In our last piece, we broke down in four simple steps how credit card payment processing works and what you need to know. In part two of this education series, we would like to help you understand the two services you’ll need to accept and manage credit card payments — a Payment Gateway and a Merchant Account —and the difference between them. I also want to introduce bundled pricing and cost-plus pricing. So hold on to your seat for an education ride… here we go.
Payment Gateways
The Payment Gateway sits between the Merchant and Processor, who passes transactions to the Network (MasterCard, Visa, American Express, Discover, etc.) The role of the Payment Gateway is that of a secure information conduit that complies with credit card processing security rules and regulations. Once the card information is entered, the Payment Gateway securely transmits the card data to the Network, who then passes it on to the card’s issuing bank for authorization. All of this happens in the blink of an eye using encryption technologies to ensure confidential cardholder information is never exposed.
The Payment Gateway also provides credit card payment management tools such asreconciling and reportingandautomated account updating—which is the process of proactively tracking down outdated credit card information for the purpose of maintaining yourrecurring payments.
Merchant Account
The merchant account serves as a repository for credit card payments and is linked to your bank account, where funds settle each day. The settlement process happens behind the scenes in coordination with your Payment Gateway.
Merchant accounts are set up directly with a Merchant Provider. Merchant Providers are just that: they are the folks that provide the account to you, the merchant. However, not all Merchant Account and Payment Gateway providers are created equal. A good gateway will provide all of the tools you need to submit payments to the networks at a reasonable price that is easy to understand. If your gateway operates a cost-plus pricing model, you can clearly see exactly what you are being charged and by whom.
Want to learn the difference between cost-plus pricing and bundled pricing? Many of the big processors operate a pricing model that is known as bundled pricing. This is typically comprised of a flat fee, plus a percentage of the payment and typically runs in the range of 2.9% + 0.30 cents per transaction. Sometimes called tiered pricing, this pricing model seems convenient and straightforward. The rate is the same, regardless of whether or not data is passed with the payment. Although this pricing model is easier to understand, it makes it impossible for you to know how all the fees break down. Merchants collectively pay millions of dollars a year in overcharged interchange.
Cost-plus pricing is more transparent because you know how it breaks down. Each interchange fee is identified, as well as the processing mark-up, so you can see exactly how your cost is calculated.
As the industry quickly changes, it is critical to keep up with new technologies and also how traditional technologies are transforming and being used differently. Good luck, and don’t be afraid to continue “getting smart.”
FAQs
In fact, the two serve totally different functions: a payment gateway facilitates online transactions and allows you to process them, while a merchant account is a holding account where those payments first land before being deposited into your regular bank account.
What is the difference between merchant account and payment gateway? ›
The merchant account verifies the payment information, processes the transaction, and transfers the funds from the customer's bank to the business's bank. The payment gateway sends a confirmation back to the business's website or point-of-sale system, allowing the customer to complete their purchase.
What is the difference between merchant acquiring and payment gateway? ›
Acquiring payment processors allow merchants to accept card payments via a payment gateway. Payment gateways are platforms through which card transactions can be processed, either online or via card terminal at a physical premises.
What is the difference between merchant of record and payment gateway? ›
Merchant of Record vs.
Payment service providers do not assume any responsibilities relating to tax, fraud risk or payment disputes for the transactions that pass through their gateway. Conversely, a merchant of record will take care of these aspects.
What is a payment gateway account? ›
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 considered a merchant account? ›
A merchant account is a bank account that is specifically used for accepting customer payments, usually by credit card, debit card, or other electronic transfer. It's not a standard business bank account. A merchant account holds on to funds before they're transferred to the merchant's primary business bank account.
What is an example of a merchant payment gateway? ›
Types of merchant payment gateways
Examples include PayPal and Stripe.
Why do you need a payment gateway? ›
For starters, a payment gateway ensures the secure transmission of any payment data. A payment gateway also provides encryption for data protection, integration with various payment methods, and the real-time processing of transactions.
Is PayPal a payment gateway? ›
No, PayPal is not a traditional payment gateway, but it does offer a payment gateway solution (Payflow) as part of its overall payment processing solutions.
Which payment gateway is best in the USA? ›
8 Best Payment Gateways of April 2024
| Product | Best for▼ |
|---|
| PayPal Payflow Read Review | Best for Payment processor integrations |
| Adyen Read Review | 4.0/5 Best for Omnichannel option |
| Authorize.net Read Review | Best for More complex payment needs |
| PayPal Braintree Read Review | 4.0/5 Best for Accepting a variety of payment types |
4 more rowsBest payment gateways compared 2024
| Best Payment Gateways | Best for |
|---|
| Paypal | Simple online payments |
| Square | Mobile payments |
| Payment Depot | Monthly fee only |
| Stax Payments | Monthly subscription pricing |
7 more rowsWhat's the difference between PayPal and a merchant account? PayPal differs from merchant accounts because it functions primarily as a digital wallet, with all of your business accounts – whether composed of proceeds from credit card transactions or cash deposits for paying vendors – combined into a single account.
Why would I need a merchant account? ›
A merchant account is a bank account specifically established for business purposes where companies can make and accept payments. Merchant accounts allow, for instance, a business to accept credit cards or other forms of electronic payment.
What is the difference between a merchant service provider and a payment processor? ›
Merchant services are the services a business uses to accept and process payments electronically. 2. Payment Processing is the series of steps required to authenticate and approve a transaction, followed by the steps that move funds from a cardholder's account to yours. 3.
