Payment Gateway vs. Payment Processor: How Are They Different

Introduction

In today’s business landscape, accepting digital payments like credit cards, online wallet payments, and Internet banking is essential for success. Setting up a system to accept these payments involves two key elements: payment processors and payment gateways.

But do you know the difference between payment gateway vs. payment processor? Well, if you don’t, this article will help.

What is a Payment Gateway?

A payment gateway is a technology that empowers merchants to accept debit or credit card payments from their customers for a purchase. This term encompasses both the physical card-reading devices used in traditional retail stores and the online payment processing portals used in e-commerce stores.

A payment gateway securely transmits payment card details from customers to a merchant’s bank through a payment processor. In online transactions, it acts as cloud-based software capturing and transferring card or payment wallet information, facilitating card-not-present transactions for seamless processing.

For transactions that involve swiping a card, the payment gateway software is built into the point-of-sale(POS) system or the card reader. It collects the account details when the card is swiped and sends it to the payment processor and the merchant’s bank for further validation and processing.

Types of payment gateways

Payment gateways come in three types based on their integration with your website or POS system. The three different payment gateways are Hosted payment gateways, Self-hosted payment gateways and API hosted payment gateways. Let’s learn about these three types. 

1. Hosted payment gateways

   Hosted payment gateways are not directly hosted by the merchant. Instead, customers are redirected to the payment service provider’s page when they click on the ‘Pay now’ link. The customer then fills in their payment details on this external page and is directed back to the merchant’s web page once the payment is complete

   Example: PayPal

2. Self-hosted payment gateways

   Self-hosted payment gateways collect customers’ payment details on the merchant website itself and then transfer the data to the third-party payment gateway for authorization. The merchant ensures that the payment data collected on the website is transferred to the third-party payment gateway using SSL encryption. 

   Example: QuickBooks Commerce B2B Payments, Shopify Payments

3. API-hosted payment gateway

   API-hosted payment gateways handle payment details and processing on the merchant website. In this case, the merchant integrates a payment gateway into his website using an application programming interface (API). Payment details need not be sent to a third-party page, thus reducing data security risks while allowing the merchant complete control over buyers’ payment and checkout experiences.

   Example: Stripe

What Is a Payment Processor?

A payment processor is a provider that handles the logistics involved in accepting credit and debit card payments. It acts as an intermediary in card transaction processing, facilitating communication between customers, merchants, and banks. The processor receives card details from the payment gateway and forwards them to the merchant’s bank and the card network for verification, ensuring secure transactions and identity validation.

The card issuing company rejects or accepts the transaction and sends a message relaying the same to the payment processor. The payment processor then relays this information back to the payment gateway, which notifies the customer whether the transaction is accepted or rejected.

An example of a payment processor is Square.

Key Differences Between Payment Processor and Payment Gateway

The table below lists some of the key differences between a payment processor and a payment gateway.

Payment Gateway vs. Payment Processor: Which One Does Your Business Need?

When setting up a digital payment system, a common question is whether you need both a payment processor and a payment gateway to accept and complete e-transactions.

In reality, you need both to complete a transaction, as one cannot function without the other.

A payment processor manages the communication between the merchant’s bank, the customer’s bank, and the card network association. In contrast, a payment gateway is the software that the customer interacts with. Payment gateways read and transfer card information to the processor for validation and approval and convey the payment status (approved or rejected) to the customer.

How to Choose the Right Payment Processor and Payment Gateway

There are several factors that you must consider when choosing a payment gateway and processor. Some of them include:

• Costs: Ensure that the costs and other charges involved are reasonable and within your budget. Most payment processors charge 1% – 4% of the transaction value as fees.
• Types of card supported: Ensure that the gateway and processor support multiple cards such as Visa, MasterCard, Amex, Diners Club, etc.
• Holding time: Though payments are approved instantaneously, the money is held for a few days before being settled into your account. Most payment service providers have a holding time of 1 – 7 days.
• Security: Make sure the payment gateway you select is PCI DSS compliant and uses SSL encryption
• Integrations: Check whether the payment processor supports data sharing with other finance and accounting tools that you use, such as accounting or invoicing software.

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FAQs

1) How do payment processors and gateways work together?

Payment gateways securely transmit transaction information from merchants to payment processors. Processors then interact with banks and card networks to authorize and settle transactions. This collaboration ensures efficient, seamless, and secure payment processing for businesses and customers.

2) What is the difference between a payment gateway and a payment processor?

A payment gateway facilitates communication between a merchant’s website and banks for transaction authorization. A payment processor manages the transaction’s financial aspects, including fund transfers between banks and card networks, ensuring payments are processed securely and efficiently.

3) Which is the best payment gateway and payment processor?

Choosing the best payment gateway and processor depends on specific needs, such as transaction volume, industry, and geographical coverage. Popular choices include Stripe, PayPal, and Square, which are known for their robust features, ease of integration, and security measures, catering to diverse business requirements.

4) Do I need a payment gateway or processor?

For businesses, both a payment gateway and a processor are essential. A payment gateway handles online transaction authorization, while a processor manages the actual transfer of funds. Choosing depends on your business needs: gateways integrate with websites, and processors handle backend financial transactions. Opt for a provider offering secure, efficient service tailored to your business model.

5) Do I need a payment gateway and payment processor?

Yes, having a payment gateway and processor is crucial for businesses to process online transactions securely. They facilitate seamless payments, ensure data security, support various payment methods, and enhance customer trust, which are essential for modern business operations and growth in digital commerce.