Payment Gateway vs. Payment Processor: What’s The Difference?

If you run an online store or a website that processes online payments, you’re probably familiar with the terms payment gateway and payment processor. However, you might not understand the difference between both terms as a lot of people use them interchangeably.

Payment gateway services and payment processors are two different types of services. Both play a role in helping you process credit card payments and other types of online transactions. Understanding the difference between both options can help you look for the right solution for your business.

In this article, we’ll explain the difference between a payment gateway and a payment processor and help you decide what option you need. Let’s get to it!

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An Introduction To Payment Processors

Every business that accepts credit card payments requires a processing service. A payment processor is a service that can execute a transaction by moving information from a customer’s bank account to a merchant’s bank account:

A payment processor works for both in-person and online transactions. However, the customer doesn’t typically interact with the processor itself.

With a payment processor, you’re usually in charge of processing the customer’s payment data. That can be through a physical or a digital Point of Sale system (PoS) system.

To sum it up, a payment processor facilitates debit and credit card payments. Typically, these services charge a fee or a percentage for each transaction (often both).

There are several types of payment processors your business can use. Some payment processors cater to international businesses, high-risk projects, specific types of online stores, and more.

It’s worth noting that a lot of modern payment processors also incorporate gateways. That means they both validate and process payment data. This makes them more comprehensive solutions. However, a full-blown payment processor can be overkill for some types of online businesses.

It’s worth noting that a payment processor can’t authorize payments directly. That’s up to the issuing bank and the credit card network. The payment processor logs the transaction, the bank authorizes it at a later date, and then approved transactions go into your merchant account.

An Introduction To Payment Gateways

Payment gateways fulfill a similar function to payment processors, but they’re more geared toward online stores. A payment gateway can authorize transactions, but there’s still a payment processor working on the back end.

This makes payment gateways a great solution for websites that want to start accepting payments online without dealing with the red tape of using a full-fledged payment processor:

It’s important to note that customers interact directly with payment gateways. They enter their payment information and the payment service provider verifies that data before processing the sale.

If you’ve ever entered your credit or debit card information online to make a purchase, you’ve used a payment gateway. Websites can integrate payment gateways to make for a seamless experience or send users to a third-party payment gateway:

In either case, the website or online store doesn’t process ecommerce transactions directly. They don’t get access to your credit card information, as the payment gateway handles it.

Typically, payment gateways charge a percentage for each sale. They can also handle transactions faster. That means if a user makes a credit card payment, some payment gateways focus on delivering that money as fast as possible (although this can vary).

Payment Gateway vs. Payment Processor: Key Differences

Now that you have a better idea of what payment processors and payment gateways are, let’s compare both options in terms of what matters for a website or an online store.

If you want to start accepting payments online, you’ll need to understand the overall differences between a payment processor and a gateway. Here’s an overview of what you need to know:

1. Payment processor. A payment processor can include a gateway but not vice-versa. A payment processor will support both in-person and online payments and customers don’t directly interact with them. That means using a PoS system or an online gateway that takes the customer’s payment data and processes it before paying out to a merchant account.
2. Payment gateway. If you run an online store or website that accepts digital payments, you need a gateway. The gateway can be part of your site or external and it helps you accept credit cards (and maybe other payment methods too). A payment gateway doesn’t necessarily pay out to a merchant account, but one might be necessary depending on the kind of transactions you’re processing.

Typically, it’s easier to open an account for a payment gateway compared to a payment processor. This is because a lot of payment gateways cater to personal users as well as businesses.

If you run a larger business or enterprise, a payment processor can be more accommodating. A standard payment processor will cater to businesses that handle a large volume of transactions while reducing the risk on your end.

Payment Gateway vs. Payment Processor: Which Option To Choose?

Overall, using a simple payment gateway can be a great option if you run an online business or website that doesn’t process a large volume of sales. Some examples of payment gateways include services such as Braintree, Stripe, and 2Checkout:

Braintree is a great example of a payment gateway, as it’s powered by PayPal. PayPal offers payment gateway functionality and enables businesses and end-users to receive payments. However, it’s accurate to say that PayPal is a payment processor that also integrates a payment gateway:

The same goes for platforms such as Stripe. With Stripe, you get a service that offers a payment gateway for websites but also acts as a processor and can deal with merchants, small vendors, freelancers, and other types of users.

It’s important to understand that there’s always a payment processor involved when accepting credit card payments. As the end-user, you can choose to integrate a payment gateway with your website.

Conclusion

If you intend to accept the occasional payment online, a gateway can be a great option. There are a lot of ways to integrate a simple payment gateway with your online store and you might not even need a merchant account. That will depend on what kind of transactions you’re processing, the volume, and how much money is going into your bank account.

A payment processor can work for both online and offline payments. They typically require you to set up a merchant account and the onboarding process for new businesses can take some time. However, most payment processors also incorporate gateways. This makes them a more comprehensive solution and the way to go if you want to process payment information for a business.

Do you have any questions about whether to use a payment gateway or a payment processor? Let’s talk about them in the comments section below!