- Payment processors and payment gateways are both pieces of how small businesses accept credit card payments.
- Although they’re both part of the same system, there are key differences between payment processors and payment gateways.
- Learn the differences between the two, as well as how to select the best payment gateway and best payment processor for small business in this guide from Nav’s experts.
What Is the Difference Between a Payment Processor and a Payment Gateway?
If you accept credit card payments or debit cards at your small business or ecommerce store, you will probably use both a payment processor and a payment gateway. These tools make sure that money is transferred between the customer’s bank account and yours during a transaction.
Both payment processors and payment gateways are aspects of the payment system, but they perform different roles.
- Payment processor: Also called a payment service provider (PSP), a payment processor is a service provider that manages the transaction details of accepting credit card payments.
- Payment gateway: The payment gateway is the technology that determines the information from a customer’s payment method, encrypts that information, and sends it to the merchant’s bank account.
A payment processor, or payment service provider, is a system or company that serves as the middleman between a merchant (business owner) and a financial institution (bank, etc.) involved in a sale. The processor authorizes credit card transactions by using security measures. Then it moves the money between banks to make sure that the merchant account receives funds quickly. Usually the payment processor is the bank that processes payments for your business.
As a small business owner, you need a payment processor if you’re going to accept multiple payment methods or online payments — like credit cards or debit cards. Many of these payment service providers have their own technology to encrypt data and verify transactions, so you may not need a payment gateway at all. You may be able to avoid it by using a payment processor that handles the credit card information itself.
Although many people use them interchangeably, merchant service providers and payment processors are not the same thing. A merchant service provider supplies all of the services that a business needs to run a credit card transaction, like point-of-sale systems, software, integrations, etc. The payment processor is the communicator between merchant service providers and financial institutions. In many instances, the payment processor will also serve as a merchant service provider, but not always.
A payment gateway is like a financial translator for card transactions. It’s an application that sends the encrypted data with the customer’s information to the payment processor. Basically, a payment gateway is the technology that allows money to be moved between the merchant account (your business’s bank) and the customer’s bank. Once the gateway encrypts the data and gets it to the payment processor, the processor can ask the issuing bank to verify it to make sure that the customer’s information is valid and that the transaction is legitimate. From there, the processor can send the funds to the receiving bank.
Some merchants opt to use multiple different payment gateways, usually to expand their ability to sell goods or services in other broader parts of the world, integration with more payment services, and greater flexibility. Others choose not to use a separate payment gateway at all because their PSP provides that service.
You’ve probably heard of payment gateways like PayPal, Square, or Stripe, or have even used them for an online payment system.
Understanding What Payment Gateways Are Used For
No matter what kind of credit card payment system you use — whether it’s an in-person credit card reader on a point of sale (POS) terminal in your store or an online transaction — the payment gateway process has the same flow: receive request, authorize transaction, move money. However, payments made online or through a mobile device use digital technology to read and encrypt the credit card data instead of relying on the output from the credit card terminal.
Here’s an example of the behind-the-scenes steps that happen when a payment is made using a payment gateway:
- A customer uses their credit card to pay for goods or services either online or at the POS terminal at checkout.
- The payment gateway encrypts the information and then sends the encrypted information to the acquiring bank or merchant bank via the payment processor.
- The payment gateway selects the credit card-issuing network (the major credit card networks are Visa, Mastercard, Discover, and American Express).
- The payment gateway engages in payment switching, which means it sends the transaction details to the selected “payment switch” that delivers the details to the right issuing bank to get approval.
- Once the issuing bank receives the information, it uses its security process to ensure the transaction is legitimate and that there’s no fraud. The bank will also make sure that the customer has enough credit in their account to make the payment.
- The issuing bank will approve or reject the payment. It then sends this information through the credit card network, which will move it on to the merchant bank and the payment gateway.
- If the transaction is approved by the issuing bank, they will put the funds on hold and promise that the merchant account will receive the funds. The customer sees a “pending” charge until the business owner reconciles payments and gets the funds delivered to their account.
All of this happens in mere moments — often even seconds — automatically with the right system.
How to Choose a Payment Gateway
If you’re looking for a payment gateway for your small business, you’ll need to make sure that it meets your business needs for credit card processing. Some things you’ll need to consider include:
- Pricing and fees, including setup fees, monthly maintenance fees, and transaction fees
- What types of card(s) the payment gateway allows
- How long the payment gateway will keep your funds on hold after approval (it can be anywhere from one to seven days)
- What regions the payment gateway can accept payments from
- If the payment gateway will accept different types of currency
- Whether the customer is redirected to another website to pay through a payment gateway that is hosted off-site
- What security measures the payment gateway uses and whether or not they are PCI compliant (Payment Card Industry compliance, which is a set of 12 security standards any business that gets cardholder data must uphold)
- Integrations with your other payment systems
- What types of limits the payment gateway sets on your transactions
- Whether the payment gateway accepts mobile payments or not
Top Payment Gateways
Some popular payment gateways include:
Pros and Cons of Using a Payment Gateway
- Real-time credit card processing
- Automatic deposits of funds into merchant account
- Robust reporting
- Easy installation or setup
- Fees can get high
- Possible transaction limits
- Have to ensure it integrates with all your payment systems, especially the payment processor
- Not all payment gateways are straightforward with their fees
Understanding What Payment Processors Are Used For
As we stated before, a payment processor is a company that facilitates transactions between the merchant, or small business, and the financial institutions involved. In other words, the payment processor transmits the payment information from the customer’s credit card to both the cardholder’s issuing bank and your business’s bank at the time of payment. Payment processors work with merchant service providers (or are also merchant service providers), and aren’t usually banks themselves.
These services allow businesses to accept payments from credit cards, debit cards, or other forms of payment like digital wallets (Apple Pay, Google Pay) — or even cryptocurrency. Many payment processors have their own payment gateways or will integrate with several different payment gateways.
A payment processor is like the overseer of the payment gateway technology and other processes to ensure that transactions are validated, approved, and funded into the merchant’s bank account.
How to Choose a Payment Processor
Choosing a payment processor for your small business will depend on a number of factors, such as:
- Pricing — as with the payment gateway, you want to consider what you’re willing to pay for payment processing. Most payment processors offer three types of pricing:
- Interchange-plus — interchange rate (a fee you pay with every transaction) plus a markup, which is a percentage, fixed amount, or both.
- Flat-rate pricing — one rate for every transaction of a certain type (e.g. online vs in-person), regardless of the interchange rate.
- Tiered pricing — a sort of combo of interchange-plus and flat-rate pricing, where interchange rates are sorted into tiers that cost different amounts.
- Your sales structure — if your business is an online store only, you may want a different payment processor than a business that does more transactions in person.
- Your industry’s specific credit card issues — if you’re in an industry that has a high chance of fraudulent card transactions, high rates of chargebacks, or highly regulated sales, you’ll want a payment processor that can handle these issues.
- Where you do business — you’ll want to make sure that your payment processor is capable of handling transactions in every region you do business.
- Which cards you accept — your payment processor should be able to process payments from all of the credit cards you accept.
- Contracts — if you may change your payment processor at some point, maybe because you’re going to offer different items for sale or increase your sales, you’ll want to find a payment processor that offers a contractless option.
- Data handling — your payment processor should help contribute to your ability to maintain PCI compliance, but you may also want to have control over your own data if you may change payment processors in the future.
Pros and Cons of Using Payment Processors
There are advantages and disadvantages of using a payment processor.
- Allows you to accept credit card and debit card payments in person, online, or in card-not-present transactions
- Helps you give your customers many different and convenient payment options
- Less expensive than DIY options
- Usually very easy setup and integration
- May provide you with point-of-sale equipment like credit card readers and sales terminals
- May come with monthly fees and transaction fees
- Increases possibility of security issues with financial transactions
- Not all payment processors are straightforward about their fees and pricing
Top Payment Processors
There are several payment processors that are good options for small businesses. (You’ll notice that many of these are also payment gateways and/or merchant service providers.)
All-in-One Payment Platform Solutions
Because a payment processor is required for all credit card and debit card transactions and a payment gateway is the technology the payment processor uses to communicate information between parties to the transactions, many payment processors provide an all-in-one payment solution.
All-in-one payment solutions may also offer other aspects of payment processing, such as:
- Shopping cart integrations
- Online payment portals
- Integrations development to work with other systems in your technology suite, such as accounting, customer relationship management (CRM), website, etc.
- Automated services
- Features like currency conversion, multiple payment options, etc.
How to Choose an All-in-One Solution
To choose an all-in-one payment solution, you should consider:
- Cost and pricing
- Fees for transactions
- Integration with your existing software systems
- The provider’s customer service reputation
- What kind of payments they accept, including credit and debit cards, digital payments like Apple Pay or Google Pay, or even cryptocurrencies
Pros and Cons of Using an All-in-One Solution
There are pros and cons to using an all-in-one payment solution.
- Easier set up
- Lower fees
- Offering more payment options to customers
- May provide multiple options for accepting payments, like in-person, card-not-present, or online transactions
- May provide you with equipment and software to accept payments
- Consistency across transactions and better efficiency
- Easier access to data when you need it
- You’re stuck with the geographic coverage your processor offers
- They may not work with all of your payment devices
- Some all-in-one providers aren’t as straightforward about their pricing or fees
Payment Gateways and Payment Processing Options for High Risk Businesses
A business that has been labeled “high risk” may be more vulnerable for things like chargebacks or credit card fraud. For instance, gas stations tend to have a high incidence of credit card fraud and dropshipping companies tend to have a high rate of chargebacks.
Other high-risk industries include highly regulated sales, like firearms, tobacco, alcohol, cannabis, or adult-themed items. It can be hard for high-risk businesses to find payment processors that will work with them, let alone understand their issues.
There are some payment processing options for high-risk businesses that shouldn’t break the bank and still provide you with a high level of service and efficiency.
- Soar Payments
- Host Merchant Services
- Durango Merchant Services
- Easy Pay Direct
You may have to do some research regarding pricing and fees for these providers, but they are generally well-regarded in the industry and can help you manage payment processing for your high-risk business.
Nav’s Verdict: Payment Gateway vs. Payment Processor
Choosing the right payment processor for your business is a good first step in offering your customers options when it comes to how they can pay for your goods or services. You may choose an all-in-one payment platform to make setup easy and keep track of your data, or you may incorporate several different payment gateways with payment processors to increase your flexibility as a merchant.
You have enough decisions to make when you’re running a business, so consider Nav your partner. Nav helps businesses learn how to establish business credit and find small business loans or business credit cards to help them manage day-to-day operations and to grow. Sign up today to see which options you’re most likely to qualify for.