Understanding the difference between a payment gateway vs. payment processor can be challenging. While they both can do the same functions, they are two different platforms for taking payments. Understanding the differences between the two and how they work together is essential, so we have broken them down for you.
What Is a Payment Processor?
On a basic level, a payment processor is an entity that oversees the entire transaction process from start to finish. It handles the transmission of a credit card transaction between a customer’s bank and the merchant’s financial institution once the transaction has been approved. It also handles the backend finalization of a credit card transaction.
What Is a Payment Gateway?
A payment gateway is a technology that securely transmits customer payment data to various entities throughout the payment process. The payment gateway will send encrypted payment data to both the issuing and acquiring banks. The gateway will then return the approval or denial of the transaction.
Payment gateway technology can be used with traditional brick-and-mortar customers with point-of-sale systems (POS), online-only businesses, or those who use both channels.
Payment Gateway Encryption
Payment gateways are required to protect data using PCI standards set by the Payment Card Industry Data Security Standard (PCI DSS). PCI DSS is used for brick-and-mortar and online shops using payment gateways.
The four different methods used to secure data are:
- Data Encryption
- Secure Socket Layer (SSL)
- Secure Electronic Transaction (SET)
Payment Gateway vs. Payment Processor: Similarities and Differences
Depending on the platform, a payment gateway and a payment processor can communicate with the customer’s bank and the merchant’s financial institution during the transaction process and when reconciling a batch with all the individual transactions for a particular business date.
What’s the difference between a payment gateway and payment processor? A gateway is typically the technology used to handle the acceptance of a payment by a customer. It is called a gateway because it is the first and last stop for a transaction. It takes the payment from the customer, ensures the payment is securely encrypted and transmitted to the payment processor, waits for the payment processor to handle everything in between, and then tells the customer if their transaction is approved or denied.
A payment processor handles everything in between, as it is the mediator between the customer’s bank and the merchant’s financial institution. The payment processor handles all the logistics behind processing the card during and after the initial transaction. It communicates between the two institutions during the transaction and then handles the final processing of the transactions after the fact.
How They Work Together
A payment gateway and payment processor work together to ensure you can take payments from your customers securely and conveniently. When a customer runs a transaction, the payment gateway securely collects and sends the payment data to the merchant’s payment processing vendor.
The payment processor then acts as the mediator between the merchant’s financial institution and the customer’s bank. The payment gateway then sends back the response to the customer. The payment processor will then reconcile the whole batch of transactions for the date of business in question.
Putting It All Together
Here are the five steps a payment gateway and payment takes from start to finish:
- A customer buys an item from a merchant through their online shop using a secured cart.
- The payment gateway encrypts the payment data and securely transmits it to the payment processor.
- The payment processor handles the communication between financial institutions and receives a response.
- The payment gateway then returns a response from the payment network. This information will determine if the customer’s payment was invalid or valid. If the customer’s payment is not valid, it will prompt them to pay with a different payment method. If the customer’s payment is valid, it allows the customer to complete the order.
- The payment processor will complete the transaction at the end of the business day.
Is PayPal a Payment Gateway or Processor?
PayPal can be a gateway, a processor, or both, depending on how you use their services. For instance, PayPal’s Commerce Platform service is an all-in-one payment gateway and processor package. If you are looking for just a payment gateway, then their Payflow service is a secure, PCI-compliant platform compatible with most online shopping carts that take over 25 different currencies.
Is Stripe a Payment Gateway or Processor?
Stripe is both a payment gateway and a processor. You can also set up recurring payments from clients. Therefore, you won’t need any other solution if you decide to work with Stripe.
How to Pick Your Payment Gateway and Payment Processing Provider
Do you need a payment gateway and a payment processor? Yes, you need both. So, you need to know how to pick these two service providers.
Not all payment gateway and payment processing providers are built the same, just like not all businesses have the exact payment processing needs. Just because one payment processor works for a business doesn’t mean it will work for you, so you must first ask yourself several key questions to understand which platform is right for you and your business.
Here are the top ten questions you should ask yourself when picking a provider:
- Do I want an all-in-one solution or individual platforms?
- Do I need to integrate different payment methods now or in the future?
- Will I need to take payments from international customers and take multiple currencies?
- What type of service account can my business handle? For instance, can I pay monthly fees, variable fees, fixed fees per transaction, etc…
- Am I a new or growing business that needs extra support?
- Will I be taking high-volume or high-value transactions?
- Do I need extensive reporting or data?
- Do I need my payment platform to be portable?
- Who offers me the best PCI compliance support?
Top Payment Processors In 2023
- PayPal: Best one-stop-shop provider
- Stripe: Best overall payment processor
- Square: Best for new/growing businesses
- Chase Payment Solutions: Best for online businesses
- Clover: Best for traditional point-of-sale systems
- Stax: Best for high-volume businesses
Understanding the difference between a payment gateway vs. payment processor can confuse you, but after reading this guide, you are now an expert! You now understand their differences and similarities and how they can work together to accomplish payment processing. We have also provided you with the six best payment processors in 2023 to make payment processes work for your specific situation.
An Outsourced CEO and expert witness, Jim Thomas is the founder and president of Fitness Management USA Inc., a management consulting, turnaround, financing and brokerage firm specializing in the gym and sports industry. With more than 25 years of experience owning, operating and managing clubs of all sizes, Thomas lectures and delivers seminars, webinars and workshops across the globe on the practical skills required to successfully overcome obscurity, improve sales, build teamwork and market fitness programs and products. Visit his Web site at: www.fmconsulting.net or www.youtube.com/gymconsultant.