What’s the difference between a payment gateway and a payment processor? While both are essential for online payment transactions, only one of them plays a significant role in boosting conversions and preventing payment fraud.

When launching an eCommerce site, setting up the ability to receive online payments through the checkout page can be confusing. At Alphacomm, we’re often asked about the difference between a payment gateway and a payment processor. What do they do? Do you need both of them? What features should you look for before making your choice?

In this article, we explain the differences between these commonly misunderstood eCommerce terms and share tips on what to look for.

What is a Payment Gateway?

When your customers click on the ‘buy’ button at the bottom of a checkout page for the very first time, they are transported to a separate landing page where they are prompted to fill in the necessary credentials for the payment to be authorized. Depending on the chosen payment method, this can be the credit card details (and sometimes an additional verification code), or user login.

The verification code and user login mentioned here are required when challenged by the card schemes as part of a 3DS / SCA check.

The interface that prompts users to enter the sensitive information that corresponds to the payment method they have chosen, is the payment gateway. The payment gateway will verify that the information entered meets the proper criteria and that the card is valid. Moreover, a top tier payment gateway will perform fraud detection checks to prevent costly chargebacks.

If anything is wrong, the payment gateway will decline the payment, whereas if everything is in order, the payment gateway will authorize the payment and establish a secure connection with the payment processor.

It is through this secure, encrypted connection, that the payment processor receives the relevant information from the payment gateway and proceeds to process the payment.

What is a Payment Processor?

As explained in the previous section, the payment processor is fed all the relevant payment details by the payment gateway, with which it can then process the payment.

In a nutshell, the payment processor will charge your customers’ cards and move funds from their bank accounts to your bank account, minus the transaction costs charged by the gateway, processor and card network.

More specifically, the payment processor (acquirer) informs the card network of the transaction. The card network, in turn, retrieves the funds from the issuing bank and sends these back, through the card network and acquiring bank, onto the merchant’s bank account. Usually, any fees charged by the parties involved, are deducted along the way.

The difference between a payment gateway and a payment processor?

Boiled down, a payment gateway handles payment information, while a payment processor moves money. In other words, the payment gateway acts as a middleman, making sure you have everything in order before the payment processor can process the transaction.

Do you need both a payment gateway and a payment processor?

If you search online for one or the other, sometimes the same suppliers show up on both search results pages, further adding to the confusion. Indeed, some companies thoroughly specialize in one of the services, while others do ‘payment processing’ (gateway + processor) as a whole, without clearly describing that these are two separate tasks.

The bottom line is this: when selling online, you always need a payment gateway, as it is the only way to communicate with a payment processor. However, you don’t necessarily need to spend time and resources looking for a payment processor separately, as many payment gateways will have a preferred processor with competitive pre-negotiated rates.

Moreover, while transaction and processing fees tend to be quite similar, the levels of security and fraud protection provided by payment gateways can vary greatly.

What to look for in a payment gateway

Arguably, the worst thing that can happen to an eCommerce merchant is a chargeback. When the profitable sales you made turn out to be fraudulent, you tend to lose both the revenue and the product, especially in the case of digital goods.

This is where a solid enterprise-level payment gateway with fraud protection, chargeback recovery and advanced reporting can make a difference.

A proper payment gateway will also enable you to offer customers a wide range of payment methods; from international payment cards to regional payment methods and the latest digital wallets. The more convenient it is for your customers to pay, the more likely they are to do so and keep coming back.

Learn more about this topic:
Paymaxx - Secure payments via any payment method

Recap & additional insight

When setting up an online business, understanding the intricacies of payment processors and how they differ from payment gateway services is crucial. This guide will walk you through everything you need to know to ensure you can accept credit cards and other forms of payment seamlessly.

Firstly, a payment gateway is a technology that captures and transfers payment data from the customer's account to the business's bank account. It acts as an intermediary between the customer's bank account and the merchant account, ensuring that online transactions are secure and successful.

On the other hand, payment processors are companies that handle the backend work of process transactions. They connect the merchant, the bank, and the payment provider to ensure that funds are transferred correctly from the customer's account to the merchant's.

Understanding the difference between gateway vs payment processor can help in choosing the right service for your business needs. For instance, when dealing with card not present transactions, such as online purchases, the role of both the payment gateway and the processor is critical to avoid fraud and ensure smooth transactions.

A merchant account is another essential component, which is a type of bank account that allows businesses to accept payments in multiple forms, including credit and debit cards. This account holds the funds from sales before they are transferred to the business's bank account.

When considering payment gateway vs payment processor, it's important to note that a payment gateway is necessary for authorising and processing online transactions, whereas a payment processor deals with the broader task of handling the logistics of payment data and ensuring that transactions are completed successfully.

To sum up, to accept credit card payments, a business must set up a payment gateway, obtain a merchant account, and collaborate with payment processors to handle the end-to-end process of accepting payments from the customer's bank account to the business's bank account. By understanding these elements, you can ensure a smooth and secure payment experience for your customers.

Get in touch with our Revenue Geeks
At Alphacomm, we’ve applied our decades of experience in developing a secure payment gateway with the best fraud protection in the market. We’re so confident in its effectiveness, that we offer a 100% chargeback guarantee to all our customers, even if they sell high-risk products such as digital goods.  

Interested in learning more about how the right payment gateway can boost your profits? Let’s talk.