If you’re in the market for a top credit card processing solution, you might have come across the terms “payment gateway” and “payment processor.” While these terms represent crucial, related elements of credit card processing, they are not the same. If you’re unsure of the distinction, you’re not alone. However, you must understand the nuances to make an educated purchasing decision about your small business’s ability to accept credit card payments.
This guide will explain how payment gateways and payment processors fit into the credit card processing landscape. If you plan to accept credit card payments online, you’ll likely need both services, so understanding each is critical to making the right choice for your small business.
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:
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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.
Here’s how a payment gateway works:
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.
Always check a provider’s terms and conditions and understand credit card processing rules and laws before signing up. It’s best to understand how much you’ll pay upfront, monthly and per transaction.
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:
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.
Here’s an at-a-glance look at the differences between payment gateways and payment processors:
Can be entered in a virtual terminal
Card inserted into a POS system or credit card reader
Card-not-present transactions, such as e-commerce and phone sales
E-commerce transactions processed online or entered into a virtual terminal
Can be entered into a POS system when the card’s chip or magnetic stripe cannot be read properly
Encryption of information, sending transaction data to be processed
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.
A merchant account is essentially an arrangement with the bank to create a space for pending transactions. Funds are held in a merchant account before being credited to your business’s bank account.
A merchant account is distinct from a payment gateway because it doesn’t transmit encrypted data. Instead, it transmits funds related to the transaction. The payment will temporarily be held in the merchant account as the transaction is finalized. After that, the funds will pass through the merchant account and into your business’s bank account.
To set up your merchant account, a payment processing company will assign you a merchant ID number. A merchant account is necessary to accept credit and debit card payments from your customers unless you operate as a submerchant with a payment facilitator, like Square or Stripe.
Selecting the right payment processor and setting up a payment gateway can seem challenging. Many payment processors exist with various pricing models and fee schedules. Navigating the sea of available services can be tricky, especially for an entrepreneur concerned with the day-to-day operations of their business.
The best credit card processor for your business will provide the services and features you need with reasonable fees. These processors include excellent options for low- and high-volume businesses and organizations with unique needs, including high-risk businesses.
To get started on your search, check out our Clover review, our review of National Processing and our ProMerchant review. If you’re specifically interested in mobile credit card processing, consider Android payment apps and learning how to accept payments with an iPhone.
When you accept credit card payments with PayPal, things work a little differently. PayPal is what is known as a payment aggregator; it has its own payment gateway called Payflow.
Payment aggregators differ from payment processors in the following ways:
Read our detailed PayPal review to learn why it’s a popular payment processing choice for freelancers, solopreneurs and other small businesses.
Stripe is a payment processor with an included payment gateway and merchant account. This enables Stripe’s merchants to accept payments online, in person, without a card present and with no additional companies or services needed.
Amazon Pay is an online payment processor that allows Amazon customers to buy from a business’s website using their Amazon accounts. Customers do not have to create a new account or enter their credit card information on your site to pay. To add this payment method to your site, you must set up an Amazon Pay account, configure the service and integrate it into your website.