Payment Gateway vs Payment Processor: Key Differences Explained

Table of Contents

1. Introduction
2. What is a Payment Gateway and How Does It Work?
3. What is a Payment Processor and How Does It Work?
4. Comparison: Payment Gateway vs Payment Processor
5. How Do Payment Gateways and Payment Processors Work Together?
6. Do You Need Both a Payment Gateway and a Payment Processor?
7. FAQ
8. Conclusion

Introduction

Have you ever been confused between payment gateways and payment processors? You're not alone. Many merchants find these terms and their functions perplexing. Understanding the key differences between payment gateways and payment processors is essential for streamlining your business's checkout process, avoiding transaction hiccups, and improving operational efficiency. This blog post will demystify these terms, explain how they work together, and provide you with the knowledge to make informed decisions for your business.

What is a Payment Gateway and How Does It Work?

A payment gateway is a technology that bridges the gap between a customer’s payment and the merchant’s bank account, ensuring that sensitive payment information is securely encrypted before being transmitted. When a customer makes a purchase online or in-store, the payment gateway collects, encrypts, and securely sends the payment data to the payment processor for authorization.

Features and Mechanism

• Collection and Encryption: Upon the customer initiating a transaction, the payment gateway collects the payment information (credit card details, etc.) and encrypts it for security.
• Transmission: The encrypted data is then sent to the payment processor for authorization.
• Secure Payments: For in-person transactions, payment gateways often include card readers and POS terminals to facilitate card-present transactions. They also handle card-not-present (CNP) payments such as digital wallets, QR codes, or NFC payments.

Types of Payment Gateways

• Hosted Payment Gateways: Redirect customers to the gateway's website for payment, adding an extra layer of security.
• Non-hosted Payment Gateways: Enable customers to complete their transactions directly on the merchant's website.

When to Use a Payment Gateway

If your business accepts online payments or direct payments via credit or debit cards, investing in a payment gateway is crucial. This tool protects sensitive customer information, ensuring secure and smooth transactions.

What is a Payment Processor and How Does It Work?

Unlike payment gateways, payment processors handle the actual transaction between the customer’s and merchant’s banks. Acting as intermediaries, they are responsible for authorizing and validating the payment information transmitted by the payment gateway.

Features and Mechanism

• Authorization: The payment processor communicates with the customer’s issuing bank and the merchant's receiving bank to request authorization for the transaction.
• Transaction Processing: Upon approval, the payment processor facilitates the transfer of funds from the customer’s account to the merchant’s account.
• Additional Services: Many payment processors offer services like fraud detection, chargeback management, and reconciliation reporting.

When to Use a Payment Processor

Every merchant requires a payment processor to handle card-based transactions effectively. Whether you're using a POS system integrated with a payment processor or opting for a third-party processor, understanding your needs and fee structures is essential.

Comparison: Payment Gateway vs Payment Processor

Though they work together, payment gateways and payment processors fulfill distinct roles in the payment transaction flow. Let’s compare their functionalities:

Payment Gateway

• Role: Collects, encrypts, and transmits payment data.
• Function: Provides security for online and in-store transactions.
• Importance: Essential for safeguarding customer payment information against fraud.

Payment Processor

• Role: Authorizes and processes transactions.
• Function: Acts as the intermediary between the customer's bank and the merchant's bank.
• Importance: Crucial for completing the transaction and transferring funds.

Here's a comparative summary to visualize the differences:

How Do Payment Gateways and Payment Processors Work Together?

Both components collaborate to facilitate a secure and seamless transaction process. Here's a step-by-step breakdown:

1. Customer Initiates Payment: The customer enters their payment information on the checkout page.
2. Payment Gateway Action: The payment gateway encrypts and securely transmits this data to the payment processor.
3. Payment Processor Confirmation: The payment processor verifies the data with the customer’s bank, authorizes the transaction, and confirms the authorization status.
4. Transaction Completion: The payment gateway receives the authorization status from the payment processor and communicates this to the merchant, completing the transaction.

Do You Need Both a Payment Gateway and a Payment Processor?

The necessity of both components depends on your business model and payment methods. Here’s a quick guide:

• For Omnichannel Businesses: Both a payment gateway and processor are essential for secure and efficient transactions across multiple platforms.
• For Online Stores: A payment gateway is crucial for processing online payments, while a payment processor handles the backend transaction validation.
• For In-Store Transactions with POS Systems: Some POS systems come with built-in payment processors, but integrating a third-party processor might provide cost benefits and flexibility.

Many payment service providers, like PayPal, Stripe, and Adyen, offer combined solutions that include both payment gateways and processors under one service umbrella.

FAQ

1. Can a Payment Gateway Be a Payment Processor?

No, they are distinct components within the payment process. Payment gateways encrypt and transmit payment data, while payment processors validate and process these data. Some companies offer combined services incorporating both functions.

2. Are Amazon Pay, PayPal, Authorize.net, Stripe, and Square Payment Gateways or Processors?

These companies often provide both payment gateway and processor services. Visa, however, is a card network facilitating communication between banks and businesses.

3. What is the Difference Between a Payment Gateway and a POS?

A POS system includes hardware and software to manage sales and accept payments, while a payment gateway focuses solely on securely transmitting payment information to processors for validation.

4. What is a Payment Aggregator?

A payment aggregator consolidates multiple merchant accounts and payment gateways, simplifying the process for merchants by eliminating the need for individual contracts with each acquiring bank.

5. What is the Distinction Between a Payment Facilitator and a Merchant Acquirer?

A payment facilitator contracts with a merchant acquirer to offer payment acceptance services on behalf of sub-merchants. In contrast, a merchant acquirer directly contracts with merchants to process their payments securely and efficiently.

Conclusion

Understanding the distinct yet complementary roles of payment gateways and payment processors can significantly enhance your business's transaction processing efficiency and security. Utilizing both ensures seamless communication and data transfer, providing a robust framework for managing customer payments.

Embrace the technology solutions fitting your business needs to ensure smooth, secure, and efficient transaction processes.