Payment Gateway vs Payment Processor

Payment Gateway vs Payment Processor

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Most people are so accustomed to swiping a credit card or making a payment online that we may not think about what actually happens behind the scenes to move that money from our bank account to the merchant’s account. When you own your own business, you start to dig deeper into how payment processing works so that you can securely collect payments from your customers. Read on to learn the difference between a payment gateway and a payment processor, and how they work together to help e-commerce customers pay for goods and services. 

What's the Difference Between a Payment Gateway and a Payment Processor?

To understand the difference between a payment gateway and a payment processor, we first need to look at the industry’s terminology and how payments work, both in brick and mortar stores and online.

Payment Terminology

Get familiar with the terminology used in payment processing. Here are the main terms you need to know.

  • Customer - The cardholder who is paying for products or services. The customer enters credit card information and initiates the transaction.
  • Issuing bank - The customer’s bank that issued their credit card.
  • Merchant - The business supplying goods or services for sale. This can be in-person or online.
  • Merchant account - The bank account receiving money for the transaction.
  • Acquiring bank - The bank that hosts the merchant’s credit card processing account.
  • Payment processor - The service that sends transaction info between the merchant, the issuing bank, and the acquiring bank. 
  • Point of sale - A credit card processing machine at a brick and mortar location that reads EMV chips in credit cards and sends it through the payment processor.
  • EMV chip - This computer chip is part of smart cards. EMV stands for Europay, Mastercard, and Visa, which were the three original processing firms that agreed to implement these chips in their cards. An EMV chip card generates a one-time use transaction code that helps prevent fraud when a card is used at a point of sale.
  • Payment gateway - The equivalent to a point of sale system for online transactions, it encrypts and transmits information to the payment processor. A payment gateway provides integrations into different e-commerce platforms and APIs to perform transactions. It also receives authorization for the banks to move money from the customer to the merchant.
  • Payment tokenization - The process of converting the customer’s card to another number to secure their private information for the online purchase.

Further reading: What is Tokenization? And its Benefits for E-commerce

What is a Payment Gateway? 

A payment gateway is the equivalent of a credit card terminal but it’s made specifically for online transactions. Without a card physically present, the payment gateway has to authenticate the card without help from an EMV chip. The gateway also encrypts the customer’s information to keep their bank info secure.

How Does a Payment Gateway Work? 

When customers check out in an online store, they enter their payment info in the checkout page. This is where you need to have the payment gateway in place. Usually, payment gateways have easy integrations into different e-commerce platforms and developer-friendly APIs / SDKs if you want a custom integration into your own system. The gateway encrypts the data and sends it to the acquiring bank’s payment processor. 

The acquiring bank sends the payment request to the issuing bank through the payment processor, and the issuing bank returns an approval or denial. If the transaction is approved, the payment gateway relays approval to the customer and closes out the sale. If 3D Secure authorization is required by the bank, the payment gateway will show a confirmation screen to the customer.

What is a Payment Processor? 

You need a payment processor for both online and brick and mortar sales. 

For in-person payments, a payment processor sends information between the merchant, the issuing bank, and the acquiring bank. The processor issues a brick and mortar business a point of sale system, or a payment terminal. Payment terminals have to be able to read EMV chip cards. 

There is also a payment processor for online transactions, but it works with a payment gateway instead of a physical payment terminal. The payment processor carries out the transaction once the data passes through the gateway.

How Does a Payment Processor work? 

When a customer uses their card in person at the payment terminal, the terminal will authenticate the card and then send info to the issuing bank. The issuing bank will then approve or deny the transaction.

The payment processor will relay the approval or denial to the terminal. If the transaction is approved, the payment processor also sends the payment information to the acquiring bank.

For online transactions, the customer enters their information through the payment gateway. The gateway encrypts the information, turning it into a token, and sends it through the processor. The processor will relay approval or denial back to the customer through the payment gateway. When the payment is approved, the processor will relay the payment information to the acquiring bank. 

Do I Need Both a Payment Gateway and a Payment Processor?  

To process online transactions, you will need both a payment gateway and a payment processor. The payment gateway is the beginning and end of the transaction, where the customer will enter their credit card information and receive an approval or denial of the transaction. The payment processor moves the information between the customer’s bank and the merchant bank. Every transaction processed online needs both.

Is MONEI a Payment Gateway or a Payment Processor? 

MONEI is a payment gateway. With our gateway, you can accept online payments without astronomical transaction fees. Take advantage of the best payment gateway rates to help you grow your e-commerce business. MONEI provides a simple interface, 3D Secure transactions, short settlement lead times, and user-friendly APIs.

What’s the Difference Between a Merchant Account and a Payment Gateway?

Think of the payment gateway as the checkout counter of an e-commerce store. As you learned earlier, this is where the customer inputs their information, which is then encrypted and processed. 

E-commerce businesses need a merchant account to accept credit and debit card payments online. The merchant account is the bank account where the funds are going to pay for goods and services. After the payment makes its way through the payment gateway, the payment processor moves information back and forth between banks. The money from the approved transaction is then deposited in the merchant account.

Further reading: Merchant Account vs Payment Gateway: How They Work Together

Choosing a Payment Processor and Payment Gateway Provider for Your E-commerce Business 

Now that you’ve learned the basics about what goes on behind the scenes of payment consider what you need in a payment processor and payment gateway for your e-commerce business.

A payment gateway should be reliable, secure, and affordable. The payment gateway is responsible for authenticating and encrypting your customers’ information. Customers want a smooth transaction, and they want their data to be secure. This is where MONEI can help!

MONEI offers you a simple and affordable solution for your e-commerce business. Our payment gateway is integrated with multiple payment processors and banks. If you already have an agreement with your own bank, you can use it with MONEI+ (only in Spain for now). 

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