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Payment Gateway vs. Payment Processor Guide
If you plan to accept credit cards online, you’ll need these services.
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If you’re in the market for a top credit card processing solution, you may have come across the terms “payment gateway” and “payment processor.” Both terms represent crucial, related elements of credit card processing, but they are not the same. If you’re unsure of the distinction, you’re not alone. You must understand the nuances, however, to make an educated purchasing decision about your small business’s ability to accept credit card payments.
This guide will explain how payment gateways and payment processors fit into the credit card processing landscape. You’ll likely need both services if you plan to accept credit card payments online, so understanding each is critical to making the right choice for your small business.
What’s the difference between payment gateways and payment processors?
Here’s an at-a-glance look at the differences between payment gateways and payment processors:
Task/use | Payment gateway | Payment processor |
|---|---|---|
Card-present transactions | Can be entered in a virtual terminal | Card inserted into a POS system or credit card reader |
Card-not-present transactions, such as e-commerce and phone sales | E-commerce transactions processed online or entered into a virtual terminal | Can be entered into a POS system when the card’s chip or magnetic strip cannot be read properly |
Encryption of information, sending transaction data to be processed | Yes | Yes |
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What is a payment gateway?
A payment gateway facilitates online credit card payments and other online payment app transactions in which a credit card is not physically present. The technology creates a secure connection between your business’s website and the credit card processing company.
Payment gateways usually have an interface called a virtual terminal that allows you to enter credit card information manually so you can accept credit cards over the phone. If you’re looking for a payment gateway, Emilis Armonas, head of product at ConnectPay, recommended thoroughly vetting all features to ensure it’s the right choice for your business.
“When choosing a payment gateway, it’s crucial to prioritize a system that supports a wide range of payment methods, including credit cards, bank transfers, PayPal and local options tailored to your target market,” Armonas said. “The user experience should be seamless, with an intuitive interface that integrates easily with your e-commerce platform, whether it’s Shopify, Magento, WooCommerce or others. Additionally, ensure that the gateway is compatible with your existing systems and provides a smooth integration process.”
How does a payment gateway work?
Here’s how a payment gateway works:
- The buyer makes a purchase with a credit card through a virtual terminal or an online store.
- The payment gateway’s secure connection encrypts credit card payment data and pushes it to the acquiring bank.
- The payment gateway determines which credit card network is involved and routes the transaction information to the issuing bank.
- The issuing bank verifies the authenticity of a transaction and determines if the buyer has enough credit remaining to cover the transaction amount.
- The issuing bank sends the approval or rejection of the transaction to you through the payment gateway.
How do you access a payment gateway?
You can typically set up a payment gateway with your chosen credit card processing company. Working with your processor makes complications and compatibility issues less likely and helps you avoid payment gateway setup fees. “Generally speaking, setting up a payment gateway is really simple. You only need an e-commerce site and a computer to get going,” said Frank Pagano, executive sales director at VizyPay. “Setting up a relationship with a payment processor is even easier. Once the e-commerce site has been established, you need to find a processor that has the ability to connect to your website (through API) via their gateway and you’re in business.”
Some credit card processors have their own payment gateways, while others work with third-party payment gateways on behalf of their client businesses. One of the most popular third-party payment gateway providers is Authorize.net.
What is a payment processor?
A payment processor is a company that handles a business’s credit card and debit card transactions. The payment gateway moves encrypted data around, while the payment processor essentially moves funds from one account to another.
If you want to accept credit card and debit card payments from your customers online, over the phone or at the point of sale (POS), you must partner with a payment processor. “When selecting a payment processor, focus on processing speed to ensure fast transaction authorizations and settlements,” Armonas said. “The processor should also be compatible with major card schemes like Visa and Mastercard. However, depending on the region, some processors might not support all card schemes, so it’s important to check compatibility if you operate in diverse markets. Beyond these features, consider the processor’s reliability and technical capabilities to scale as your transaction volumes grow.”
Once you’ve selected your preferred processor, you need to set it up. “[That] begins with choosing the hardware that suits your needs best,” Pagano said. “There are a lot of different options that accommodate mobile payments, contactless payments, desktop or tabletop payments. As far as software, all payment processors should be equipped with API integration, security and compliance safeguards and an easy-to-use interface.”
Payment processors can be categorized into front-end and back-end processors.
- Front-end processors: Front-end processors maintain connections to card networks and settlement services, and they manage merchant accounts on behalf of their clients. They contract with back-end processors, who handle the actual movement of money behind the scenes.
- Back-end processors: Back-end processors primarily settle the transactions, moving money from the issuing bank (the customer’s account) to the merchant bank, which ultimately transmits funds to the business’s bank account when the transaction is finalized.
Credit card processing fees vary by transaction amounts, values and models. Generally, payment processors charge a percentage of each transaction, often adding a small per-transaction fee and a few other fees, such as a monthly statement fee, a monthly minimum fee and an annual Payment Card Industry compliance fee.
Do I need both a payment gateway and a payment processor?
To accept credit and debit cards online, you’ll likely need both a payment processor and a payment gateway. You can typically forgo a payment gateway, however, if you only intend to accept credit and debit card payments via your in-store POS system. Still, virtual terminals accessed through your computer require a payment gateway, even if you accept payment only at the point of sale. [Learn about the best POS systems]
“For businesses accepting online payments, both are generally needed,” Armonas said. “A payment gateway is necessary to interface with customers, while a payment processor handles the behind-the-scenes movement of funds. However, in some cases, businesses may only need one or the other depending on their payment methods. For example, businesses accepting only bank transfers or PayPal may not need a traditional payment processor.”
Payment gateway vs. payment processor FAQs
- You don’t need a merchant account. Unlike traditional payment processors, payment aggregators don’t require your business to set up a merchant account. Instead, aggregators group your transactions with other merchants’ transactions, essentially making you a submerchant on the aggregator’s merchant account.
- Payment aggregators process payments quickly. Payment aggregators typically have a quick and easy application process and allow for much faster processing times than conventional payment processors.
- Payment aggregators have straightforward fees. Payment aggregator fees tend to be straightforward. Aggregators are often cheaper overall, depending on the amount and value of your transactions. Unlike payment processors, aggregators generally offer fixed rates, so even as your transaction volume increases, your price does not increase. In contrast, payment processors typically offer more favorable rates to businesses with high transaction volumes or high-value transactions.
- Payment aggregators are risk-averse. Unfortunately, payment aggregators are wary of risks and may place holds on your account if they detect suspicious activity or are trying to avoid chargebacks.
Natalie Hamingson contributed to the reporting and writing in this article.
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