Key Differences Between a Payment Gateway & Payment Processor - person inserting EMV chip credit card into terminal

Key differences between a payment gateway and payment processor

Sunday, November 30, 2014
When it comes to running a small business, there’s a lot of jargon you need to know. Knowing all these terms can not only be overwhelming, but it can also take your mind away from your business. Not to mention that these terms can often sound similar to one another, especially when it comes to payments. From payment service providers to payment gateways to payment processors, there are a lot of phrases that can trip you up.
So in this article, we’ll take a look at the differences between payment gateways and payment processors, helping you decipher them and decide what your business needs. Let’s refresh your memory on credit card processing.

Credit card processing: The basics

When a customer swipes a credit card at your business, the process might seem simple. But while the process happens quickly, it’s a bit more complicated than you’d think. In credit card transactions, there are a few key players that you should know:

  • The merchant – a business like yours that sells goods and services
  • The customer – the person or business that is buying the goods or services you sell
  • The issuing bank – the bank that issued the customer’s debit or credit card
  • The acquiring bank – the bank that collects funds during the transaction from the issuing bank

So how does money go from one bank to the other? That’s where the payment processor comes in

What’s a payment processor and what does it do?

To process payments from your customers, you'll need to work with a payment processor. A payment processor is a facilitator, helping connect the four parties in a credit card transaction by transmitting data between them. Payment processors can also provide businesses with point of sale (POS) systems or payment terminals. This helps a merchant accept card payments. To accept credit or debit cards, your business needs a merchant account. Your business can work with a bank to get your own merchant account or a payment processor to utilize their merchant account. In today’s landscape, these systems have to be able to read EMV chip-enabled cards.

Payment processors allow businesses like you the opportunity to accept multiple forms of payments from customers. Let’s take a quick look at an example transaction to see the role of a payment processor.

Let’s say Monica’s Clothing Shop sells t-shirts. When a customer, Jake, buys a t-shirt in the store, he taps or inserts his physical card into a credit card reader. The payment processor grabs the cardholder's credit card information and then sends this transaction information to the card network—Visa, Mastercard, Discover or American Express, depending on what card Jake used.

The credit card network then approves or rejects his payment and, if rejecting it, sends a code that details their decision. If approved, the transaction is complete for Jake. Then the payment processor tells the issuing bank to send funds from the customer’s bank account to the merchant’s bank, aka the acquiring bank. Once the acquirer receives the funds, they’ll be available for Monica’s Clothing Shop to access in its business bank account within a few days.

Because of the payment processor, Monica was able to accept payments at her brick and mortar store. As you can see, a payment processor helps to execute the transaction by connecting all of the parties in a transaction. Payment processors can also supply a merchant with the hardware it needs to accept payments, like POS systems or credit card terminals.

So if a payment processor helps facilitate the connection between all parties, what’s a payment gateway do?

What’s a payment gateway and what does it do?

The best way to think about a payment gateway is as an online point of sale system for your business. Not only does it help to authenticate a card that’s used in an online transaction, but it also securely transmits data from online payments or sales to the payment processor. Let’s take a look at an example to see the role of a payment gateway in action.

Monica’s Clothing Shop decides to start an ecommerce store. Once that store is up and running, a customer, Julia, decides to make a purchase. At the online checkout page, she enters her card information for that purchase. This is when Julia interacts with the payment gateway. The payment gateway then takes that information and packages it up, encrypting the data before sending it to the acquiring bank’s payment processor. Like we saw before, the payment processor now takes over and helps to complete the process. When the card network approves the transaction, the payment gateway lets Julia know before closing the sale.

Thanks to the payment gateway, Monica’s able to accept credit card payments online. Besides the critical role of authenticating transactions, payment gateways can seamlessly connect to a business’s ecommerce platform and accounting software, helping to streamline your business. While a payment gateway is like a virtual POS system, it’s important to note that payment gateways are for customer-facing transactions. If your business accepts other forms of card-not-present transactions like over the phone orders, it may be best to utilize a virtual terminal,  a way to accept transactions without hardware.

Now that you know more about payment processors and payment gateways let’s discuss how they can help your business.

Payment processor vs. payment gateway: How do they help?

Payment processors and payment gateways can help your small business. Each has its own set of benefits for your business. First, let’s take a look at a few ways payment processors can help your business.

A payment processor is an essential partner if you run a brick and mortar store or sell products online. They provide your business a whole host of benefits, including:
  • Allowing your business to take multiple payment methods, therefore increasing your potential customer base
  • Ensuring proper credit card funds for each transaction, protecting your business from declines
  • Directing payments to the proper accounts, helping you to get your payments promptly
  • Incorporating a loyalty program into your transactions to retain more customers
Payment gateways also have their advantages for businesses who operate online storefronts or take card-not-present transactions, including:
  • Enabling your business to accept online payments through an ecommerce website
  • Streamlining your business’s ledger while avoiding manual reconciliation of transactions or double data entry
  • Enhancing security for your customers’ payment data through the use of tokenization and encryption, helping to limit fraudulent transactions and chargebacks
As you can see, payment processing and payment gateways both have advantages for your business. So which is right for you?

Payment processor vs. payment gateway: Making the right choice for your business

After learning about payment processors and gateways, you’re ready to implement them in your business, but you’re still unsure what you need. The short answer is that if you process online payments or have an ecommerce storefront, you’ll need both a payment processor and payment gateway. If you don’t have an online ecommerce storefront, chances are you only need a payment processor. 

Again, the payment gateway is customer-facing and helps your business accept payments from customers on an ecommerce website. It takes the customer’s payment information and encrypts it so that hackers can’t steal it.  A payment processor then takes that information and shares it with the necessary parties to complete the transaction.

When you are researching a payment processing partner or a payment gateway, there are a few questions you’ll want to ask:

  • What are the payment processing fees and other setup costs?
  • How long does it take to get set up?
  • Can this partner help me set up new payment methods or technologies down the road?
  • How does this partner prioritize my customers’ security? Do they adhere to PCI compliance standards?
  • Does this partner offer an all-in-one solution to fit my company’s needs?

Answering these questions can help you determine which company to partner with. Each of these questions is vital to help you evaluate the best solution for your business. A good partner should provide a flexible and secure system. For instance, some partners even offer bundle pricing for using multiple services, like utilizing a payment processing solution and a payment gateway. It’s important to decide what’s best for your business in order to meet customer needs and expectations.

Is an all-in-one solution right for my business?

If you accept payments in both a brick and mortar storefront and an ecommerce site, your business will most likely benefit from an all in one payment services provider. Utilizing a single provider can help you streamline your business while allowing you to integrate all facets of your business for an omnichannel experience. Working with a single provider can also save your business money by aggregating the fees you’ll pay for a company’s services while making billing easier. Many providers offer bundle pricing depending on how many services your business utilizes. It's important to talk to individual providers to get a sense of this pricing.

As you can see, a payment processor and a payment gateway are two important aspects of accepting payments at your business. Finding a partner who works with small businesses like yours can ensure your business is receiving a solution tailored to your needs, so you can focus on running your business.

Ready to work with a partner who can help simplify payment processing and payment gateways for your business?

Heartland is the point of sale, payments and payroll solution of choice for entrepreneurs that need human-centered technology to sell more, keep customers coming back and spend less time in the back office. Nearly 1,000,000 businesses trust us to guide them through market changes and technology challenges, so they can stay competitive and focus on building remarkable businesses instead of managing the daily grind.