Payment Gateway vs. Payment Processor

What parties are involved in credit card transactions?

When your business accepts credit card payments, a lot goes on behind the scenes among multiple parties. It’s essential to understand these parties before getting set up with a credit card processor:

• Issuing bank: The issuing bank issues the customer’s credit card. When the customer uses the card to make a purchase, the issuing bank deducts the transaction amount from the customer’s account and pays it to the acquiring bank.
• Acquiring bank: The acquiring bank is also called the merchant account provider or merchant’s bank. This bank is in charge of depositing funds from credit card sales into your merchant account. The acquiring bank deducts interchange fees from the purchase amount and pays them to the issuing bank.
• Card networks: Card networks are credit card brands like Visa, Mastercard and American Express. They set the interchange rates ― the percentage of each transaction you pay for the ability to accept credit cards.
• Credit card processor: A credit card processor or payment processor is the entity responsible for coordinating and transmitting the purchase amount and merchant information from the merchant (you) to the issuing bank so it can pay the acquiring bank.
• Payment gateway: A payment gateway is a technology that encrypts credit card information and sends it to the credit card processor.

Editor’s note: Looking for the right credit card processor for your business? Fill out the below questionnaire below to have our vendor partners contact you about your needs.

What is a payment gateway?

A payment gateway facilitates online credit card payments and other online payment app transactions where a credit card is not physically present. This technology creates a secure connection between your business’s website and the credit card processing company. 

Payment gateways usually have an interface called a virtual terminal that allows you to enter credit card information manually so you can accept credit cards over the phone.

How does a payment gateway work?

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.

How do you access a payment gateway? 

You can typically set up a payment gateway with your chosen credit card processing company. Working with your processor makes complications and compatibility issues less likely and helps you avoid payment gateway setup fees. 

Some credit card processors have their own payment gateways while others work with third-party payment gateways on behalf of their client businesses. One of the most popular third-party payment gateway providers is Authorize.net. 

What is a payment processor?

A payment processor is a company that handles a business’s credit card and debit card transactions. While the payment gateway moves encrypted data around, the payment processor essentially 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 manage merchant accounts on behalf of their clients. They contract with back-end processors, who handle the actual movement of money behind the scenes.
• 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.

Credit card processing fees vary by transaction amounts, values and models. Generally, payment processors charge a percentage of each transaction, often adding a small per-transaction fee and a few other fees, such as a monthly statement fee, a monthly minimum fee and an annual Payment Card Industry compliance fee.

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:

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. However, you can typically forgo a payment gateway if you only intend to accept credit and debit card payments via your in-store POS system. Still, virtual terminals accessed through your computer require a payment gateway, even if you only accept payment at the point of sale.