Payment gateway, payment processor, merchant account – what’s the difference

Payment gateway, payment processor, merchant account - what's the difference

Our team has written multiple articles on financial topics, and payment gateways, payment processors, and merchant accounts come up a lot. Thus, we understand why sometimes people mix up these three or don’t quite differentiate between the services they offer.

Today it is time to set the record straight! Find out the difference between the three in this article!

What is a payment gateway?

A payment gateway is a service that takes a substantial part in accepting payments from clients online. Mainly, it allows securely authorize the customer’s transaction and encrypt the payment data to further pass it to other players in payment processing. 

To better understand what functions payment gateways carry out, let’s describe the whole process in more detail:

First of all, think of the payment gateway as a virtual version of the POS terminal at your local store. It is called a gateway for a reason – this is where the so-called payment processing journey starts.

That’s how it goes: a customer surfs the internet on their mobile phone and stumbles upon your website. There they find something to their liking and add the product to the shopping cart. To buy it, the customer needs to enter their credit/debit card details inside the payment form: the card number, its CVV, expiration date, and the cardholder’s name. 

If a payment gateway provides 3D Secure services, the client is also required to further confirm their identity using the OTP, their gadget, or biometric technology. This procedure helps to ensure that the cardholder is the one that makes the purchase, or is aware of the transaction. If you need more information on how 3D Secure works, this article is for you

So, after submitting all the payment details, the customer clicks the “Pay” button. From there, the payment gateway receives the said data, encrypts it for security purposes, and passes it onto the payment processor. We will describe the functions of the latter in the next section. What you also need to know about payment gateways, is that after the transaction was successful/declined, this information subsequently gets back to the payment gateway, which corresponds it to the customer.

Some banks and Fintech companies have their own payment gateways, in other cases, you need to seek out this service separately. Need some good examples? Check out the list of the most popular payment gateways compiled by us.  

What is a payment processor?

A payment processor, also known as a payment service provider (PSP) is a company/service that is an integral part of accepting online payments. It acts as a middleman between a merchant and other financial institutions that take part in payment processing.

 What does a payment processor do? After a payment gateway sends the transaction information to the payment processor, it passes the data onto the card association (Visa, Mastercard, etc.). It then goes to the issuer bank (the customer’s bank). The bank approves or declines the transaction – the latter can happen due to insufficient funds, the customer’s account being closed/frozen, or the payment date’s expiration. 

The transaction is then redirected to the acquiring bank (the merchant’s bank). It approves or declines the transaction based on the received information. After, the payment processor corresponds the decision on whether the payment was successful to the payment gateway, which notifies the customer.

If the transaction was approved, the money will arrive in the company’s merchant account. Speaking of, let’s discuss it next!

Also, more useful information here: “The basics of online payment processing”.

What is a merchant account?

Well, this one differs a lot from previously described payment gateways and processors. A merchant account is an account financial institutions provide for businesses to accept card and electronic payments for their goods and services. 

To get the merchant account, you need to refer to the bank where you have your personal/business account or even approach a payment gateway service provider or a PSP that offers such accounts. 

This is how it works: after the payment processing is complete (see the whole process described above), the money is eventually transferred to a merchant account. At this point, a company can’t use or withdraw these funds. A certain settlement period needs to pass, as the real money transfer takes place from the customer’s account to yours. The period can last from one to seven days and differs between processors. Once the settlement period is over, the funds you have earned are sent to your business account, and you can use and spend them. 

To apply for a merchant account, you first need to make sure your website is secure and complies with PCI DSS or other regulations necessary. Then, find a reliable bank/payment processor and learn what documents are required to open the account. Typically, this is the basic information about the business owner, the company address, processing history or estimated processing volumes, etc. 

For more information, check out Maxpay’s article: “Why do you need a merchant account and how to set it up safely?”. 

At the end of the day, no matter if your business is small or large, you will need all three components to accept online payments. 

Comparison

To sum up the main things from the article, let’s compare a payment processor, a payment gateway, and a merchant account.

Payment gatewayPayment processorMerchant account
Is required to accept payments onlineYesYesYes
Takes part in payment processingYesYesNo; once the payment processing is complete, and if the transaction was successful, the money will be transferred to the account.
The main functionsAfter a customer enters the card data into the payment form, receives this data, encrypts it, and passes it onto the payment processor. Notifies the customer if the transaction was approved or declined.Receives the transaction data from a payment gateway and sends it to the card association, issuer, and acquiring banks. Once the payment is approved/declined, correspond this information to the payment gateway.Holds the money a merchant has earned from the online trade for a certain settlement period. The money can’t be used until transferred to the business account.

Maxpay’s advantages

Maxpay is a payment gateway service provider that has everything a company requires for accepting electronic payments. Our payment gateway allows frictionless and secure transactions and supports 140 alternative payment methods, as well as cards of major card brands. The merchants are protected from scammers with 3D Secure technology.

We help companies with merchant account companies and make sure your website complies with regulations before sending your documents to the acquirers. Our team has developed special plugins for multiple marketplaces so that Shopify, WooCommerce, PrestaShop, OpenCart, OXID, etc. merchants can accept payments with us.

Maxpay takes the safety of our merchants’ funds extremely seriously: we offer the services of Covery anti-fraud platform to prevent fraudulent transactions. Our merchants can also use solutions such as Ethoca Alerts and VMPI to avoid chargebacks. Ethoca Alerts warns you of card fraud minutes after it is verified, so you can issue a refund and cancel the shipping. And VMPI allows you to provide proof that the transaction was valid in case of potential friendly fraud.

Feel free to contact us at start@maxpay.com for more information.