business.com receives compensation from some of the companies listed on this page. Advertising Disclosure
BDC Hamburger Icon

MENU

Close
BDC Logo
Search Icon
ArrowFinance
Updated Apr 04, 2024

Payment Gateway vs. Payment Processor

If you plan to accept credit cards online, you'll need these services.

author image
Jennifer Dublino, Senior Writer & Expert on Business Operations
Verified CheckEditor Verified
Verified Check
Editor Verified
Close
A business.com editor verified this analysis to ensure it meets our standards for accuracy, expertise and integrity.

Table of Contents

Open row

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.

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. 

TipBottom line
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.

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:

Task/use

Payment gateway

Payment processor

Card-present transactions

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

Yes

Yes

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.

Did You Know?Did you know
According to Mastercard, small businesses that accept digital payments achieve profitable growth nearly twice as fast as businesses that do not accept digital payments.

Payment gateway vs. payment processor FAQs

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. Read our review of Square and our Stripe review to learn how these services can act as payment facilitators.
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 . 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:
  • You don't need a merchant account: Unlike traditional payment processors, payment aggregators don't require your business to set up a merchant account. Instead, aggregators group your transactions with other merchants' transactions, essentially making you a submerchant on the aggregator's merchant account.
  • Payment aggregators process payments quickly: Payment aggregators typically have a quick and easy application process and allow for much faster processing times than conventional payment processors.
  • Payment aggregators have straightforward fees: Payment aggregator fees tend to be straightforward. Aggregators are often cheaper overall, depending on the amount and value of your transactions. Unlike payment processors, aggregators generally offer fixed rates, so even as your transaction volume increases, your price does not increase. In contrast, payment processors typically offer more favorable rates to businesses with high transaction volumes or high-value transactions.
  • Payment aggregators are risk-averse: Unfortunately, payment aggregators are wary of risks and may place holds on your account if they detect suspicious activity or the increased possibility of chargebacks.
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.
author image
Jennifer Dublino, Senior Writer & Expert on Business Operations
Jennifer Dublino is an experienced entrepreneur and astute marketing strategist. With over three decades of industry experience, she has been a guiding force for many businesses, offering invaluable expertise in market research, strategic planning, budget allocation, lead generation and beyond. Earlier in her career, Dublino established, nurtured and successfully sold her own marketing firm. Dublino, who has a bachelor's degree in business administration and an MBA in marketing and finance, also served as the chief operating officer of the Scent Marketing Institute, showcasing her ability to navigate diverse sectors within the marketing landscape. Over the years, Dublino has amassed a comprehensive understanding of business operations across a wide array of areas, ranging from credit card processing to compensation management. Her insights and expertise have earned her recognition, with her contributions quoted in reputable publications such as Reuters, Adweek, AdAge and others.
BDC Logo

Get Weekly 5-Minute Business Advice

B. newsletter is your digest of bite-sized news, thought & brand leadership, and entertainment. All in one email.

Back to top