What are the Differences Between Payment Gateway and Payment Processor?

With Covid-19 and all the other cataclysms we've been through recently, the online sales keep on growing. Companies have shifted towards a more digital way of selling and have started to find ways to provide more and more digital payment methods in-store. 

With billions of daily transactions, the payment gateways and payment processors are bringing security, functionality, speed, and reliability – like two peas in a pod, every company needs both to run a successful business and accept payments online.

Let`s take a deeper look into the differences between a payment gateway and a payment processor and their individual roles in the dynamic world of online transactions.

 

First, let`s have a better understanding of what exactly a payment gateway is…

Basically, this is the mechanism that reads and transfers payment information from a customer to a merchant’s account. Its job is to capture the data, ensure funds are available and get a merchant paid.

Online, a payment gateway is cloud-based software that connects a customer to the e-commerce merchant. In person, it’s the software built into a point-of-sale (POS) system or card reader that processes a transaction when the cardholder uses their card to make a payment.

 

Let`s now turn our heads towards the payment processors. What is a payment processor?

Payment processors are an intermediary between a business and the financial institutions involved in a merchant transaction. When the customer swipes their card, the processor takes care of everything, from encrypting their information, sending that information to their Issuing bank for confirmation, and finally – to the merchant`s Acquiring bank. It is basically responsible for verifying authenticity, providing security, completing credit card and debit card transactions, and payments to merchants.

 

Wait! Isn`t this what the payment gateway does? Where exactly is the difference between a payment gateway and a payment processor?

Here is the answer: Payment gateways essentially capture and transmit credit card data to the payment processor. They communicate approvals or rejections of payment to the merchants and their customers. To break it down even more:

• Payment processors work behind the scenes by securely routing data to the different parties from the beginning of the process to the settlement of funds in the merchant`s bank account.
• The payment processor facilitates the transaction.
• A payment gateway is a tool that communicates the approval or decline of transactions between the company and customers. 

 

How do they work together?

To process online transactions, companies need both a payment gateway and a payment processor. The gateway is the beginning and end of the transaction. The customer will enter their credit card information and receive an approval or denial of the transaction. 

The payment processor moves the information between the customer’s bank and the merchant`s bank. Every single transaction processed online needs both.

Here is how the payment authorization process works and how payment processors work with payment gateways: 

1. The customer buys an item on a merchant`s web-site with a credit or debit card.
2. The information goes through the payment gateway.
3. Gateway encrypts the data for security purposes and sends it to the processor.
4. The payment processor then sends a request to the customer’s issuing bank. This is a check to see that they have enough credit to pay.
5. Issuing bank responds with an approval or denial.
6. Payment processor sends the answer back to the merchant that the sale was approved then tells the bank to credit the merchant`s account. 

 

The payment gateway and the payment processor have both an important role in the authorization process for each online transaction. Seamless cooperation between these two will always ensure security, speed, and reliability for the digital market.

 

Want to run a successful business and accept payments online? Contact Us and we will find the best and most effective integration solutions for your online business!