Over the past few decades, the payments sector has experienced significant growth and enthusiastically adopted new technologies, creating new opportunities to cater to customers. Cash utilization is rapidly shrinking, with a decline of 20 percentage points in global payment share within the last five years; meanwhile, electronic payments have experienced double-digit growth of 17 percent over the last 5 years according to the 2023 McKinsey Global Payments Report. Convenience, changing customer habits, rapid innovation around instant payments, and the lingering effects of the COVID-19 pandemic are all factors in this surge.
The Federal Reserve asked consumers directly – and found that 60% of payments are made with a credit or debit card.
This leaves businesses with little choice – if you want to maximize your revenues going forward, you need to provide seamless digital payment options to customers. And when you are in the market for payment solutions, you will come across these two terms – payment processors and payment gateways.
While they may sound similar, gateways and processors cannot be used interchangeably. While equally vital for online payments, each has a unique role. Watch the video below for a basic introduction to payment gateways and payment processors, and an explanation of the differences.
The Basic Anatomy of an Online Transaction
To explain these two services, first, we need to establish the basics of an online transaction. On the surface of every eCommerce payment, there are four parties. The first two are self-explanatory:
- the customer
- the merchant
- the issuing bank coordinates payment from the customer. Usually, it will partner with a card company like VISA/MasterCard to link a credit/debit card to the customer
- the acquiring bank coordinates accepting payment into the merchant’s bank account
In a typical online transaction, these four entities interact with each other:
- The customer initiates an online payment at the merchant’s website
- Payment is processed after secure authentication
- The funds are debited from the customer’s bank account by the issuing bank (when they pay their bill; in the interim the “credit” is extended by the processor)
- The acquiring bank accepts the funds and deposits them in the merchant bank account
These steps cannot take place without the transmission of data among the four entities. This is where payment processors and payment gateways enter the equation. Let us explore their separate roles.
How a Payment Processor Works
A payment processor is an entity responsible for moving money from the customer account to the merchant account. The original role of these organizations was to help facilitate offline transactions like credit card payments. With the advent of the internet and electronic payments, they continue to perform this role. Payment processors are the ones who provide credit card terminals or other Point of Sale (PoS) systems to merchants. In this offline system, the payment processor plays the role of the messenger while the PoS acts as the security/gatekeeper.
The purpose of a PoS terminal is to verify that the transaction is being conducted with an authentic credit card, presented by a genuine owner of the card/account. Authentication in these situations relies on a combination of an EMV chip embedded in the credit/debit card, and approval from the customer.
Next, the payment processor will send the payment information to the issuing bank. One of two things can happen at this point – if the bank approves the transaction, the processor sends the transaction details to the acquiring bank and communicates the success of the transaction to the customer at the PoS terminal.
If the bank declines the transaction for any reason, like lack of credit balance/funds, the payment processor will relay the details to the customer via the PoS terminal.
Payment Gateways and Payments Online
A payment processor performs the same “messenger” role in an online transaction much like an offline one. But in the online setting, there is no secure PoS device to act as the authenticator. This is where a payment gatekeeper comes into the equation. In essence, a payment gateway is a software or technological platform that provides a secure, encrypted connection between a merchant’s online website or hosted payments software, and major credit card processing companies.
The need for an electronic “gatekeeper” for transactions only arose in the 1990s, after online payments and debit cards became a reality. A payment gateway is like a virtual PoS terminal, tasked with the duty of authenticating a digital payment request by the customer.
Instead of inserting a physical card into a physical terminal, the customer has to enter credit card information and identifying details as proof of authenticity into the payment gateway’s customer-facing interface. If the credentials are correct, the gateway will forward the payment information to the payment processor.
From this point onwards, the transaction works just like in an offline, in-person card transaction where the payment processor securely transmits the transaction data between the merchant and customer banks. Upon successful completion of the fund transfer, the processor shares the details with the customer via the gateway.
Understanding the Choice Between Payment Processors & Payment Gateways
As the payment landscape evolves, merchants have more choices than ever when it comes to taking payments. While some payment gateways are available as standalone platforms, many modern gateways come as an integrated service offered by a major payment processor. Authorize.net, CyberSource, and USAePay operate as standalone gateways that connect to several different processors on the back end. Worldpay / Vantiv, PayPal, and Stripe are examples of processors that also have in-house gateway solutions.
Enterprise organizations may opt to use multiple processors and gateways to ensure maximum coverage in terms of payment volume, payment methods accepted, currencies, and global reach. For smaller merchants, a single integrated payment service is often the most reasonable choice.
When choosing a payment gateway or payment processor (or more than one), there are some notable trade-offs with each option. Using multiple gateways and processors comes with increased fees and other ancillary costs. Having an in-house gateway platform gives you more control, but requires extra maintenance. With a more affordable all-in-one platform, you get limited coverage and less control over data.
If you use Salesforce CRM, Chargent provides you with the best of both worlds: a flexible payment processing platform that works with more than 30 different payment gateways, and leverages advanced tokenization features to save on processing fees while ensuring data security and business continuity. Payment process automation allows you to route payments to the optimal payment gateway based on customizable criteria, while multi-gateway tokenization enables you to use multiple gateways to meet your business needs.
Wondering which payment processing platform or gateway is right for your business? Let’s chat. Reach out to our sales team today.
