Payment Processor vs Payment Gateway vs a Merchant Account - Understanding the Differences for eCommerce

Payment Processor vs Payment Gateway vs a Merchant Account

The secret to running a successful ecommerce business is taking your time to understand the basics. Most ecommerce merchants know that payment processors, payment gateway and merchant accounts are essentials for making online sales, but very few understand their differences. They tend to use the terms interchangeably, and this can harm their end goals when looking for the ideal payment provider.

Keep reading to understand these concepts and how to choose the suitable one.

What is a Payment Processor?

A payment processor is a payment processing services provider or company that deals with financial transactions when consumers purchase your products. The processor acts as a mediator between you as the merchant and the bank or any other involved financial institution. The payment processor has the mandate to authorize transactions by facilitating funds transfer. Some processors operate by offering card acceptance machines, PCI compliance assistance and security solutions to ensure smooth operations. Some of the top payment processors include;

  1. PayPal
  2. Stripe
  3. BitPay
  4. Square
  5. Payline Data
  6. Due

How Does a Payment Processor Work?

As earlier mentioned, a payment processor acts as an intermediary between merchants and financial institutions. The processors are responsible for facilitating transactions and allowing for online and brick-and-mortar stores to accept different payment methods.

In simple terms, the processor contacts the financial institution or buyer's issuing bank in real-time to assess the transaction's validity before releasing funds to the merchant account. However, merchants must pay for these services, but it is worthwhile because it accommodates a range of payment methods.

Business owners may choose to incorporate payment processors only or integrate other solutions such as POS systems. This means that you can go for a payment processing company offering both solutions or choose separate providers for each.

To understand how a payment processor works, think of a buyer who visits your online store, adds an item to the cart and is about to checkout. At this stage, the buyer chooses their ideal payment method, which could either be debit card, direct debit or payment plan. The consumer is asked to key-in their details to complete the transaction.

The information is sent to the payment processor. It assesses the validity of the transaction by communicating with the acquiring and issuing banks in real-time. Upon evaluation and confirming that the transaction is valid, the acquiring bank clears up the transaction. The funds are transferred from the buyer's accounts to the merchant's account, and both the buyer and seller receive a notification that the operation was successful.

Payment processor involves a range of fees including flat fees, which is the monthly fee paid by the merchant to use the processor. There is the transaction fee which includes the assessment fee, fee for return of funds where a purchase is cancelled, and markup and interchange fees. The payment processor, credit card network, issuing and receiving banks get a portion from this. The last fee is incidental, which is accumulated in exceptional cases like when the debit or credit account does not have enough funds for the transaction.

What is a Payment Gateway?

A payment gateway is a type of payment technology that connects all merchants to credit and debit card companies. This means that it connects your buyers' financial or bank accounts to your account for completion of a transaction. Without a payment gateway, you may have everything else required to transfer or receive money but the transaction will not be complete. Thanks to this technology, buyers can use credit or debit cards online via your website. Payment gateway acts as an intermediary between payment processors and the online transactions as they are being processed on your website. This in return promotes security and confidentiality of your clients' card information.

The top payment gateway providers include;

  1. BlueSnap
  2. Stripe
  3. PayPal
  4. PayPal Payments Pro
  5. WePay
  6. Payza
  7. BitPay
  8. Skrill

How Does a Payment Gateway Work?

The primary role of the payment gateway is to process and authorize payments between buyers and merchants. It offers security assurance by encrypting personal or sensitive credit card details such as the credit number during transactions.

For a clear insight into how it works, think of a customer who places an order on your site. When checking out, the consumer selects the preferred payment method and has to enter the necessary information to complete the transaction. The payment gateway receives this order, and the transaction is redirected to the issuing bank to request for evaluation of the transaction.

Once the authentication or evaluation process is done, the transaction is either approved or declined by the issuing bank based on the availability of funds in the buyer's account. Payment gateway informs the merchant immediately. The bank transfers money to the payment gateway, which then sends it to the merchant account.

You should note that everyone involved in the transactions wants to benefit from it. This includes the issuing bank, merchant bank, credit card dealer and the payment provider. These role players get their benefits from transaction fees namely;

  1. Interchange fee which benefits the issues
  2. Assessment fee used to pay the credit card association
  3. Processing fee that benefits the payment processor or merchant bank
  4. Markup fee and a percentage of it go to the merchant bank

In some cases, these fees are bundled together and could confuse you as you try to figure out the amount paid.

What is a Merchant Account?

Merchant accounts are a must-have for online businesses, especially stores that accept online credit card transactions. This is ideally where the money goes after transfer from the customers' credit or debit cards. Therefore, a merchant account can be termed as a bank account that allows credit and debit card payments.

Although you cannot access a merchant account, it acts as an intermediary between your store and the financial institution to acquire funds before settling them in your business bank account after the transaction.

How Does a Merchant Account Work?

Think of a merchant account as a hidden haven, where customers deposit money safely, and you only get to access it after the bank confirms that the transaction is valid.

Take an example where a customer orders something from your shop. They pay for the item by keying in and confirming their credit card details. These details are sent to the acquiring bank, which sends them to the relevant payment processor. The details are then forwarded to the buyers' issuing bank, which confirms if the customer has enough funds in their account.

After authenticating the transaction, the issuing bank sends a message to the acquiring bank, which forwards the information to the card reader, and the transaction gets approved. This is where the term settlement period pops in. It could vary between one to seven days as the acquiring and issuing banks authenticate the transaction to send you a code so that you can transfer money from the merchant account to your business bank account.

Note that sometimes that merchant account comes bundled in the payment gateway offering or is not required at all for some newer gateways

How to Choose the Right Payment Processor

A payment process is a critical aspect of running an ecommerce, and you must ensure that you select the right one for smooth operations. The processors vary depending on the features and capabilities. Some of the aspects to consider when choosing the right provider include;

Compatibility: Confirm that the payment processor is compatible with any other software that is vital to your ecommerce website.

PCI Compliance: The payment industry requires the processor to meet some requirements to operate legally. Take your time and do in-depth research before settling on a particular partner.

Security and License: Selecting an accredited payment processor provider is the key to fraud prevention. Ensure that the provider has put up the necessary measures and tools for security and prevention of credit card fraud.

How to Choose the Right Payment Gateway

With numerous payment gateway providers in the market, selecting a trustworthy one can prove to be a hard nut to crack. Some crucial aspects to consider in your selection include;

The Confidence of Your Customers: Customers should be your top priority, and you should always make them feel safe. You want them to trust your business, and the best way to do so is by selecting a payment gateway that accommodates most buyers.

The Transaction Speed: A properly working payment gateway will ensure fast transactions. This will make you look professional, and buyers are likely to come back after such a pleasant shopping experience.

The Cost of Services: The payment gateway companies need to make money, and you must, therefore, pay for the services. However, while some have your best interest at heart, some only care about making profits and are likely to overcharge you. Evaluate the rates from different providers and select one that matches the offered services.

How to Choose the Right Merchant Account

Of all the three mentioned services, merchant accounts are the most misunderstood. Selecting the wrong account can result in irreversible losses, but this does not have to be the case with the right tips at your fingertips.

Consider the Processing Rates: Establish how much you are willing to spend on processing credit card transactions and select an account that fits within the budget.

The rates vary from one account to the other with some offering flat-rate pricing, others interchange-pricing and some subscription pricing.

Check the Contract Terms and Conditions: Go through all the conditions to understand the rates, the contract period, and renewal clause and termination fee.

Provider's Reputation: Ensure that the provider has a clean track record. If you find many complaints under the review section, you should consider another one.

Settlement Period: How long does it take after a transaction for the money to reflect in your busi ness bank account? Select a merchant account with a favorable settlement period.

Final Thoughts

Understanding how payment processors, payment gateway, and merchant accounts work is the first step when setting up a functional ecommerce site. If you need further guidance with selecting the best payment providers, do drop us an enquiry. We’ll be happy to help.