Payment Gateway Vs. Payment Processor: What's The Difference? (2024)

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You’ve probably heard the terms “payment gateway” and “payment processor” tossed around with equal weight. While each one plays a vital role in managing online transactions, the distinction can be a bit confusing, especially if you’re new to the world of e-commerce. Learn more about a payment gateway versus a payment processor to discover which one you need for your business.

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Payment Gateway vs. Payment Processor: At a Glance

A payment gateway collects and verifies a customer’s credit card information and is crucial for online payments. It ensures sure all the details are correct so the sale can be transmitted to the payment processor.

A payment processor is the service responsible for communicating between the merchant, credit card company and banks. It manages the transfer of funds so you get paid for your sale.

Without a payment gateway, you wouldn’t be able to verify credit card information while completing online sales. But payment processors play an equally vital role; without them, you couldn’t request and receive payment from the customer’s account.

Here’s a closer look at how the two services stack up:

Payment GatewayPayment Processor
Collects, encrypts and verifies an online customer's credit card informationCommunicates between the merchant, issuing bank and acquiring bank to transfer funds
Acts as an online point-of-sale (POS) terminal to make sure the card is validActs as an in-person point-of-sale (POS) terminal to make sure the card is valid
Intermediary between business and customerIntermediary between business, customer's bank and merchant's bank
Must be used in conjunction with a payment processorCan be used as a stand-alone service
Best for: e-commerce or card-not-present transactionsBest for: POS, in-person transactions

What Is a Payment Gateway?

Payment gateways are a way to collect and verify a customer’s credit card details. They are essentially the virtual version of a point-of-sale terminal chip reader. Their main purpose is to authorize a transaction, and they often include a purchasing page where the customer can securely submit their information.

The gateway might be seamlessly integrated into the website (known as a white-label payment gateway), or the checkout may send customers to the gateway’s own website to complete the transaction and then send them back to the merchant. This is known as a third-party payment gateway. Payment gateways are often offered as a free service because the company charges fees for the payment processing side of the transaction.

Once credit card information is submitted, the payment gateway sends it to the payment processor for verification. It doesn’t process the transaction directly, but rather, just makes sure the card is valid, similar to how a point-of-sale terminal checks a physical credit card’s chip.

When To Use a Payment Gateway

You’ll want to use a payment gateway if you’re branching into the world of e-commerce. Payment gateways are your only option for verifying the validity of a credit card in a virtual setting. Without them, you might be scammed by customers using fraudulent information or who don’t have enough money in their accounts to cover their purchases.

Here are a few examples of when using a payment gateway makes sense:

  • You’re setting up an online store
  • You’re collecting payments over the phone without a physical credit card present
  • You want to collect in-person payments but don’t want to buy a full POS system

Top Payment Gateways

We’ve put together a list of the best payment gateways for businesses, but here are our top three favorites.

  • Stax is the best for high transaction values, as it has a low per-transaction cost for both keyed and swiped transactions.
  • Stripe provides integration with your in-person payment system to help integrate your online and on-site stores.
  • Helcim offers volume discounts and comes with many APIs so you can customize your payment gateway.

What Is a Payment Processor?

You can think of a payment processor as a communication intermediary. It’s the service responsible for sending messages between your business, your customers, the customers’ bank accounts and your bank account.

You’ll need a payment processor no matter which type of business you operate. As a bonus, if you operate a brick-and-mortar store, a lot of payment processors provide POS systems that help you collect credit card information during transactions.

Many businesses use a payment processor that’s connected to their merchant account, meaning all of their payments are delivered directly to them. However, you can also use a third-party payment processor that stores payments for many different businesses. The benefit is a more streamlined experience with lower fees.

When To Use a Payment Processor

All businesses, whether online or brick-and-mortar, will likely need some form of payment processor if they plan on accepting credit card or ACH payments. Here are some examples of when using a payment processor makes sense:

  • You have a brick-and-mortar store that also operates an e-commerce website
  • You have a pop-up shop that travels to different venues
  • You have a dedicated storefront where you can install a permanent POS system

Top Payment Processors

There are several different kinds of payment processors, including credit card processors and ACH processors. Since most businesses collect credit card payments, here are our top picks for credit card processing companies.

  • Square delivers funds to your account in one to two business days with fees ranging from 2.6% to 3.5%.
  • Payment Depot uses a subscription pricing model based on your monthly transaction volume, making it good for businesses with lots of transactions.
  • Stripe offers rates between 2.7% to 2.9% per transaction and accepts all types of mobile wallets as well as ACH debit payments.

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Bottom Line

When comparing a payment gateway versus a payment processor, you can see they each play different roles. Payment gateways are vital for verifying a customer’s credit card information, while payment processors handle the behind-the-scenes communication that eventually lands payments in your account. Some companies, such as Stripe, provide both services.

Overall, online stores will likely need both solutions, while brick-and-mortar shops typically just require a payment processor.

Frequently Asked Questions (FAQs)

What is the difference between a payment processor and a payment gateway?

A payment gateway is a system that collects and verifies a customer’s credit card information before sending it to the payment processor. A payment processor, on the other hand, is a service that routes a customer’s credit card information between your point-of-sale system and the customer’s card network or bank.

Is PayPal a payment processor or gateway?

PayPal can be both a payment processor and payment gateway. If you want to use your own payment processor, you can just use PayPal’s payment gateway Payflow. If you’d like both payment processing and payment gateway services, you can use the PayPal Commerce Platform. Learn more in our PayPal review.

Do I need a payment gateway and payment processor?

You’ll need both a payment gateway and a payment processor if you run an e-commerce business that accepts online payments. It’s also important if you want to accept point-of-sale or mobile device payments. If you have a traditional brick-and-mortar business and don’t plan to offer online sales, all you’ll likely need is a payment processor.

How much does a payment gateway cost?

Many payment processors offer payment gateways as an optional free service. This is meant to encourage the use of their platform, as they can then generate revenue from the credit card processing fees.

What are the best ways to avoid chargebacks?

The best way to avoid chargebacks is to make sure that you offer excellent customer service to those who buy your products or services. If there is an issue, be sure that you have a refund policy in place and offer refunds when necessary. Other ways you can avoid chargebacks is ensuring that your receipts or billing information has your phone number on them, preferably a toll-free number, and that your business name and the name of your business or website are the same.

Payment Gateway Vs. Payment Processor: What's The Difference? (2024)

FAQs

Payment Gateway Vs. Payment Processor: What's The Difference? ›

A payment gateway is a system that collects and verifies a customer's credit card information before sending it to the payment processor. A payment processor, on the other hand, is a service that routes a customer's credit card information between your point-of-sale system and the customer's card network or bank.

What is the difference between payment processor and gateway? ›

The payment gateway securely encrypts the customer's payment data and sends it to the payment processor. The payment processor receives the encrypted payment data from the payment gateway and forwards it to the customer's bank (the issuing bank) to request authorization for the transaction.

What is the difference between a payment gateway and a POS? ›

Whereas POS terminals are designed for in-person transactions, online payment gateways allow for card-not-present (CNP) transactions in which the buyer and seller never meet face to face. Credit card information is entered on the website, in a hosted checkout form, or on a mobile app.

What is the difference between payment gateway and payment portal? ›

The payment gateway facilitates the transfer of information between the payment portal (a website, mobile phone, or IVR system) and the Front-End Processor or acquiring bank. Payment Gateways mediate between customers and vendors they purchase goods or services.

Is Visa a payment processor or payment gateway? ›

As a financial intermediary, Visa operates one of the most advanced and extensive payment processing networks. Visa is a card network, but it doesn't issue cards or set interest rates. Instead, it provides the infrastructure for authorized issuers and cardholders to facilitate electronic funds transfers (EFTs).

What is payment gateway in simple words? ›

A payment gateway is a technology platform that acts as an intermediary in electronic financial transactions. It enables in-person and online businesses to accept, process, and manage various payment methods—such as credit cards, debit cards, and digital wallets—in a secure and efficient manner.

What is an example of a payment processor? ›

Top-rated payment processors for 2022 are Stripe, PayPal, and Square. The best payment processor companies can be used in-store and as online payment software for eCommerce and other suppliers' needs.

Is a payment gateway a payment processor? ›

The difference is a payment processor facilitates the transaction and a payment gateway is a tool that communicates the approval or decline of transactions between you and your customers.

Is a payment gateway a processor? ›

A payment gateway is a system that collects and verifies a customer's credit card information before sending it to the payment processor. A payment processor, on the other hand, is a service that routes a customer's credit card information between your point-of-sale system and the customer's card network or bank.

What is a disadvantage of payment gateway? ›

Disadvantages. Payment gateways can be expensive. Transaction fees are usually charged on each transaction and additional monthly fees may apply. Payment gateways may require merchants to organise their own PCI compliance.

What does a payment processor do? ›

A payment processor is a company or service that facilitates electronic transactions—such as payments made with credit cards, debit cards, or digital wallets—between businesses and their customers.

Is PayPal a payment processor or gateway? ›

As your payment processor, gateway, and online merchant account, PayPal authorizes transactions and helps protect electronic payments that come through your website. So you can easily accept online payments and earn money for your business.

Is Amazon pay a payment gateway or processor? ›

Amazon Pay provides your business with an online payment processing service that allows Amazon customers to buy on your site using their Amazon account.

What is my payment processor? ›

A payment processor is a company that manages the credit card transaction process, acting as a kind of mediator between the bank and the merchant. Put simply, the payment processor communicates information from your customer's card to your bank and the customer's bank.

What card type is a payment gateway? ›

The acquiring bank sends the information to the card provider (eg Visa, Mastercard or Rupay) and onwards to the issuing bank for authorisation. One of the most important functions that the payment gateway performs is that it automatically checks for fraud.

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