Payment Gateway vs Payment Processor: What Are The Key Differences?

With online sales skyrocketing for businesses thanks to the COVID-19 pandemic, you can see why it’s important to understand the foundations of online payments. And that starts with two key links in the chain: the payment gateway and the payment processor.

You’ve probably heard about these terms before and wondered how they play into your online payment system and if there are any key differences between the two. Well, as a business owner, prepare to fully grasp why these two links are crucial for your business to succeed in the online marketplace.

Your Comprehensive Guide To Payment Gateway & Processor

What Is A Payment Gateway?

A payment gateway is a system that securely transfers, authorizes and verifies the online payment information, such as the credit or debit card, to the payment processors. In other words, it can be deemed as the online version of a “point-of-sale (POS) terminal”.

When & Why Are Payment Gateways Used?

As the name suggests, the payment gateway is exactly that: a gateway to start the online transfer of the online transactions. Payment gateways can be used for various transactions, including:

• Traditional online payments through e-commerce websites or mobile or tablet devices
• When using digital wallets to make payments both online and in-store
• When using credit or debit cards to make in-store purchases

As for the reasons why payment gateways are used extensively, they offer the following:

• High-level encryption, making it safe to transfer sensitive information, such as credit card payments and money
• Ensure businesses reach specific standards for online data security
• Make in-store and online purchases easier for everyone
• Integrate easier with existing software systems

What Is A Payment Processor?

The payment processor is the next step of the transaction process after the payment gateway. A payment processor handles the data transaction between the customer, the business and the banks (the issuing bank that provides the customer’s funds and the acquiring bank that accepts the funds).

The processor basically is the middleman that handles everything, including sending encrypted information, confirming the funds and transferring the money from one account into the other.

To keep all of this secure, most payment gateways follow PCI DSS (Payment Card Industry Data Security Standard) guidelines. This PCI Compliance can ensure that the system meets industry-wide standards for protecting cardholder information and helps businesses reduce the risk of fraud and data breaches.

When & Why Are Payment Processors Used?

Processors are used in almost every financial transaction available, both in-store and online. The most common examples include:

• When paying for goods or services with credit or debit cards online and in-person
• When using contactless payment (e.g., Apple Pay, Google Pay or Tap)
• For merging cryptocurrency
• When submitting online cheque payments
• For electronic funds transfers (EFTs)

The Key Differences Between The Two

Although payment gateways and processors are the two connecting links in the payment chain, there is one key difference that separates the two:

• The payment processor works “behind the scenes” by safely transmitting data and finances between the different parties. This system handles the majority of the transaction process.
• The payment gateway is the tool that communicates to the banks and the payee (the customer) if payment has been approved or not.

Do You Need Both Of Them?

Yes, you do! You cannot have one without the other. For all online payment solutions, you need to have both the gateway and the processors. Every transaction processed online needs both. The best way to describe it is this:

Think of the gateway as the beginning and the end of the process, while the processor is the middleman handling everything in between. You need them together working as one to process any online payments.

What To Do For Your Business

Choosing a payment processor and gateway might seem like a challenge. So make sure you keep an eye out for the following things:

• The system’s flexibility (does it work for cashless cards, digital wallets, credit cards and so forth?)
• The costs and fees associated with the service (lower fees are always preferable)
• Does it work with current and upcoming systems and banks?
• If the system offers integrations and third-party services
• If the product can grow as your business grows and if your needs change in the future (they will, they always do!)
• The security of the system

If you are interested in an online payment system that manages it all, we recommend Pateno Payments. Reach out to their sales representatives to learn more about their advanced online payment processes.