Businesses can benefit from having credit card processing solutions. The right process makes it easier to accept and process customer payments automatically. Finding the right credit card processing solution is crucial to the business. The payment processor and payment gateway are among the many factors you need to consider. These are terms you will come across often when making the selection.
The two terms are often used interchangeably. But they refer to different parts of the payment process and different entities. Both processes are crucial to the credit card payment process, and understanding their roles can help you make informed decisions for the best results.
Key Parties Involved in a Credit Card Transaction
Before delving into the differences between payment processors and payment gateways and their role in helping process payments for your business, you can start by familiarizing yourself with the different parties involved in the payment process. It will make your read easier to understand. Although the process looks quick and simple from the front end, it has many moving parts behind the scenes.
- Issuing bank – This is the customer’s bank, the one that has issued the credit card the customer uses to make the purchase. The issuing bank deducts the transaction amount from the customer’s account and pays it to the acquiring bank.
- Acquiring bank – The merchant account provider or the merchant’s bank is also called the merchant account provider. It is in charge of depositing funds from credit card sales into the merchant account. The acquiring bank deducts interchange fees from the purchase amounts and pays them to the issuing bank.
- Card networks – These are the card brands like Visa, MasterCard and American Express. They set the interchange rates, which are the percentages of each transaction you pay for the ability to accept credit cards.
- Credit card processor – Responsible for coordinating and transmitting the purchase amount and merchant information from the merchant to the issuing bank so it can pay the acquiring bank.
- Payment gateway – This is the technology that encrypts credit card information and sends it to the credit card processor.
Now that you know the different role players in the card processing system, it is easy to understand the roles that payment processors and payment gateways play in the larger scheme of things.
What is a Payment Processor?
Every business that wants to process credit cards online, over the phone or at the point of sale must partner with a payment processor. The payment processor is a company that handles credit and debit card transactions. In layman’s terms, a payment processor could be said to move funds from one account to another.
Payment processors are categorized into two;
Front-end processors maintain connections to card networks and settlement services. They manage merchant accounts on behalf of their clients. The front-end payment processor can also contract with the other payment processor category back-end processors to handle the actual movement of funds behind the scenes.
Back-end processors primarily settle transactions by moving money from the issuing bank account or the customer’s account to the merchant’s bank. It ultimately transmits funds to the business’s account when the transactions are finalized.
What is a Payment Gateway?
A payment gateway facilitates online credit card payment and other transactions where credit cards are not physically present. It creates a secure connection between your business’s website or browser and the credit card company processing the payment.
Payment gateways often have an interface where you can manually enter credit card information for phone sales called a virtual terminal.
How a Payment Gateway Works
- The payment gateway process begins with the customer making a purchase through an e-commerce site or a virtual terminal.
- The payment gateway creates a secure connection that is used to encrypt the credit card payment data and push it to the acquiring bank.
- The payment gateway also determines which credit card network is involved and routes the transaction information to the issuing bank.
- After verifying the transaction’s authenticity, the issuing bank verifies and determines if the buyer has enough credit remaining to cover the transaction amount.
- The issuing bank sends an approval or rejection of the transaction through the payment gateway to you.
How Do They Work Together?
You need a payment gateway and a payment process to process online transactions for your business. The process begins and ends with the transaction. The customer enters their credit card information and receives an approval or denial of the transaction through the payment gateway.
The payment processor moves the information between the customer’s and the merchant’s banks. Every transaction you process online needs both the payment gateway and the payment processor.
Differences Between the Payment Processor and the Payment Gateway
While the two work together, they have major differences and handle different credit card payment processing aspects.
|A payment gateway verifies the legitimacy of the card information entered on the merchant’s website.
|Handles the logistics of credit or debit card payments.
|It can authorize and process transactions
|It can process payments but doesn’t usually authorize transactions
|It is not required for in-person card transactions.
|It is required for in-person and online card transactions
|Best for e-commerce or card-not-present transactions
|POS, in-person transactions
How to Find the Right Payment Gateway and Payment Processor
Payment gateway and payment processors are vital to your online credit card payment process. The payment gateway is also part of your security features and safeguards customer information and payment data. Finding the right payment gateway and payment processing can greatly enhance customer experience. A few tips to consider when choosing a payment gateway payment processor include;
- Decide whether you want a third-party or native payment gateway. If you’re using an e-commerce website builder, it might have a built-in payment gateway, or you may need to find one on your own that integrates with your website.
- You can try to see what you can get as a bundle from your current providers. Many payment gateway providers also offer payment merchant accounts, making it easier to set up and lower fees.
- The costs for payment processing are usually percentage-based, plus a fixed fee per transaction. Sometimes the providers offer discounts to businesses with a high volume of transactions, so don’t settle on the first option you find. Shop around!
- Most gateways and processors have no problem with major networks and cards. But they might have restrictions on foreign credit cards and other currencies. You should check this with your providers if you intend to receive international payments.