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Payment Gateway vs. Payment Processor: What’s the Difference?

10 June, 2022
5 min read
Kiran Rana, General Manager, Mid-Market
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What you'll learn

  • You require both a payment processor and payment gateway to complete an online transaction
  • Payment processor is the company that mediates your online payment while payment gateway is the software that helps with payment data transfer
  • Most payment processors provide their own payment gateways to offer a smooth end-to-end experience
CONTENT
What is a payment gateway?
What is a payment processor?
Key differences between payment processor and payment gateway
Payment gateway vs. payment processor: Which one does your business need?
Next Steps: Choose the right payment processor and payment gateway
FAQs
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Accepting digital payments, including credit cards, online wallet payments, and internet banking, is crucial for businesses to succeed today. According to a study, 74% of consumers prefer digital payment methods over traditional channels. Almost 50% of consumers say they would not purchase from an organization that doesn’t offer contactless digital payment options.

There are several elements that go into setting up a system to accept digital payments. Payment processors and payment gateways are two key elements that are required to process online payments. If you are wondering what’s the difference between payment processors and payment gateways and whether you need both of them, this article will help.

In this article, we deep dive into payment processor vs. payment gateway and provide relevant tips to help you make the best decisions when setting up your digital payment system.

60% - e Payments

Source: The State of CFO’s Office: A Mid-Market Perspective 2022

What is a payment gateway?

A payment gateway is a technology or software that reads the payment card information and sends it to the seller’s (merchant’s) bank for processing via the payment processor. In a card-not-present transaction (e.g. online payments), your payment gateway is a cloud-based software that captures the card or payment wallet details entered by the customer and transfers it to the merchant’s bank. 

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.

The role and function of a payment gateway

The payment gateway is a crucial component to complete the payment transaction. Here are some ways by which it helps:

    Instantaneous completion of the e-payment transaction: The payment gateway helps to speed up the completion of a transaction by sharing information between the POS and the bank quickly
  • Secure transfer of information: The payment gateway encrypts the card details with secure socket layer (SSL) encryption before transferring the information to the bank’s web server
  • Authorize and approve transactions: The payment gateway lets the customer know if the payment has been authorized and approved, helping them complete the purchase

Types of payment gateways

Based on how it is integrated with your website or POS system, payment gateways are of three types.

  1. Hosted payment gateways

    Hosted payment gateways are payment gateways not directly hosted by the merchant. Instead, the customers get 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 gets directed back to the merchant’s web page once the payment is complete. Example: PayPal

    Pros Cons
    Highly secure and easy to set up: Hosted payment gateways are secure with PCI compliance and fraud detection. You can also integrate the gateway to your website easily. Limited control: Since the payment process happens on an external page, you do not have complete control over the end-to-end user experience.
  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

    Pros Cons
    Faster transactions and full control over the user experience: Since payment details are entered on the merchant’s website, the process is faster and you get full control over the customer experience. Technical support unavailable: Since the gateway is self-hosted, you’ll need to maintain and troubleshoot the system in case of any technical issues or errors.
  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 to his website using application programming interface (API). Payment details need not be sent to a third-party page, thus reducing data security risks while allowing the merchant full control over buyers’ payment and checkout experiences. 

    Pros Cons
    Customizable: API payment gateways allow you to customize the customer experience. You can also integrate these payment gateways with your mobile devices for easier POS transactions. Responsible for security mechanisms: The merchant is responsible for PCI DSS compliance and SSL certification purchase when they opt for API payment gateways.

What is a payment processor?

The payment processor is a company that helps manage card transaction processes. They function as mediators between customers, merchants, and their respective banks. The payment processor receives customer card details from the payment gateway and sends these details to the merchant’s bank and the card network or association. The merchant’s bank then requests the card-issuing bank to verify the card holder’s identity and validate the transaction.
The card issuing 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. The payment gateway notifies the customer whether the transaction is accepted or rejected. 

The role and function of payment processor

The payment processor plays the role of facilitating the transfer of funds from the card-issuing bank to the merchant account. Here’re some of the key roles and functions that it performs.

  • Offers  payment infrastructure support: The payment processor often provides the hardware (e.g. POS machines) and software support (e.g. payment gateway) needed to process card transactions
  • Manages interactions with multiple parties involved: The payment processor company mediates between the card network authority (e.g. Visa, MasterCard, etc.), the card-issuing bank or company, and the merchant’s bank to complete the transaction
  • Resolves customer disputes: In case of disputes arising from the online payment or card transaction, the payment processor is involved in settling it and helping reverse the transaction, if needed
  • Helps get merchant accounts: The payment processor can also help businesses get the merchant account needed for transactions
  • Provides payment gateways: Many payment processors often have their own payment gateways. Using the same brand as the payment processor and the payment gateway helps speed up the process and resolve any issues faster

Key differences between payment processor and payment gateway

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

Payment Processor Payment Gateway
Payment processor is the company that facilitates the completion of the payment transaction Payment gateway is the software that helps complete the transaction
Payment processor communicates with the merchant’s bank to initiate the transaction Payment gateway communicates with the processor to share card information
Payment processor does not directly interact with the customer unless there is a dispute on the transaction Payment gateway is the customer-facing interface. It lets the customer know immediately if the transaction is approved or rejected.
Payment processors are present in both eCommerce transactions and retail transactions Payment gateways are commonly used in eCommerce transactions

Payment gateway vs. payment processor: Which one does your business need?

A common question many business owners ask when setting up a digital payment system is whether you need both the payment processor and the payment gateway to accept and complete e-transactions. 

By now, you’d likely have realized that you need both the payment processor and the payment gateway to complete a transaction. One cannot do without the other.

A payment processor is the company that helps you manage the communication between the concerned parties (merchant’s bank, customer’s bank, and card network association) while payment gateway is the software that the customer interacts with. Payment gateways read and transfer the card information to the processor for further validation and approval. It also conveys the payment status information (approved or rejected) to the customer.

Pro tip: For optimal results, using the same company as payment processor and payment gateway is suggested. Today, most payment processors also offer payment gateway software as well as hardware such as card readers, POS terminals, etc.

Next Steps: 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

At HighRadius, we offer an ERP Payment Gateway that provides seamless connection between your ERP modules and the payment gateways and processors that you choose including FirstData, Vantiv, etc. To learn more about our invoicing and payment solutions and watch them in action, talk to our representative.

ERP Payment Gateway

FAQs

How do payment processors and gateways work together?

The payment gateway captures card details from the customers and shares this data with the processor. The payment processor transfers this data to the card association and the banks, which then approve the transaction. The approval message from the bank is shared by the processor to the gateway which then relays the same to the customer.

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

Payment gateway is a software that collects card details from the customer while payment processor is the company that mediates and helps complete the transaction with the banks and the card network.

Which is the best payment gateway and payment processor?

PayPal, Stripe, Payline, Square, Adyen, GoCardless, BitPay, etc. are some examples of payment processors. Some examples of payment gateways include PayPal, WorldPay, Stripe, Authorize.net, Amazon Payments, and Square.

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