Today’s shoppers expect options at checkout. Industry data shows that 70% of consumers say the availability of their preferred payment method is very or extremely influential when choosing an online store. Whether it’s using a credit or debit card, a mobile wallet, or a contactless payment solution, flexibility is critical to guaranteeing a great payment experience for your customers.
A payment processor and payment gateway are both crucial components in transactions, as they enable the various ways that shoppers want to pay. That being said, they serve distinct roles in facilitating payments.
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 provider 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 buyers and sellers by securely transmitting payment 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 Gateway vs. Payment Processor: An Overview
A payment processor is a service that handles the technical aspects of transferring payment information between the merchant, the customer, and the customer’s bank. A payment gateway, on the other hand, is a technology that acts as an intermediary between a merchant’s website and the payment processor, securely transmitting payment information.
| Payment Gateway | Payment Processor | |
| Primary Function | Secures and transmits card data between the customer and the processor | Facilitates the actual movement of funds between the customer’s and merchant’s banks |
| Used For | Online or card-not-present (CNP) transactions (e.g. eCommerce, phone sales) | All card transactions, including both in-person (POS) and online |
| Acts As | An online POS terminal that encrypts and forwards payment information | The back-end courier that completes the transaction between banks |
| Encryption | Encrypts card details entered on websites or virtual terminals | Encrypts card data read by POS terminals (e.g., EMV chip readers) |
| PCI Compliance Required | Yes | Yes |
| Fraud Prevention Tools | Yes – may include AVS, CVV checks, tokenization | Yes – may include velocity checks, fraud detection filters |
| Examples of Use | A customer pays via a website checkout form | A customer swipes, taps, or dips their card at a physical POS terminal |
| Needed For | eCommerce, mobile apps, phone/mail orders | Brick-and-mortar stores, virtual terminals, and all card transactions |
| Can It Stand Alone? | No – requires a payment processor to complete transactions | Yes – for in-person transactions; needs a gateway for CNP transactions |
| Provided By | Often bundled with eCommerce platforms (e.g., Shopify Payments, PayPal, Stripe) | Often provided by banks or payment service providers (e.g., Stax, Square, Fiserv) |
| Typical Users | Online merchants, SaaS platforms, subscription services | Any merchant accepting credit or debit card payments |
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 card and debit 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.
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 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 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 ensures that all data 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 is processed through the payment processing service provider). If the transaction is deemed legitimate and the customer has sufficient funds, the payment gateway will finalize the sale and relay the 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 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 also comes with increased responsibilities and costs.
For example, an enterprise-level retailer like Nike might use an on-site payment gateway to deliver a fully branded checkout experience while tightly controlling transaction speed, data security, and customer analytics.
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.
Here’s what that could look like: A small handmade soap business may choose to integrate its website with PayPal, allowing customers to complete their purchase through PayPal’s secure hosted page without the merchant handling any sensitive card data directly.
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 them 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 systems play a crucial role in securely handling payment data. They share several common features:
- Encryption: Both encrypt transaction and cardholder data to help protect against fraud and ensure PCI compliance.
- Fraud prevention: Both can include fraud detection and prevention tools to help reduce chargebacks and unauthorized transactions.
- Integral to payment processing: Whether the transaction happens online or in person, at least one of these systems is involved in securely transferring payment data.
Example: With a payment processor and POS terminal, the transaction is encrypted by the terminal reading the EMV chip. With a payment gateway, encryption happens through the secure online connection that transmits the card details.
The differences
While payment gateways and payment processors often work together, especially in eCommerce, they serve different purposes—particularly depending on whether the transaction is card-present or card-not-present.
When they’re used:
- Payment processor only: Needed for in-person, card-present transactions (e.g., swiping a card at a brick-and-mortar store).
- Both processor and gateway: Required for online or card-not-present (CNP) transactions (e.g., an eCommerce checkout or phone sale).
Role in online transactions:
- Gateway: Acts as the digital point-of-sale, creating a secure channel for entering card details.
- Processor: Sends the payment info from the gateway to the customer’s bank and back again with approval or decline status.
Virtual terminals:
- If you’re manually keying in card details via a web browser or POS system (such as through a virtual terminal), you’ll still need a gateway to securely transmit the data from your device to the processor.
Think of it this way: the gateway is the online “card reader,” while the processor is the behind-the-scenes courier that completes the transaction.
How To Pick Your Payment Gateway and Payment Processing Provider
To provide your customers with a seamless, omnichannel shopping experience, you’ll need both a payment processor and a payment gateway, allowing them to make purchases both 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, verify if they can easily integrate with the software you already use (such as what you run your eCommerce website on, 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
Ultimately, it’s crucial to ensure that your provider’s offerings align with 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 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 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.
