Two terms “payment gateways" (Payment gateway) and “payment processor” (Payment Processor) probably won't be strange if you've worked in the E-com industry for a long time. Each of these concepts plays an important role in online transaction management, but distinguishing between the two can be confusing, especially for newcomers. So today, let's learn more about the difference between a payment gateway and a payment processor with PlutusPay to discover which one you need for your business.
overview
A payment gateway will collect and verify the customer's credit card information. It ensures that all the details are correct so that transactions can be passed to the payment processor.
A payment processor is a service that acts as a bridge between the merchant, the credit card company, and the bank. This party manages the money transfer so you receive the money the customer paid to shop on your store.
Without a payment gateway, you will not be able to verify credit card information during online shopping. But payment processors play an equally important role; Without them, you won't be able to request and receive money from customers' accounts when they make purchases on your store.
Payment gateways |
Payment processor |
|---|---|
| Collect, encrypt and verify customer credit card information. | A bridge between the seller, the issuing bank and the beneficiary bank to receive money transfer. |
| Acts as an online point of sale (POS) to ensure card validity. | Acts as a direct point of sale (POS) to ensure card validity. |
| Act as an intermediary between businesses and customers. | Act as an intermediary between the business, the customer's bank and the seller's bank. |
| Must be used in conjunction with a payment processor. | Can be used as a standalone service. |
| Suitable for: E-Commerce businesses | Suitable for: POS machine transactions, direct transactions. |
What is Payment Gateway?
A payment gateway is a method for collecting and verifying customer credit card information. The main function of a payment gateway is to confirm a transaction, and there is often an additional payment page for the customer to secure the card information entered.
The payment gateway can integrate into the merchant's website, or the payment page can send customers to the payment gateway's website first to complete the transaction and then redirect them back to the merchant's website. This is called a third-party payment gateway. Payment gateways are often offered as a free service because fees are typically charged on a per-transaction basis.
Once the credit card information is submitted, the payment gateway passes it to the payment processor for verification. It does not process the transaction directly, but simply ensures that the credit card is valid, similar to how a chip reader on a point-of-sale computer checks a physical credit card.
When do I need to use a payment gateway?
You should use a payment gateway when you decide to enter this E-com business. Payment gateways are the only option to verify the validity of a credit card in cyberspace. Without them, you could be scammed by customers who use fraudulent information or have insufficient funds in their accounts to pay for their purchases.
Here are some examples of considerations you should use for payment gateways.
- You are building an online store.
- You want to collect money directly but don't want to buy a POS system.
Leading payment gateways
We have compiled a list of the best payment gateways for businesses, but below are the two most prominent names.
- Stripe provides an integrated system that connects your online store with Stripe so customers can pay directly on your website.
- Helcim offers quantity discounts and comes with multiple APIs so you can customize your payment gateway.
What is a Payment Processor?
A payment processor is an intermediary service responsible for sending messages between your business, the customer, the customer's bank account, and your bank account.
You will need one for whatever type of business you are running. If you have a physical store, many payment processors offer POS systems for you to collect credit card information during transactions.
Many businesses also use a payment processor connected to their merchant account, meaning all payments go directly to them. However, you can also use a third-party suite that will store all payments from many different businesses. From there, the customer experience is optimized at a lower cost.
When to use a payment processor?
All businesses, whether online or brick-and-mortar, will likely need some form of payment processor if they plan to accept credit card or ACH payments. Below are some situations where a payment processor is needed
- You have both a physical store and an online store.
- You have a permanent physical store where you can install a permanent POS system.
The Best Payment Processors
There are many different types of payment processors, including credit card and ACH processors. Since most businesses collect credit card payments, below are our top picks for credit card processing companies.
- Square will transfer money to your account in 1 – 2 business days with fees ranging from 2.6% to 3.5% (per transaction).
- Stripe supports fees from 2.7% to 2.9% (per transaction) and accepts all types of e-wallets and ACH payments.
Summary
When comparing these two solutions, you can clearly see that they play two completely different roles. On one side, the payment gateway plays an important role in verifying customer credit card information. Meanwhile, a payment processor is about handling communication with parties and transferring customer payments to your account. In general, you will need both of these services if you want to do business in the online market as well. Therefore, you should choose something like Stripe that can provide both of these services at the same time.
In short, online stores will need both of these solutions, while physical stores often only need a payment processor.
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