Credit Card Processing

Payment Gateway vs Payment Processor: What is the Difference?

payment processor vs payment gateway

We’ll be looking at online payments, specifically, comparing payment gateway vs payment processor to highlight the differences. Once you can distinguish between the terms you’re sure to have a smoother business experience, whether you’re an online or a brick-and-mortar merchant.

What is a Payment Processor?

A payment processor is a company that manages your payments by transferring data between four units: the issuing bank, the acquiring bank, the merchant, and the customer. It’s a tool that works both for online shops and brick-and-mortar stores. Additionally, the processor supplies your physical store with point-of-sale systems. As soon as the payment is processed through the gateway, the payment processor initiates the transaction.

payment processor vs payment gateway - woman setting up her gateway

What is a Payment Gateway?

A payment gateway is a payment service that allows merchants to accept credit card payments through a physical credit card terminal. Once a customer submits their transaction by inserting their card into the EMV terminal, their data is sent to the payment gateway. The gateway confirms the payment with the bank, then sends the response back to the terminal (“payment accepted” or “payment denied”).

A virtual terminal communicates with the payment gateway for online payments, mobile payments, and other transactions. The gateway encrypts the customer’s information to ensure maximum safety.

How to ensure a payment gateway is secure

There are a few security measures that payment getaways utilize. One of the most common is the SSL (Secure Sockets Layer) encryption. By using this standard security protocol, private data can be securely transferred over a public network such as one between a web server and a browser. It basically keeps all the data the customers enter safe.

Another very popular and probably the most common is data encryption. It means that the gateway automatically encrypts the credit card information the customers enter through a public key and only with a private key you can decrypt it. Simply put, it keeps unwanted third-party users from accessing the account.

A security measurement that’s part of a lot of payment getaways is the Secure Electronic Transaction (SET). During an online transaction, this protocol secures a customer’s card information. Its function is to conceal the details of credit and debit cards and that prevents merchants from accessing any sensitive information.

Tokenization has proven to be a great security measure for payment gateways over the past years. It essentially substitutes the credit card number with a randomly generated formation of symbols. This one-time code, also known as a token, is untraceable by the cardholder and the numbers carry no value without a decryption key.

What is the Difference between a Payment Gateway and a Payment Processor?

Here’s a breakdown of the differences between a gateway and a processor:

Payment Gateway: Payment Processor
Carries the transaction process (accepts or declines) between the customer and your business.Distributes the data customers enter to the appropriate locations: the customer, your business, the receiving bank, and the acquiring bank
Can be a part of your business accounting software or online store which means that you can process credit cards from your existing software without having to implement other solutions.Can set up merchant accounts that allow your business to accept credit card payments.
Is used to process payments onlineIs the one that provides your business with point-of-sale terminals

Payment Processor vs Payment Gateway: Which one does my business need?

Depending on what kind of a business you own, you’ll either need one of these or both of them. To accept online payments you must have a payment processor and a payment gateway, whereas brick-and-mortar stores work just with a payment processor. 

The payment gateway works during the beginning and end of a transaction, where after entering credit card information, the payment is declined or accepted. The processor in this case moves this information to the appropriate destinations as we previously mentioned.

Any online business should have a payment gateway since all online transactions, including phone and e-commerce sales, are card-not-present transactions and can’t be executed without a payment getaway. Additionally, any business that has a payment gateway should also have a payment processor. This is because you can’t use a payment gateway without having a payment processor.

Choosing the Right Payment Processor and Gateway for your Business

You’ll need to be careful when choosing the products that facilitate your business. Payment gateways and payment processors both play an important role in your business and have a few factors that determine their value to your business. Here’s what to look out for when getting a payment processor:

The cost of the payment processor — The cost plays a big role. Usually, the higher the price, the better the product is. However, be sure to do your research and take the other factors into consideration before making a decision.
The variety of payment methods — Having multiple ways to pay is extremely beneficial for your business. Make sure that your payment processor accepts all sorts of credit cards, whether it’s contactless, magstripe, or chip-and-PIN ones.
The level of security — When getting a payment processor, make sure to get one that has a strong level of security. This will ensure smooth transactions and no fraud.

Here’s what to look out for when getting a payment gateway:

payment processor vs payment gateway

Cost— Much of what we said for the payment processor applies for a payment gateway too.
Features — Be sure to find out if your payment gateway of choice supports electronic invoicing, all payments types, text/email reminders for customers, smart chargeback management, etc. Regarding payment gateway vs payment processor features, gateways usually offer a lot more features since they’re online.
Easy integration process — Ensure the gateway will integrate with your software.
Security— Payment gateways almost always come with some kind of security measure. We covered some of them in this article. So when comparing make sure to check which gateway uses what kind of security measure and choose the one you prefer.
Merchant account — Having a merchant account is of utmost importance for any business owner. It is different than your personal bank account and usually, gateways don’t charge extra fees if you have one. If you do not have a merchant account, you will need to use your personal account. This comes with a handful of additional fees.

Final Thoughts

Looking at the differences between a payment gateway and a payment processor, we can see that they’re attached to one another. If you’re business primarily functions online, you’ll need both a payment gateway solution and a processor. In case you’re a brick-and-mortar store, a payment processor will suffice for all your customer needs. Keep in mind the factors that go into the two and decide the best solution for your business.

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