Payment Processor vs Payment Gateway: Purpose and Differences
TABLE OF CONTENTS
Adding a page for customers to input card details isn’t enough to secure their personal information. It is the merchant’s responsibility to provide customers with safe and secure online payment options. This means integrating a program is inevitable.
To know whether you have the right payment processor, follow the PCI Security Standards. You can either ensure to follow the requirements yourself or benefit from a payment solution that is already PCI compliant.
By failing to comply with PCI requirements, you risk your reputation and might even receive fees. Being a small local shop that accepts electronic payments does not justify neglecting security measures.
At some point, you might have heard about a payment gateway and a payment processor that are needed to accept online payments. This guide compares the two and explains why you need both of them for your online business.
WHAT HAPPENS DURING ONLINE TRANSACTIONS?
A transaction takes a few seconds to complete when a credit or debit card is entered to purchase an item. However, on the other side of the process, transaction data goes through a number of steps:
- The transaction goes through a payment gateway to a payment processor.
- The debit or credit card processor verifies and approves (or declines) the transaction.
- The issuing bank (customer’s bank) sends the requested amount to the processor.
- The amount is then redirected to the acquiring bank (merchant’s bank account).
- The payment processor then sends the status (approved or denied) back to the customer via the payment gateway.
WHAT ARE PAYMENT GATEWAYS?
As you’ve noticed from the pathway of online transactions, a payment gateway is where the process starts. When accepting credit card payments in-store, you would normally use a card reader or any physical point-of-sale (POS). A payment gateway is an online version of a POS.
In essence, payment gateways are designed to accept card-not-present transactions that can only be processed online, for example, in a mobile application or website. Once the transaction data is accepted by a payment gateway, it is then directed to a payment processor.
TYPES OF PAYMENT GATEWAYS
Online payment gateways can be divided into three types: redirects, off-site, and on-site payments. Each of them has its cons and pros. Regardless of the type you choose, your online payments will be secure.
REDIRECTS
A redirect payment gateway is when a customer is redirected from the merchant’s store to a third-party company to process online transactions. A third-party credit card processing company is responsible for the process so that a merchant has nothing to worry about.
This type can be very convenient for small shop owners who want to integrate payments through the internet. As for customers, they will be required to take an extra step to pay for their order.
OFF-SITE PAYMENTS
An off-site payment gateway is another popular choice by merchants as it is a secure way to accept credit card payments. A customer pays on a page that is handled by a third party, while the checkout is done on a merchant’s site. A merchant would only need to ensure a secure connection between a store’s website and a payment gateway. This can be done by using SSL on a merchant’s website.
Both redirect and off-site payment gateways cannot be customized as they are handled by another company. So, there is limited flexibility in how your customers can engage with it.
ON-SITE PAYMENTS
In comparison to other payment gateways, this type is fully manageable by the merchant. Although it offers a lot of flexibility and room for improving customers’ experience, it comes with great responsibility. Firstly, the online transactions are handled on the merchant’s servers; secondly, there will be stricter PCI requirements. Therefore, vendors with a high volume of sales usually choose an on-site payment gateway.
HOW DOES A PAYMENT GATEWAY WORK?
Here is a step-by-step breakdown of how a payment gateway works:
| Step | Description |
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The customer enters credit card details on a merchant’s website and confirms purchase. |
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Gateway checks the customer’s bank (issuer) for sufficient funds and transaction validity. |
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Encrypted card details are sent to card networks (Visa, Mastercard, etc.). |
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Card networks mark the transaction as valid or fraudulent. |
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Payment gateway informs merchant of successful transaction (if approved). |
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The merchant’s bank receives approval to transfer funds from the customer’s bank to the merchant’s bank. |
WHY IS HAVING A PAYMENT GATEWAY IMPORTANT?
The most important purpose of a payment gateway is to transfer data through the net securely. One of the key features of the payment gateway system is that it encrypts sensitive data so that it cannot be hacked and stolen.
Depending on the payment gateway provider, your customers will have some of the most common payment options to choose from. Payment Savvy has a compliant and secure payment gateway solution for companies of all shapes and sizes.
WHAT ARE PAYMENT PROCESSORS?
A payment gateway cannot finalize the transaction without one more component that completes the process – a payment processor. A payment processor facilitates the transaction and is a primary mediator among three parties: your store, the issuing bank, and the acquiring bank.
Payment processors are necessary if you want to accept payments with or without a physical debit or credit card, online, or in a brick-and-mortar store.
When paying in a store, a debit and credit card reader will authenticate the account by reading the EMV chip. For card-not-present transactions, authentication is done via a payment gateway.
In essence, payment processors work behind the scenes when securely routing data and actual funds from one account to another.
FRONT-END AND BACK-END PAYMENT PROCESSORS
A payment processor can be divided into front-end and back-end. The former is responsible for maintaining the connection with the card networks and settlement services to manage merchant accounts. The latter performs an action of transferring the funds from the issuing bank account to the acquiring bank.
HOW DO PAYMENT PROCESSORS WORK?
Here is a breakdown of how payment processors work with a payment terminal:
| Step | Description |
|
The customer swipes or inserts a credit/debit card into the terminal. |
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The point-of-sale system reads the card information and contacts the issuing bank. |
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The bank approves or declines the transaction based on available funds and security checks. |
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The processor sends an approval/denial message to the payment terminal. |
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The processor also sends the approval/denial information to the merchant’s bank. |
The process differs for card-not-present transactions:
| Step | Description |
|
The customer types in credit/debit card information on the merchant’s website. |
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Gateway secures the transaction details and sends them to the processor. |
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The processor communicates with relevant networks and banks to authorize the transaction. |
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Processor relays approval or denial back to the customer through the gateway. |
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If approved, the processor routes the payment to the merchant’s acquiring bank. |
HOW DO A PAYMENT GATEWAY AND PAYMENT PROCESSOR WORK TOGETHER?
When paying in person, a payment processor is enough. However, online purchases require both a payment gateway and a payment processor. The transaction starts and finishes with a payment gateway. The information a customer provides is encrypted, sent to the processor, and returned via a gateway. The role of a payment processor is to route the information between an issuing bank and an acquiring bank.
Due to the lack of an EMV chip that facilitates fast authentication, a gateway becomes a substitute, a kind of virtual terminal. Without a gateway, the translation cannot be initiated.
PAYMENT PROCESSOR VS GATEWAY: DIFFERENCES
Although both a payment gateway and a payment processor have to work in unison, their roles are very different. Payment processors direct the information between two banks, and the information that is transferred is initially encrypted by gateways. Gateways are also responsible for checking whether the customer’s bank account has sufficient funds and that the transaction will not exceed the credit limit. Payment processors only transfer the funds when the acquiring bank approves them.
In the case of in-person payments, a payment gateway is only required if a merchant has a virtual terminal. In other instances, with a traditional payment terminal, a payment processor is more than enough.
PAYMENT GATEWAY VS PAYMENT PROCESSOR – COMPARISON
| Feature | Payment Gateway | Payment Processor |
| Function | Manages online payment flow, verifies basic card information, encrypts data | Authorizes transactions using card networks, facilitates communication with banks |
| Interaction | Integrates with merchant’s website or app, handles communication with customer and card networks | Works behind the scenes with payment gateways and POS systems, communicates with issuing and acquiring banks |
| Focus | Security (data encryption, fraud prevention) | Transaction authorization and settlement (ensuring sufficient funds, transferring money) |
| Customer Interaction | Customer directly interacts with the gateway (entering card details, receiving approval/denial) | Customer experience is facilitated by the gateway, but the processor handles authorization |
| Setup | Typically easier to set up, often integrated with shopping carts and platforms | May require a merchant account and involve a more complex setup |
CAN YOU ACCEPT PAYMENT WITHOUT A PAYMENT GATEWAY?
This question is tricky because it is possible to ask customers to provide card details directly on the website – however, on the other hand, it poses a great risk for both parties: the merchant and the customer. Unfortunately, accepting payments without a gateway won’t necessarily cut costs but put your and your customer’s sensitive information at risk. If the transaction data is stolen, it can lead to a big financial loss for your company, not to mention your reputation. Security should be your highest priority when it comes to payment processing.
Payment gateways’ main features include but are not limited to checking the issuing bank account’s balance and making sure you will get paid for selling goods. So, investing in a secure payment gateway for your online business should be in your interest.
DISCOVER RELIABLE PAYMENT SAVVY’S PAYMENTS SOLUTION
Traditional ecommerce transactions can be a breeze for merchants if they implement a secure and innovative payment gateway. If you want to give your customers an opportunity to benefit from many payment methods, check out Payment Savvy’s All-in-Done solution.
Our platform will allow your customers to pay with:
- Credit cards
- Debit cards
- ACH payments
PAYMENT PROCESSING CAN ALSO BE DONE VIA THE FOLLOWING CHANNELS:
- Web payments
- Online payment gateway
- Recurring payments
- Pay by text
- Integrated Voice Responses
At Payment Savvy, our goal is to simplify and accelerate payments to provide a smooth and problem-free experience for both you and your customers. Learn more about our innovative online payment gateway solution and discover how we can transform your business.
With Payment Savvy, you can expect nothing else than transparent fees, foremost security, and great customer support.
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