Merchant Account vs Payment Gateway

Large and small business owners often ask themselves, “What is the difference between a merchant account and a payment gateway?” Well, they are vastly different entities that serve two unique purposes. A merchant account processes payments for goods or services sold to customers whereas a payment gateway simply transmits data about transactions from your business’s website to your bank or credit card company. With this blog post you will learn more about these differences as well as their benefits. So read on! 

Merchant Account vs Payment Gateway Comparison 

A merchant account is a bank account that lets your business accept credit cards, debit cards, and ACH (Automated Clearing House) payments while an online payment gateway works like a credit card machine. 

Merchant accounts allow businesses to accept payments from customers. It can be provided by a PA that takes funds from the merchant in its account. The funds are deposited into the merchant’s account. Merchants can get funds in under 15 minutes and the settlement takes less than 2 days. 

On the other hand, payment gateways are technology providers that facilitate and route the online payment of businesses. It captures the payment data of the customer on the checkout page and forwards it to the acquiring bank. This data is forwarded securely in an encrypted format. Thereafter, it informs the customer if the payment has been accepted or declined. But, aside from these basic definitions, what are the key differences between a merchant account and a payment gateway? In this article, we make a comprehensive comparison between merchant and payment gateway.  

What Is a Payment Gateway? 

A payment gateway refers to the technology that connects merchants of all kinds — not just online merchants — and payment networks. At its most basic level, a payment gateway does the following (all in under a second!): 

  • It integrates with your online store. It gives your store one or more ways to integrate online card advanced processing features with your business operations. 
  • It securely captures payment details for customer transactions. The merchant sends the shopper’s information to the payment gateway via the tools the gateway provides. To transmit these details securely, the gateway encrypts the payment information during transmission. 
  • It routes that information to a payment processor or an acquiring bank. The acquiring bank takes over at this point. The acquiring bank may do some fraud screening and then route the transaction to the card networks. 
  • It sends an approval or decline message back to the merchant. Based on the yes or no response, the merchant may either direct the shopper to a confirmation page or ask them to provide another form of payment. 

Characteristics of payment gateways 

  • Multiple payment methods: Credit and debit cards are not the only way to pay for goods and services online. Many shoppers prefer to use other payment methods, like electronic wallets, direct debit, or bank transfers, so you need more than just a card payment gateway. Many payment gateway providers support a variety of payment options so you can attract and retain a greater number of customers. 
  • Fraud protection services: Online businesses are at risk of attack every time they accept payment. If your fraud level gets out of control your business will be negatively impacted in the form of chargeback fees and penalties, lost merchandise, and reputational harm. It is to your benefit to find a payment gateway that has strong fraud detection and prevention tools. 
  • Recurring billing tools: These days, many businesses use a subscription model to sell goods. It will make your life easier to find a payment gateway that can manage automated billing, send out payment reminders, set up customizable billing plans, and automatically update shoppers’ subscription payment information. 
  • Detailed payment analytics: Having detailed payments data can help you make better, more informed decisions about how to improve your business. The best payment gateways give you access to a variety of payment analytics and reports that paint a complete picture of where your payment process is succeeding and where it needs some work.  

What Is a Merchant Account? 

A merchant account is an account that enables merchants to process payments. Your payment gateway deposits the funds from your sales there. According to a designated schedule, as determined by your payment gateway, the funds are automatically transferred from your merchant account into your business bank account, which you set up for yourself. 

A merchant account is different than a business bank account, a point that often confuses. You have no control over your merchant account; it is simply a holding place for deposits. Why can’t the money from sales be deposited directly into your business bank account? Since merchandise can be returned, there is always the chance that some money you receive as a seller will have to be paid back, which accounts for a certain level of risk in your transactions. Returns are subtracted from whatever sits in the merchant account at that time; the remaining funds are then transferred to your bank account, sometimes using application programming interfaces. 

Also, your payment gateway may be accumulating deposits from multiple sources. Rather than giving you five different deposits, it collects them in your merchant account and combines them into one single deposit for your bank account, making reconciliation easier. 

How Do You Get a Merchant Account? 

Many payment gateway providers are full-service payment solution providers, which means they provide merchant accounts to their customers along with a payment gateway and processing solution. However, that is not always the case. But setting up your own merchant account is not the ideal situation in simple terms; the fewer providers you have, the better. So, we recommend finding a payment gateway that is also a payment service provider—one that gives you a merchant provider account and handles payouts. 

  • Some make global commerce easier. Some merchant accounts can only receive money in dollars, whereas an internationally minded payment gateway provider can set one up to accept multiple currencies. So, if you are looking to grow globally (and you should be!), it is an innovative idea to set up a multi-currency merchant account. 
  • Some have a more sophisticated underwriting process. Depending on the type of business, not all merchants have an equal level of risk for their transactions, something that should be taken into consideration during the underwriting process. A customized underwriting process leads to fewer problems down the road and helps avoid an unexpected shutdown of the account due to miscalculations of transaction charges. 
  • Some are shared, or aggregate, accounts. Some eCommerce merchant accounts are shared among all the merchants serviced by the payment gateway. That means your risk profile is blended in with all the other merchants in the pool, which may be an advantage for some merchants but not for others. Before you sign on with a provider, check whether you will have a dedicated or aggregate account, and consider how that might affect your online business. 

Is the Merchant Account the same as the Payment Processor? 

A merchant account is like a business bank account for an organization or enterprise. After the customer pays for the product or service, the payment gateway credits the funds into the merchant account after deducting the gateway fees.  

On the other hand, a payment processor helps communicate the payment processing services information between the card companies to Acquirer and Issuing Banks. The payment processor is extremely essential for online payment processing.  

 How does a payment gateway make money? How do I avoid payment gateway charges? 

A payment gateway can charge fixed and variable costs from the merchants. Fixed charges are usually the onboarding fees, infrastructure charges, and annual maintenance fees. On the other hand, the variable application fees are the merchant discount rate/transaction discount rate (MDR/TDR) charges.  

The MDR may vary according to the payment processing solution and is charged per transaction. There are no ways to avoid payment gateway charges. However, you can choose a payment gateway that charges no annual maintenance fees or conversion fees.  

Is the Merchant Account the same as a Bank Account? How much does it cost to set up a merchant account? 

A merchant account is a business bank account that is different from a normal bank account. Many payment gateways have zero setup fees and help you set up a sub-merchant account with zero charges and transaction costs. 

Can I have multiple merchant accounts? 

Yes, a lot of merchant account providers will help you open multiple types of merchant accounts. There can be several reasons for this. For example, the bank decided to shut down the merchant account due to a change in policies and conditions of cooperation. (Companies in high-risk industries are especially susceptible to this.) 

It is also possible that the Acquiring bank has imposed a monthly volume limit. Multiple merchants, rather than a single merchant, accounts can help businesses avoid sudden disruptions of payments.  

Can I have multiple payment gateways? 

Yes, merchants can have multiple payment gateways on their sites. You can choose to integrate multiple gateways at once. Alternatively, you can integrate multiple gateways but route them selectively. You may route the transactions based on your business needs, the strengths of the gateway or downtimes. Multiple payment gateways can help increase customer trust. Moreover, it can lead to a higher number of successful transactions by balancing the load. 

Which option is right for your business? 

Merchant accounts have been with us for quite some time since the coming on of credit cards. If you are a retailer that sells primarily from brick-and-mortar stores, then setting up a merchant account can help you increase your cash flow in the business. 

On the other hand, the payment gateways are ideal for e-businesses and other mobile retailers. When you use this payment gateway, the retailers can easily enter and approve their credit card details from their mobile devices. 

BNG Payments is payment processing made easy. Whatever your processing needs, we make it easy for merchants to accept credit and debit cards, mobile payments, e-commerce, and more. Contact us to find out more about what BNG Payments can do for your business.