Payment Gateway vs. Payment Processor Guide

What’s the difference between payment gateways and payment processors?

Here’s an at-a-glance look at the differences between payment gateways and payment processors:

What is a payment processor?

A payment processor is a company that handles a business’s credit card and debit card transactions and moves funds from one account to another. If you want to accept credit card and debit card payments from your customers online, over the phone or at the point of sale (POS), you must partner with a payment processor.

Payment processors can be categorized into front-end and back-end processors.

• Front-end processors: Front-end processors maintain connections to card networks and settlement services, and they manage merchant accounts on behalf of their clients. 
• Back-end processors: Back-end processors primarily settle the transactions, moving money from the issuing bank (the customer’s account) to the merchant bank, which ultimately transmits funds to the business’s bank account when the transaction is finalized.

What is a payment gateway?

A payment gateway facilitates online payment app and card transactions in which a credit card is not physically present. The technology creates a secure connection between your business’s website and the credit card processing company to move encrypted data. 

Here’s how a payment gateway works: 

1. The buyer makes a purchase with a credit card through a virtual terminal or an online store. 
2. The payment gateway’s secure connection encrypts credit card payment data and pushes it to the acquiring bank.
3. The payment gateway determines which credit card network is involved and routes the transaction information to the issuing bank.
4. The issuing bank verifies the authenticity of a transaction and determines if the buyer has enough credit remaining to cover the transaction amount.
5. The issuing bank sends the approval or rejection of the transaction to you through the payment gateway.

You can typically set up a payment gateway with your chosen credit card processing company. Some credit card processors have their own payment gateways, while others work with third-party payment gateways, such as Authorize.net, on behalf of their client businesses.

Do I need both a payment gateway and a payment processor?

To accept credit and debit cards online, you’ll likely need both a payment processor and a payment gateway, said Emilis Armonas, head of product at ConnectPay. 

“A payment gateway is necessary to interface with customers, while a payment processor handles the behind-the-scenes movement of funds,” Armonas said. “However, in some cases, businesses may only need one or the other depending on their payment methods. For example, businesses accepting only bank transfers or PayPal may not need a traditional payment processor.”

You may be able to forego a payment gateway if you only intend to accept credit and debit card payments via an in-store point-of-sale (POS) system. However, virtual terminals accessed through your computer require a payment gateway. [Learn about the best POS systems]

How do I choose a payment processor or a payment gateway provider?

Once you know whether your business needs a payment processor, payment gateway or both, you’ll need to research your options to choose the right provider(s) for your needs.

The best credit card processor for your business will provide the services and features you need with reasonable fees. The processors include excellent options for low- and high-volume businesses and organizations with unique needs, including high-risk credit card processing. 

Frank Pagano, executive sales director at VizyPay, advised considering the following when searching for a payment processor:

• POS hardware that suits your business needs and customers’ preferred payment methods, such as those that accommodate mobile payments, contactless payments, desktop or tabletop payments.
• API integrations.
• Security and compliance safeguards.
• An easy-to-use interface.

Armonas added that processing speed and compatibility with major credit card companies like Visa and Mastercard are essential.

If you’re looking for a payment gateway, Armonas recommended looking for these features:

• Support for a wide range of payment methods, including credit cards, bank transfers, PayPal and local options tailored to your target market.
• An intuitive interface that provides a seamless user experience for you and your customers.
• Integrations with your e-commerce platform.
• Compatibility with your existing systems.

To get started on your search, check out our Clover review and our review of National Processing. If you’re specifically interested in mobile credit card processing, consider Android payment apps and other methods of accepting card payments on your phone. [Learn how to accept payments with an iPhone]