If you are a merchant who needs to accept online payments via credit card, debit card mobile payments, etc., you need to understand how payment processors and payment gateways work. This way, you can be in a better position to find the right partner and solution for your business to start accepting payments. In this article, we will look into payment processors versus payment gateway.
- 1 What is a Payment Processor?
- 2 What is Payment Gateway?
- 3 How Payment Processors and Payment Gateways Work
- 4 Do I Need a Payment Gateway or Payment Processor or Both?
- 5 What is a Merchant Account?
- 6 Final Word On Payment Gateway vs Payment Processor
What is a Payment Processor?
A payment processor is a company, financial institution or service that handles online transaction by communicating information between the customer’s bank/financial institution and the merchant’s bank (merchant account). Sometimes the company providing payment processor services is refereed to as payment service provider.
Payment Processor Fees
Are there any fees for using a payment processor? Yes, there are fees involved. However, fees vary depending on the payment service provider you are using. Some fees cover for set-up process, transaction fees, invoicing fees, automated tax calculation fees, chargeback protection fees, fraud protection fees, termination fees, etc. If you have low volume of payments, you can choose pay as you go pricing plan instead of customised or monthly pricing plan, which is ideal for high volume payments.
How to Choose a Good Payment Processor
Payment processors are important for any merchant who wants to receive payments online such as e-commerce businesses. It is, however, a bit tricky when it comes to choosing the right payment processor for your business. Luckily, there are common elements that you need to be looking for. They include:
- Cost. Keeping running cost low for any business is critical, especially for SMEs. You need to choose a payment processor whose running cost will not be a financial burden to your company. However, the cheapest payment processor in the market is not always the best choice for you.
- Payment options. A good payment processor should have multiple payment options such as credit card, debit card, bank transfer, etc.
- Compatibility. Choose a payment processor that is compatible and able to integrate with the other e-commerce software you already using.
- PCI compliant. Choose a PCI-compliant payment processor to secure and protect sensitive credit/debit card data.
- Fraud. Fraud is one of the biggest problems facing merchants today. Choose a payment processor that offers fraud protection services.
Which payment processor is best for IRS? The Internal Revenue Services (IRS) in the US uses third party payment processors for payments by debit and credit card. Payment processors that offer the best fees for IRS include PayUSAtax, Pay2040, and ACI Payments, Inc.
Payment Processor Examples
The following are some of the best payment processors. Although these payment processor companies serve some big businesses around the world, they are also best payment processors for small businesses.
What is Payment Gateway?
Payment gateway types: Generally, there are hosted payment gateways, API payment gateways, self-hosted payment gateways, and bank integration payment gateways.
A payment gateway is a software that allows merchants to accept credit card or debit payments online by validating credit card or debit card details. When a customer is making a payment with a card, a payment gateway tells the merchant if the charge has been approved by the cardholder’s bank. This means a payment gateway includes card-reading machines in physical stores and payment platforms on e-commerce stores.
What is a crypto payment gateway? A cryptocurrency payment gateway enables merchants to accept cryptocurrency transactions/payments securely and efficiently. Best crypto payment gateways include BitPay, Coinbase and BitcoinPay. Crypto payment gateways come with different features such as fiat to crypto payment gateway, crypto to fiat payment gateway, etc.
Payment Gateway Fees
There are a number of costs associated with payment gateways. The fees and fee structure vary from a company to a company. Commons fees include set-up fees, transaction fees, chargeback fees, administration fees, etc.
How to Choose a Payment Gateway
There are many factors to consider when choosing a payment gateway for your business Critical factors to take into consideration include:
- Cost. Make sure you opt for a company that offers competitive pricing and the most cost-effective fee structure based on your transaction volume.
- International support and currencies. Any merchant who sells products or services worldwide, needs to choose a payment gateway that accept multiple currencies from around the world.
- PCI compliant. Choose a payment gateway that ensures security of your customer’s sensitive data.
- Supported cards. Make sure that your payment gateway of choice support multiple card types such as Mastercard and Visa.
- Recurring billing. If you are offering subscription-based services, it is important that the payment gateway enables you to set up recurring billing for your customers with monthly payment plans.
- Mobile payments. Payments made by the use of mobile phones or digital wallets such as digital mobile wallets like Google PAy, Apple Pay, and Samsung Pay are becoming popular. The ideal payment gateway should support mobile payment options.
- Integration. Make sure that the payment gateway software is compliant with other software your company uses such as ecommerce and accounting software.
Is there a difference between an acquirer, payment processor, and payment gateway. An acquirer is a financial institution that that maintains a merchant’s account to accept payments.
Payment Gateway Examples
The following are some of the best payment gateways you can consider.
Payment gateway in open source: There are merchants who would prefer open source payment gateways. You can find some such as UniPay. Alternatively, you can look for open source payment gateway on Github. On Github, there are open source payment gateways for PHP such as Omnipay or open source payment gateways for Ruby such as ActiveMerchant.
How Payment Processors and Payment Gateways Work
When a customer initiates a payment, the payment gateway sends customer information to the payment processor using Secure Socket Layer technology (SSL). Then the payment processor transmits encrypted data of the customer to the merchant account. The merchant account in turn verifies if the customer data, identity and validity of the transaction. If the transaction was approved, the customer can finalize the transaction. Once a transition has been finalized, the payment processor will send information to the card-issuing bank to make a transfer to the merchant account. The payment gateway then notifies the customer whether the transaction he initiated has been approved or not.
Payment processors provide merchant accounts and the machines necessary to complete the transaction. They work behind the scenes to secure the customer’s data. Payment gateways are used to capture and send credit card data to the payment processor for processing.
Do I Need a Payment Gateway or Payment Processor or Both?
The type of your business and the payment means you are using will dictate whether you need a payment gateway or a payment processor or both. You may need them both to accept debit card and credit card payments online.
Is PayPal a payment processor or payment gateway? The PayPal Commerce Platform is both a payment gateway and payment processor.
What is a Merchant Account?
A merchant account is an account that allows merchants to process and accept credit and debit card payments. This is where funds are held before being credited to your account. The role of the merchant account is to hold funds related to the transaction before they are credited to the business bank account. Once the transaction is over, the funds will be moved from the merchant account to the business bank account. There are different categories of merchant accounts. For example, there are merchant accounts for high risk businesses.
Final Word On Payment Gateway vs Payment Processor
Understanding a payment processor and payment gateway is important to differentiate each one of them and how each works. If you have a business that accepts online payments, it important that you get to differentiate the two so that you are in a position to select the best payment gateway and payment processor.