As a business owner, you often hear two terms — payment processor and payment gateway. You may have even heard them being used interchangeably or as one term like “payment processing gateway,” but the two are actually very different.
To better understand what these terms mean, it’s important to note that there are always four parties involved in a transaction:
- The customer who purchases the product or service
- The merchant who sells the product or service
- The issuing bank sends funds on behalf of the customer’s credit card
- The acquiring bank collects funds from the issuing bank for the merchant
For these four parties to participate in a transaction, there must be communication between the parties. The customer must know how much money they’re paying in the transaction, the merchant must know that the customer agrees, and the transaction details must go from the point of sale to all banks involved.
That’s where payment processors and payment gateways come in. They handle the communications between all parties involved in the transaction, but what are the differences when you compare payment processing vs. payment gateways? Read on to learn more.
Payment Gateway vs. Payment Processor: Quick Overview for Online Payments
Both payment gateways and payment processors are involved in the communication aspect of transactions. But when you delve into the payment gateway vs. payment processor comparison, you find that the communications they take part in are very different.
- Payment Gateway Communications: A payment gateway is in charge of communications between you and your customer. It tells your customer the payment methods you accept, the total value of the transaction, and the approval or decline message from the processor. Payment gateways were designed to make the integration and connection to payment processors easy.
- Payment Processors: Payment processors are in charge of facilitating the payment and handling the communication and money transfer between the issuing, acquiring, and merchant bank. That means that the payment processor communicates things like the overall value of the transaction and the type of transaction through payment networks/schemes (Visa, MasterCard, etc) to these banks. It’s also responsible for telling the payment gateway if a transaction was approved or declined so that information can be relayed to you and your customer. Payment processors also facilitate the transfer of money from the approved sales to the merchant’s bank account.
Considering the data these tools are designed to communicate, payment processors are always involved in electronic transactions. Without a payment processor, the system of communication and funding would fall apart.
Payment gateways aren’t always necessary. They’re typically used for online sales and subscriptions and may be used in some card-not-present transactions for in-store sales in lieu of a physical terminal, but they’re not a necessity in all sales environments.
What Exactly Is a Payment Gateway?
A payment gateway is a piece of technology that gives you the ability to accept credit card payments. This is done by connecting a payment processor to your gateway account and offering a system that relays data between the two as well as between you and your customer.
How Does a Payment Gateway Work?
Here are the steps to a transaction from a payment gateway provider perspective:
- Buyer Purchase: The payment gateway comes in as soon as the buyer makes a purchase on an e-commerce site and sometimes in person.
- Gateway Communications: As soon as the purchase is made, the payment gateway sends the transaction to the payment processor that’s enabled on the account.
- The Payment Processor: Next, the payment processor facilitates the transaction through the appropriate network/scheme (Visa/MasterCard, Discover) and lets the payment gateway know if the transaction is approved or declined.
- Approval Communication: The payment gateway communicates an approval or decline code to the customer or the merchant.
The payment gateway provider offers a service that works in conjunction with the payment processor, so you can expect to pay a small fee for each transaction made through your payment gateway.
How To Set Up a Payment Gateway
There are two ways you can set up a payment gateway. You can either use a payment gateway service or create your own gateway to get around the fees services typically charge. If you’re using a service provider, simply follow the steps offered by the service provider. This typically involves adding strings of code to your website.
If you decide to set up your own payment gateway, you’ll need to follow these steps (keep in mind this takes advanced coding knowledge):
- Set Up Your Infrastructure: Start by building your payment gateway infrastructure.
- Choose Your Payment Processor: You’ll need to connect your payment gateway to a payment processor to facilitate transactions for you. Compare your options wisely, as the right payment processor will help grow your business, while the wrong one will have a detrimental impact on it.
- *Many payment processors don’t require a payment gateway, or offer these services natively, so consult with your providers before spending wasted technical cycles.
- Create a CRM: Create a customer relationship manager. This tool will help you manage transaction data and client information.
- Add Security: Any time you accept credit card information from your visitors, you have a responsibility to keep that information secure. So, if you’re operating your own payment gateway, it’s important that every aspect of that gateway is safe for your clients’ data. If you’re not sure what security measures to implement, look into PCI DSS standards for keeping credit card data secure.
- Get Certified: You’ll need to get the required certifications for your payment gateway before you can accept credit cards. This includes taking part in PCI audits and applying for 3DS certification.
- Launch Your Gateway: Once your gateway is certified, you’re ready to launch it and start accepting credit cards.
What Exactly Is a Payment Processor?
A payment processor is the party that facilitates the transaction by communicating data and funds between the merchant bank and the customer’s issuing bank through Payment Networks. You’ll need to work with payment processing companies for all debit and credit card payments. Typically processors also offer support of digital wallets like ApplePay and GooglePay along with ACH and other Account-to-Account transfers. .
Payment processors send credit and debit card data from wherever customers tap, insert, or input their credit card information to payment networks like Visa, Mastercard, Discover, and American Express.
The best payment processors use dynamic routing and other tools to ensure that the data moves as efficiently through the infrastructure as possible, resulting in higher approval rates. Read on to learn the details of payment processing services.
How Does a Payment Processor Work?
A payment processor follows these steps to facilitate a transaction:
- Receive Transaction Details: The payment gateway sends the payment processor transaction details. The payment processor receives these details for fulfillment.
- Send Transaction Data: The payment processor determines the card network for the transaction (Visa, Mastercard, Discover, American Express, or others) and sends the transaction data to that card network with an approval request.
- Approval Decision: The card network lets the payment processor know if the transaction has been approved or declined. If it has been declined, the network will include a code that tells the merchant and the customer why the payment was declined.
- Information Relay: Finally, the payment processor sends the approval decision along with any relevant codes to the payment gateway.
At this point, the merchant moves forward with the transaction based on the result of the charge. If the charge is approved, the merchant completes the transaction and provides the product or service to the customer. If not, the merchant may request another form of payment.
As is the case with payment gateways, payment processors provide a service. As such, they typically charge transaction fees for the services they provide.
How To Set up a Payment Processor for Online Transactions
Payment gateways are not always a necessary step in processing transactions so it’s important to start with what systems your business is using, what’s the source of truth for your payment and consumer data, and where you are conducting business. Some businesses might need payment gateway-like functionality or checkout/shopping cart options, while others need direct integrations to popular CRMs. Still others will use completely bespoke systems using direct API integrations to various system types. One size never fits all, so you should start by advising options based on your business type. Determine the infrastructure and workflow first and then work with the best in class providers in those areas to reduce the number of vendors and payment touch points.
Choosing the Right Payment Processing Company
When you decide it’s time to accept credit and debit card payments, the most important decision you’ll make is choosing a specific payment processor. As you compare your options, keep the following in mind:
- Fees: Payment processors are individual companies that create their own fee structures. As such, you’ll find that fees vary wildly. Moreover, some payment processors nickel and dime their customers with transaction decline and other fees. It’s best to work with a company that’s more interested in your success and less interested in nickels and dimes.
- Routing: Some payment processors use traditional routing methods, while others use modern dynamic routing. This is an important distinction because dynamic routing can greatly reduce your decline rate, resulting in higher revenues and happier customers.
- Scalability: Finally, you didn’t build your company to this point for it to become stagnant. Your goal is to grow. When you choose a payment processing service, it’s important to choose one capable of growing with your business. If not, it may hold your business back down the road.
You can compare hundreds of payment processors. Or you could skip the hassle and go to Revolv3. Revolv3 is a full-stack SaaS payment orchestration and optimization payment processor that ensures the highest credit card approvals in the industry. Moreover, with Revolv3, you won’t have to worry about nickel-and-dime fees like declined transaction fees. Find out how Revolv3 can help your business today!