Whether you own an online-only retail business or a brick-and-mortar store with an online presence, your goal is to make it as easy as possible for customers to give you money, whether it's through credit, debit or other means. Payment gateways and payment processors are used to help facilitate the transfer of funds between customer and merchant. The two are often confused with one another, despite having different functions.
Business owners need to understand the differences between the two services and the implications for running an AmeriCommerce online store or any other e-commerce operation.
Setting the stage
Before we can discuss the differences between payment gateways and payment processors, we first need to cover the four primary parties involved in a transaction:
- The customer
- The merchant (you)
- The issuing bank (customer’s bank)
- The acquiring bank (merchant’s bank)
The merchant and the customer are the two people that initiate the transaction. You, as the merchant, offer goods and services up for sale, and the customer chooses which products or services he wants to buy. In a physical retail environment, the customer would hand over cash or his credit/debit card. In an online environment, the customer would submit his payment information.
The issuing bank would be the party issuing the funds according to the transaction details, and the acquiring bank would receive them.
Now that that’s out of the way, let’s get to the meat of the discussion:
What is a Payment Processor?
A payment processor is a service that transfers transaction information between a merchant, the issuing bank, and the acquiring bank. Essentially, a payment processor moves money from one account to another.
In a retail environment, a payment processor often provides the credit/debit card processing terminals for point-of-sale (POS) transactions. The customer swipes their card, and both the card and the transaction information are sent to the issuing bank for authentication. Once authenticated, the payment processor communicates with both the merchant (through the credit card terminal) and the issuing bank, allowing the transaction to proceed.
If the transaction is declined, then the issuing bank sends a rejection notice to the merchant, who then rejects the customer’s payment card.
All this happens within a few seconds.
What is a Payment Gateway?
A payment gateway is not a replacement for a payment processor; rather, it works with the payment processor to fulfill an online transaction.
Websites and e-commerce stores typically don’t send customer credit card information to the banks themselves. That process is handled by the payment gateway. As such, the payment gateway is primarily used for card-not-present transactions, such as in e-commerce purchases, or for recurring transactions.
When a customer makes an online purchase and submits their credit card information, the payment gateway transfers the information from the website directly to the issuing bank. If the authorization is valid and the transaction is approved, the payment gateway then hands things over to the payment processor, which in turn facilitates the transfer of funds from the issuing bank to the acquiring bank. Just like a point of sale credit card machine, a gateway serves as the equivalent of an online terminal.
Not all payment gateways are created equal, either. Each payment gateway has their own collection of rates, fees and conditions. It's not uncommon for different e-commerce stores to use different processors in conjunction with standalone payment gateways -- or even with payment solutions that serve as both.
Examples of payment gateways include:
Examples of payment processors include:
- EVO Payments
Examples of payment gateways+processor include:
How much does a processor or gateway cost?
Different gateways have different fee structures depending on the level and type of service you require.
For instance, many payment gateways charge a setup fee at the start of the relationship. Although this is a one-time charge, the value of the setup fee is up for debate as it only gets applied if you sign up directly with a payment gateway provider. Some merchant account providers will waive this fee if you purchase your gateway through them.
Payment gateways also charge monthly fees of around $10 to $25 a month for access, although there are a few gateways that don’t charge any monthly fee at all. Keep in mind that these monthly gateway fees are charged in addition to your merchant account, even if you got your gateway through the merchant provider.
A merchant account is a bank account that allows you to accept credit and debit card payments. It’s an agreement between a business, the merchant bank, and the payment processor. When a customer pays for something, that amount is first deposited into the merchant account, and from there transferred to the business’ bank account. E-commerce businesses typically need at least one internet merchant account, which is specifically set up for online payment processing. You will need separate internet merchant accounts for each type of card you wish to accept, and each merchant account has its own fees.
Most payment processors (or the gateway, if the gateway is also the processor) charge a flat processing fee for each transaction, which covers 2-5% of the transaction’s value plus an additional $0.05 to $0.30 per transaction. Payment gateways may increase this fee for processing international payments.
Payment processors also charge using Interchange Plus. Interchange Plus is a transparent pricing model that breaks down the charges going to issuing banks and credit card associations. It allows you to see the markup that you’re being charged for every transaction, including any hidden fees that a flat rate model may not divulge. Large volume online stores may find better rates with an interchange pricing model than the flat rate model.
All of these choices make it more challenging for e-commerce store owners to pick an option and stick to it.
How do you choose the right provider?
Your ideal payment solution will depend on a number of different factors.
Cost. Fees make a big difference, of course, and you want a payment solution whose rates won’t eat into your bottom line. But don’t just go for the solution with the lowest fee--take other factors into consideration as well.
Business model. Your payment solution should have features that line up with your business specifics. For example, if you sell internationally, if you sell products considered high-risk, or if your gateway should have these capabilities.
Customer preferences. Are your customers satisfied with paying via credit card? Or do they want to be able to pay using alternative methods like PayPal or Bitcoin?
Performance. Your payment solution should not frustrate your customers. Try to get one with an easy to use dashboard, an intuitive interface and responsive customer service.
Security. Hackers are a very real danger in today’s marketplace, and e-commerce merchants need to guarantee their customer’s safety as much as possible. Review your candidate solution’s security policies,compliance and history for any red flags.
Knowing the right option
As you can see, there are a lot of considerations that go into collecting money from your customers. Have an intimate understanding of your business so that you can compare these requirements to the details of each option. That way, you’ll be able to pick the payment solution that will help your business thrive and grow.
AmeriCommerce has more integrations with gateways and processors than other e-commerce platforms, and allows for a greater degree of flexibility for subscription payments due to AmeriCommerce being a PCI certified e-commerce platform. Plus, AmeriCommerce offers a great partnership with vendors to power AmeriCommerce Payments which offers lower processing rates just for AmeriCommerce customers. Whether you need lower rates or just a simpler solution for payments - AmeriCommerce has you covered.