When you’re running a business you need to understand the payment process for accepting credit cards. A payment gateway and a payment processor perform different functions in obtaining credit card transaction data, getting approval, and processing it for payment.
This guide differentiates payment processor vs payment gateway and helps you decide what to look for in the right online payment processor and payment gateway for your business.
Table of Contents
- Payment Gateway vs Payment Processor
- The Role of Each in a Credit Card Transaction
- Payment Processor vs Payment Gateway–When to Use Which?
- Understanding Payment Gateways
- Example(s) of Payment Gateways
- Understanding Payment Processors
- Example(s) of Payment Processors
- How to Find a Payment Processor or Payment Gateway
- Benefits of an Automated Payment Solution
A payment gateway is a place on a merchant’s website where customers securely enter credit card information. A payment gateway also verifies that a customer’s card is legitimate. A payment processor transmits card data from a merchant’s point-of-sale system to card networks and banks involved in the transaction.
Payment Gateway vs Payment Processor
In simplest terms, a payment gateway is where a customer enters their credit card information on a website when making a purchase, whereas a payment processor works behind the scenes to transmit the credit card information from the point-of-sale system to the banks that will process the payment.
Payment gateway is software that transfers encrypted and tokenized customer sales and payment data between the merchant’s website and the payment processor. Payment processor is an online service coordinating the approval or denial code from the issuer to the gateway and merchant payment from the credit card issuer through the acquirer bank.
The Role of Each in a Credit Card Transaction
Payment gateways and payment processors play different roles in completing credit card transactions between merchants and customers. This automated software process takes about two seconds from submitting the transaction to placing the approved transaction on the customer’s credit card for payment by the card bank issuer upon settlement (or declining the transaction).
The payment processor receives tokenized customer order and payment data from the payment gateway software tool, acts as an intermediary with the card issuer and acquirer banks, notifies the payment gateway of the transaction approval or decline code, and facilitates the payment from the issuer to the merchant account through the acquiring bank.
The payment processor interacts with the issuer bank that gives approval or declines the transaction and then notifies the payment gateway. Then the payment gateway notifies the merchant of the approval or decline of the transaction.
As part of transaction processing, the card issuer pays upon settlement of approved transactions through an acquirer bank providing the merchant account. The payment processor acts as an intermediary. The merchant account is a bank account for receiving batched credit card payments upon settlement.
For each purchase, buyers enter their credit card number, expiration date, and security code through an online form. The best payment gateway software will securely validate their credit card using encrypted and tokenized data with PCI compliance. The payment gateway will automatically contact a payment processor to facilitate an approval or decline of the customer’s credit card for a transaction through the issuer bank.
If the credit card is approved by the customer’s card issuing bank, the payment processor begins providing the payment service for the transaction.
The payment processor sends the credit card data and associated sales transaction data to the credit card network, bank credit card issuer, and acquirer bank with the merchant account receiving the payment. For a transaction fee, which may be a percentage of the sales amount plus a fixed fee, the payment processing service gets the buyer’s credit card charged and the merchant paid (often through combined daily batch transactions).
Payment Processor vs Payment Gateway–When to Use Which?
A payment processor facilitates online “card not present” transactions received from a payment gateway. A payment processor can handle physical point-of-sale (POS system) transactions in a store without needing a payment gateway.
As a merchant, your customers may pay for their online purchases with a credit card through your website, eCommerce platform, or virtual POS terminal. For these “card not present transactions”, a payment gateway performs the functions of a physical POS terminal for online transactions by securely transmitting data to the payment processor and performing some post-approval notification steps.
Besides credit cards, payment gateways also handle transactions for debit cards, gift cards, and direct payments (called ACH in the United States).
Understanding Payment Gateways
A payment gateway is software operating between a merchant’s site and a payment processor for online transactions like credit card or debit card payments for purchases. Payment gateways may be accessed either through an external gateway site or through the merchant’s eCommerce platform.
Payment gateway software receives securely encrypted payment data through an online form and automatically coordinates the payment process with a payment processor after the customer submits their order for credit card payment on the merchant’s website. The payment gateway notifies the merchant of the transaction approval or decline response code for rejections it receives through the payment processor.
Payment gateway software may be already included in your shopping cart software for eCommerce or it may be an additional software product that you’ll need. Some payment gateway service providers offer multi-currency and multi-language functionality for global payments. And some payment gateway providers also offer merchant accounts.
Fraud is a payment gateway issue. Some payment gateway software provides enhanced fraud protection. But, according to BigCommerce, some payment gateways may allow opportunities for fraud to occur at some points in the process. Ensure that you use the most secure payment gateways and enhance security when using a payment gateway. One security solution BigCommerce recommends is to stack payment gateways.
Example(s) of Payment Gateways
Payment gateways include:
- Braintree (a PayPal company)
Braintree-PayPal, Stripe, and Adyen are combined payment gateways and payment processors. To understand how Braintree and PayPal work together, read Braintree vs. PayPal.
For a payment gateway or payment processor, your business can select Stripe or competitors and alternatives to Stripe. The linked list of Stripe alternatives includes some additional companies for comparison, including WePay vs. Stripe.
Understanding Payment Processors
The payment processor works as an intermediary between the gateway and the bank issuer of the customer’s credit card and the acquirer bank, holding the merchant account for a credit card or debit card transaction payment. These transactions may include payment options of virtual cards in addition to physical cards. Merchants make decisions about accepting payments from which credit card companies.
A payment processor transfers encrypted payment data received from the payment gateway to a credit card network that contacts the credit card’s issuing bank or financial institution for transaction approval or denial as a digital code. The payment processor electronically notifies the payment gateway of the response received from the issuing bank and facilitates payment by the acquirer bank to the merchant’s bank account.
Credit card networks include Mastercard, Visa, American Express, and Discover. Mastercard and Visa use banks to issue their credit cards and debit cards, whereas American Express and Discover directly issue their own credit cards. The steps in this article describe a Mastercard or Visa transaction with involvement of an issuer bank.
The issuer checks for a valid customer’s credit card from a credit card network within its credit limit. If it’s not a valid card number or cardholder, the card credit limit is reached, or another type of fraud alert is issued, the issuer will decline the transaction.
Upon approval of the transaction, the issuing bank puts a hold on the customer’s account funds immediately and sets up a pending transaction on the credit card. The issuer pays the acquirer the discounted amount (after payment processing fees) upon settlement within one or more days. The acquirer deposits daily payment batches into the merchant account. The customer pays their credit card statement by the due date or carries a balance with interest charges after making a minimum payment.
The payment processor should be PCI DSS compliant for adequate security. Besides credit cards and debit cards, a payment processor may also handle ACH payments and some other payment methods.
The payment processor earns a service fee. The service fee may have two components—fixed cost per transaction and a percentage of the transaction amount. Rather than paying standard pricing for fees, some high-volume merchants may be able to negotiate better pricing through a customer-specific quote from the payment processor.
Example(s) of Payment Processors
- QuickBooks Payments (Intuit Merchant Services)
PayPal, Stripe, and Square are some of the best online payment software solutions for payment processing.
Square provides POS hardware and virtual terminal software that works without a software payment gateway. In this comparison, Square describes differences in the business offering of Square vs. Stripe. You may possibly decide to compare Square vs Payoneer vs. Tipalti for online payment software.
QuickBooks Payments, provided through its parent company Intuit, is used only by approved business users within the QuickBooks accounting software.
How to Find a Payment Processor or Payment Gateway
To find the best payment processor or payment gateway for your business, consider security, costs (including fixed and percentage fees), choice of payment methods, and the ability to handle global payments and reduce fraud risks. Determine whether your eCommerce software includes a payment gateway to handle eCommerce transactions for your online store.
When choosing a payment gateway or payment processor, small businesses may have different business needs than larger businesses with a greater volume and more global transactions.
Benefits of an Automated Payment Solution
An automated payment solution like Tipalti integrates with payment processors and lets your business efficiently make batched global payments using various preferred payment methods while reducing fraud risks and ensuring regulatory compliance.