So, you’ve decided to accept credit cards at your brick-and-mortar or ecommerce business. You probably had no idea that there was so much payments terminology to familiarize yourself with. A prime example is payment processors and payment gateways, two entities that may sound similar but play their own unique roles in helping facilitate fast and frictionless transactions. The distinctions between them should be clear before you move forward and expand your operations to accept electronic payments.

Get to know the cast of characters.

Before we dive into the details, let’s get a sense of everyone involved in the payments process. There are four main actors. 

• The merchant. This is the seller who provides the products or services.
• The customer. This is the person wishing to pay for the goods and services. If the purchase is happening at a physical store, the buyer will provide cash, a check, a mobile phone, or wearable device, or a credit card to be swiped, tapped, or waved near the merchant’s reader to transmit payment details.
• Issuing bank. This is the holder of the customer’s bank account.
• Acquiring bank. This is where the merchant account is held and where the funds are ultimately deposited after the payment process is complete.

All of these elements must work together seamlessly for a purchase to be successfully conducted.

What is a payment processor?

A payment processor or payment processing company is responsible for handling your credit and debit card transactions. Processors may be categorized as either front or back-end. Front-end processors use their connections with settlement services and card companies to manage a merchant account on your behalf. On the other hand, back-end processors perform the behind-the-scenes functions, are involved in settling transactions by moving funds from the customer’s (issuing) bank to the merchant bank, and ultimately to your business account once the transaction has been processed. This is of course after the other players in the process have received their fees.

Speaking of fees, what you will pay depends on the value and volume of the transactions you process and the pricing model you choose. In general, you will pay a percentage of each transaction amount, a small per-transaction charge, and several other accompanying fees to your processing company. Although some of these charges are set by the card companies, others are negotiable, a fact that underscores the importance of choosing your payment processing company carefully.

If you own a brick-and-mortar store, your payment processor generally provides you with a point of sale (POS) interface that reads and validates the authenticity of the credit card that a buyer presents at the time of purchase. Modern POS terminals are also equipped with near-field communication (NFC) technology that performs the same function without the card ever needing to come into direct contact with the reader.

What is a payment gateway?

If part or all of your store is online, you need to come up with a way to accept customers’ payments over the internet on a hosted checkout page, directly on your website, or on your mobile app. This is the purpose of a payment gateway, a web application that securely connects your browser or website to the card processing company. During this process, payment card data is encrypted, tokenized, and authenticated, helping to ensure that sensitive data remains secure from cyberattacks.

You can think of the gateway as the online version of a point of sale terminal. When a customer hits the “buy now” button, their credit card information is immediately encrypted. It is then sent on to the card processor, the card network, the issuing bank, and your financial institution. Once the payment is confirmed, the customer’s account is debited the specified amount and the funds, minus fees, are delivered to your merchant account.

If you already are working with a payment processor, it is often your best course of action to set up your payment gateway through them. This minimizes compatibility issues and tends to be your most cost-effective option.

Do I need both a payment processor and a gateway?

There is not a one-size-fits-all answer to this question. For instance, retailers who do not have an online presence and only accept payments through an in-store POS terminal may not need to invest in a payment gateway. However, brick-and-mortar sellers who accept electronic payments through their computers using a virtual terminal will still need a gateway.

There are also cases when merchants can use what is known as a payment aggregator. You can think of payment aggregators as hybrids of processors and gateways. Unlike traditional processing companies, aggregators do not require you to open a merchant account of your own.

Instead, your account is combined with those of numerous other merchants under the aggregator’s “umbrella” account. Payment aggregators typically have easier application processes and often have more straightforward and economical fee structures. Since most offer fixed payment rates, you will not pay more to your aggregator even if your sales increase.

That being said, these companies are highly risk-averse. If they suspect that your business might be engaged in potentially suspicious activity or is likely to incur an above-average number of chargebacks, they may close down your account with no warning. This can be extremely disruptive and costly.

The difference, explained.

Now that you have gotten to know the various components of the payment process and the roles that both processing companies and gateways play, you probably have a much better idea of how these two concepts relate to each other. In case you need some confirmation, payment gateways are a vehicle specifically designed for online transactions that capture credit card data and transmit it to the payment processor, communicating whether the transaction has been approved or rejected. Whereas the gateway is front and center, the processing company works subtly behind the scenes to ensure that data is securely routed and authentication is obtained to facilitate a smooth and speedy payment.

As you move forward with your plans to accept electronic payments, there are many factors to consider. The marketplace for gateway and payment processing companies is brimming with options, and competition is fierce. Use the knowledge you have gained to carefully explore your many options so that you ultimately make the choices that are best for your business’s long-term success.