When you start a business online and want to accept payments from customers, there are two important things you need to know about: payment gateways and payment processors. They have specific jobs in the payment process, but their names can be confusing. In this blog, we'll explain the big differences between these two important parts of online payments. It's like understanding who does what in your online store's money matters.
Payment Gateways vs. Payment Processors: An At-a-Glance Comparison
A Payment Gateway and a Payment Processor play distinct roles in the online payment process.
Payment gateways are like virtual cashiers, collecting and securing customer payment data and creating a bridge between the customer and the payment processor.
Payment processors, on the other hand, act as financial dispatchers, executing the transaction, verifying funds, and managing settlements between banks and the merchant.
While gateways focus on data security and user experience, best payment processors ensure funds are transferred securely, handle fraud detection, and manage merchant accounts. Both are essential for a seamless and secure online payment experience.
Difference | Payment Gateway | Payment Processor |
1. Role | Collects and secures customer payment data and forwards it to the processor. (Between business and customer) | Executes transactions and manages fund transfers. (Between merchant, merchant's account, customer's bank, and card network.) |
2. Data Collection | Gathers and encrypts sensitive payment information from customers. | Focuses on the financial aspects of transactions. |
3. Security | Prioritizes data encryption and secure data transmission. | Emphasizes fraud detection and risk management. |
4. User Experience | Influences the checkout experience, impacting user satisfaction. | Less focused on user interface, more on transaction processing. |
5. Funds Settlement | Not responsible for managing fund transfers and settlement. | Manages fund transfers, disbursements, chargebacks, and refunds. |
6. Services | It requires a payment processor for fund completion | Can alone complete payment transactions |
Payment Gateway: The Virtual Doorman
Think of a payment gateway as the virtual doorman of an online store. Its primary purpose is to facilitate the secure transfer of transaction data from the customer to the payment processor. Here are the key aspects of a payment gateway:
- Customer Interaction: Payment gateways are the customer-facing part of the payment process. They are responsible for collecting and encrypting sensitive payment information from the customer, such as credit card details or digital wallet information.
- Encryption and Security: A payment gateway ensures that the payment data is transmitted securely from the customer's browser or device to the payment processor. This encryption is crucial for protecting sensitive customer information from potential threats.
- Authorization Request: Once the payment information is collected and secured, the payment gateway forwards an authorization request to the payment processor, asking for approval to complete the transaction.
- User Experience: The design and functionality of the payment gateway can significantly impact the user experience. A seamless and user-friendly payment gateway can reduce cart abandonment rates and improve conversion.
Merchants should be vigilant during the selection of the best payment gateway for their business to accept payments online. However, merchant service providers, such as Stripe, Square, WebPays, Autherized.net, and Skrill, are reliable and efficient processors, one may consider.
Payment Processor: The Financial Dispatcher
While the payment gateway collects and secures payment data, the payment processor is responsible for executing the transaction. It is like the financial dispatcher of the payment process, ensuring that money moves between accounts smoothly and securely. Here are the major characteristics of the best payment processor:
- Transaction Execution: Payment processors handle the transaction itself. They communicate with banks and financial institutions to verify and transfer funds between the customer's account and the merchant's account.
- Fraud Detection: Payment processors have sophisticated fraud detection mechanisms to assess the validity of a transaction. They use various parameters, including transaction history and geographic location, to detect and prevent fraudulent activities.
- Funds Settlement: Payment processors ensure that the funds are transferred from the customer's account to the merchant's account. They manage the settlement process, which can take a couple of days to complete.
- Merchant Account Management: Payment processors typically provide merchants with accounts where the received funds are held before being disbursed. They may also handle chargebacks, refunds, and other financial transactions.
As mentioned earlier, merchants should be vigilant while selecting the best payment processor from the best payment processing companies for their business. However, payment processing providers, such as Stripe, Square, WebPays, Helcim, and Clover, are reliable, efficient and proven best payment processors that business owners may consider.
Conclusion
To put it simply, a payment gateway is responsible for collecting and securing payment information and creating a bridge between the customer and the payment processor, while the payment processor is focused on managing the actual transaction and ensuring that the funds are transferred securely.
In an online transaction, both the payment gateway and payment processor work seamlessly together to provide a secure and efficient payment experience for customers and merchants. While understanding the distinctions between these two entities is vital, it's also important to note that many service providers offer integrated solutions that encompass both payment gateways and payment processors. These solutions streamline the payment process, making it easier for businesses to accept digital payments.
As technology continues to evolve, the boundaries between payment gateways and payment processors may blur further, but having a fundamental understanding of their core functions is crucial for businesses and consumers alike to navigate the ever-changing landscape of digital payments.
