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Payment Processor vs. Payments Gateway

Welcome to Learn, where we provide straightforward, easy-to-understand definitions of the payments industry.

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A payment processor is a service provider that facilitates the transfer of funds between merchants, credit card companies, and banks. A payments gateway, on the other hand, is responsible for verifying a customer’s credit card information before a sale is transmitted to a payment processor.

What is a Payments Gateway?

Merchants use payments gateways to make sure credit card details are correct when an online sale occurs. They function similarly to a point-of-sale (POS) terminal for in-person sales but are used for virtual transactions. Customers securely enter their payment information on the purchasing page of a website, while on the backend, the payments gateway authorizes the transaction so that the payment processor can complete the transaction.

Some merchants use white-label payments gateways to offer a seamless experience to customers. This is where the payment page is embedded into the merchant’s website, and it appears to the customer as if they are simply submitting their payment information directly to the merchant.

In some cases, merchants use third-party payments gateways that send customers to the gateway’s website to enter their payment information or complete the transaction. Upon entering their details, the customer is then routed back to the merchant.

In both cases, the payments gateway transmits the payment information to the payment processor to finalize the transaction.

What is a Payment Processor?

A payment processor acts as a middleman between the merchant (business), the customer, the issuing bank, and the merchant’s bank. Payment processors are necessary for all types of businesses, whether they are online-only, brick-and-mortar, or hybrid. Many payment processors also provide POS terminals to brick-and-mortar shops so they can collect payment card information.

Merchants can opt to use a payment processor that is connected to their merchant account so that payments are transmitted directly to them (direct transmission). Some businesses choose to use a third-party payment processor that processes transactions for many different merchants because they tend to offer lower fees and a more personalized experience. It’s worth noting that transactions routed through third-party processors may take 3-7 days to settle because they are working with many different merchants.

It’s important to understand the differences between a payment processor vs. a payments gateway; however, both are necessary to complete an online sale.

When to Use a Payment Processor vs. a Payments Gateway

A payments gateway is a necessity for e-commerce businesses because it is the only way to verify payment cards virtually. Gateways help prevent fraud by verifying that the card used is legitimate. They also ensure that customers paying with debit cards have enough money in the account to cover the purchase. Consider using a payments gateway when:

  • You have an online store
  • You collect payments over the phone
  • You collect in-person payments but don’t have a full POS system

Both online and brick-and-mortar stores need a payment processor to accept payment cards (credit and debit) or ACH payments. Use a payment processor when:

  • You have a brick-and-mortar store that uses a POS system
  • You have a hybrid brick-and-mortar store that also makes sales online
  • You have a pop-up shop that makes sales at different venues

Some payment gateway providers also offer payment processing solutions, so merchants can bundle the services.

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