Payment Gateway vs. Payment Processor: The Difference
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Payment gateways and payment processors are often confused, but both are distinct and important components of accepting credit card payments. In short, payment gateways step in first to securely transfer card information to the payment processor. Payment processors then complete the transaction by verifying the card information and facilitating the transfer of funds from the customer's account to the business's.
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What is a payment gateway?
A payment gateway is the technology that accepts a customer's card information, encrypts it and securely sends it to the payment processor for authorization. This takes place during both in-person transactions, via a card reader or larger point-of-sale terminal, and the online checkout process.
What is a payment processor?
A payment processor processes credit card payments by transmitting card data from a merchant’s point-of-sale system to the card networks or banks involved in the transaction. Payment processors are required for a business to accept card transactions, and charge fees that are usually calculated as a portion of each transaction that is processed. Some POS providers like Square include payment processing in their larger POS system.
Payment gateway vs. payment processor: Which do you need?
All businesses that accept credit cards, debit cards, prepaid cards or gift cards either online or in person need a payment gateway and payment processor. Many payment gateway providers also offer payment processing services, which makes it possible to bundle the services.
For brick-and-mortar businesses, your payment gateway is baked into your POS hardware. For e-commerce businesses, there are two types of payment gateways:
Third-party payment gateways. These send customers to an external gateway during checkout, meaning a customer submits their card information outside of the merchant’s website. Customers are redirected back to the merchant’s website after completing the transaction.
Integrated payment gateways. These gateways are built into the merchant’s e-commerce platform, so customers submit their card information and process their transactions on the merchant’s website. These are sometimes called white-label payment gateways.
Payment gateways may or may not charge a monthly fee. You’ll always pay fees for processing services, whether they’re packaged with your gateway or come from a different provider.
Fees for each transaction come out of the merchant's sales. The total fee, called the merchant discount rate, is generally 1% to 3% of the purchase. For example, on a $100 sale, the merchant would receive $97 to $99.
How to find a payment gateway or payment processor
First, make sure you understand your basic setup needs. Then, be a strategic shopper.
Basic setup needs
To accept credit and debit cards, you’ll first need a place to receive the funds. You can get that by either opening your own merchant account, which is a special type of bank account for receiving card payments, or by using a payment service provider that lets you use its merchant account.
Next, you’ll need to subscribe to a payment processor to handle the work of routing your card transactions through the financial system so you get paid.
Then, you’ll need a way to take card payments from customers. If you sell in person, you’ll need a POS system, which can be as simple as a stand-alone card reader or as built-out as a countertop terminal with a cash drawer and receipt printer, so people can pay you. If you sell online, you’ll need a secure checkout portal — the payment gateway — on your website or within your app so that people have a place to enter their card information in order to pay you.
How to shop for options
Decide whether you want a third-party or native payment gateway. Your e-commerce website builder might have one built in, or you may need to find one on your own that integrates with your website.
See what you can get as a bundle from your current providers. Many payment gateway providers offer merchant accounts, for example, which may mean easier setup and lower fees.
Remember that costs for payment processing are often a percentage of the transaction plus a fixed fee per transaction. Sometimes providers offer discounts to businesses that bring them a high volume of transactions, so shop around.
Consider whether you want to receive international payments. Most gateways and processors have no problem with major card brands and networks, but they might have restrictions on foreign credit cards and other currencies.
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