the payment experience.
On-site checkout, off-site payments. In this method, customers can checkout on a merchant’s website but payment processing takes place at the gateway’s back end. The merchant, therefore, has partial control over the payment experience.
When to use a payment gateway
You only need a payment gateway when you’re planning to take credit card payments online. So if you’re an eCommerce merchant, you need both a payment processor and gateway in order to set up shop.
Some payment processors also offer gateway capabilities, though you can also go with third-party payment gateways and integrate it with your existing solution.
Payment Gateway vs. Payment Processor: Similarities and Differences
Now that we’ve defined what a payment processor and payment gateway are, let’s look at their differences and similarities. Doing so will make it easier to understand how they work and will help you make the right choice for your payment processing or gateway service provider.
The similarities
Whether you’re using a payment gateway or a payment processor, both of them encrypt the transaction information and card data that’s sent out—and are required to have PCI compliance to protect payment data in a standardized fashion.
With a payment processor and a POS terminal, the credit card transaction data is encrypted by the POS terminal reading the EMV chip in the credit and debit card (whether you swipe, tap, or dip).
With a payment gateway, the credit card and transaction details are transmitted through the secure connection created.
Regardless of which service provider you use, both options should encrypt your customers’ data.
The differences
One of the main differences between a payment gateway and payment processor is when they’re used. You only need a payment processor for card present transactions, such as via a credit card terminal at the point of sale.
Meanwhile, both a payment gateway and processor are needed for CNP transactions, such as via phone sales or through an eCommerce site. The payment gateway creates the connection for a customer to securely enter their credit card information, while the processing service transmits the information between the customer’s bank and the acquiring bank. Essentially, the gateway acts as the credit card reader or POS in this instance. The payment processor still plays the same role it would in an in-store transaction.
It’s important to note that when you access a virtual terminal (even when using it with a POS system) for online transactions, you would still need the gateway technology because you are sending the transaction from your computer (platform) to a terminal.
How To Pick Your Payment Gateway and Payment Processing Provider
If you want to provide your customers with a seamless, omnichannel shopping experience, you’ll need both a payment processor and payment gateway so they can make purchases in-store and online.
Make sure it works with the software and tools you’re already using
When you’re looking for a payment processor or gateway, it’s important to verify if they can easily integrate with the software you already use (such as what you run your eCommerce website on, like Shopify), and if minimal (or any) coding is needed. This will save valuable time so you can get up and running more quickly. By opting for a platform that provides extensive customization options, you’ll be able to develop a powerful omnichannel approach for your eCommerce business. (Of course, if you have an excellent developer, you may opt to go for a system that requires quite a bit of coding as those tend to give developers a lot of flexibility in customizing the system for your precise needs.)
Go with a provider that offers favorable pricing and rates
Another key factor to look into is pricing. Many service providers may require a contract for multiple years, and often charge transaction fees of up to 2% for credit card payments. Try to go for a payment systems provider offering transparent pricing options and agreements that clearly state what’s included in the monthly or annual plan, so you won’t be surprised when you receive your bill. Hidden fees are quite common with some providers and include such things as chargeback fees, monthly bill processing fees, and more.
Opt for a provider that offers the latest payment tech and solutions
Finally, you want to ensure your business is as future-proof as possible. You can do that by looking for a payment processor that offers multiple, secure payment options, both online and in-store. Make sure that the POS terminal you use can accept cards whether customers want to swipe, tap, or dip.
According to Trading Platforms, mobile payments will make up one-third of all POS transactions by 2024, so consider having contactless payment options so customers can pay with their mobile wallet app.
For online payments, you can reduce shopping cart abandonment by accepting as many credit cards and payment methods as possible, including mobile wallet options like Apple Pay, Paypal, or Venmo. By allowing your customers to be in control of how they choose to pay and guaranteeing their online security, you can be sure that they’ll complete their payment with you.
Final Words
At the end of the day, it’s important to make sure that your service provider’s offerings fit into your overall strategy and business needs. By doing so, you’ll be well on your way to having a good relationship with your payment processor or payment gateway provider.
Stax offers an all-in-one payment processing platform that can modernize your payment technology. We accept all payment types and offer customizable hardware and software solutions for each business, with transparent and predictable pricing.
FAQs about Payment Gateway and Payment Processor
Q: What is the difference between a Payment Gateway and Payment Processor?
A payment processor is a financial institution that facilitates transactions between a buyer’s and a seller’s bank. On the other hand, a payment gateway is a technology that authorizes and processes payments between a buyer and seller by securely transmitting payment data.
Q: When should I use a Payment Processor?
You will need a payment processor if your business accepts credit card payments, regardless of your sales method or platform. All businesses accepting card payments must work with a payment processor, which liaises and facilitates transactions between customers, merchants, and banks.
Q: What is a Payment Gateway and when is it used?
A Payment Gateway is essentially an online POS terminal for your business. It encrypts and transmits crucial payment data such as the cardholder’s credit card information securely. You need a payment gateway when you plan to accept credit card payments online. So, if you’re an eCommerce merchant, you will need both a payment processor and gateway to set up your shop.
Q: What are some similarities between a Payment Processor and Payment Gateway?
Both Payment Processor and Payment Gateway encrypt the transaction information and card data that’s transmitted. Both have to be PCI compliant to standardizedly protect payment data. Be it through a POS terminal at a physical store or via an online payment gateway, they should both ensure the encryption of your customers’ data.
Q: What are some differences between a Payment Processor and Payment Gateway?
One key difference is in their application. A payment processor is necessary for transactions that occur in person, like using a credit card terminal at a point of sale. However, for card-not-present transactions, like online payments or phone sales, both a payment gateway and a processor are needed.
Q: What should I consider when selecting a Payment Processor and a Payment Gateway?
When selecting a payment processor or gateway, consider factors like favorable pricing, integration with your existing solutions, supported payment options, and more. Also, look for a provider offering the latest payment technologies, multiple secure payment options, and transparent pricing options.
Q: Will I need to invest in both a Payment Gateway and a Payment Processor?
If your aim is to provide your customers with a seamless, omnichannel shopping experience, you’ll require both a payment processor and a payment gateway. A processor handles transactions at physical locations, while a gateway enables secure online transactions.
Q: How can I ensure my business is future-proof when choosing a payment processor or a payment gateway?
To future-proof your business, choose a payment processor offering multiple, secure payment options, both online and in-store. Make sure your POS system accepts all forms of customer’s chosen payment methods. Also, to ensure secure online payments, incorporate as many credit card and payment methods as possible, including mobile wallet options.
Q: Is it necessary to have an SSL certificate for my online store if I use a Payment Gateway?
Yes, it is recommended to have an SSL certificate when taking payments through your online store. It improves the security of your eCommerce site, ensuring a secure connection between your site and your customers’ browsers. It gives your customers an extra sense of security, showing that your online store can be trusted with their data.
Q: Can a single platform offer both Payment Processor and Payment Gateway services?
Yes, some payment processors also offer gateway capabilities. Alternatively, you can use third-party payment gateways and integrate them with your existing solution. This provides you with more flexibility and choice to best meet your business needs.
