Payment Gateway vs. Payment Processor: What’s The Difference?
If you’re a business owner, chances are you’ve already heard about payment gateways and payment processors. Both are related to any online selling or shopping that you do. However, have you ever wondered what makes each of these items unique? They occupy two critical positions in any payment processing chain – but to understand how they both work at securing your company’s finances, we need to understand the basics of a credit card transaction.
In short, a payment processor is typically a company that facilitates transactions between a card holder’s bank and your merchant account. A payment gateway is an encrypted application that authorizes credit card or direct payments processing for e-commerce, online retailers, or any other card-not-present transactions.
Whenever you swipe your credit card, four parties are involved in the transaction: the merchant, customer, and two banks. Firstly, the bank responsible for issuing your credit card, then the bank collecting the funds from your account – are all necessary components of any successful credit card transaction where the card is not being physically swiped face-to-face.
To accept credit card payments, your business needs to make use of a payment gateway and a payment processor. Each is vital to have for any merchant looking to make sales online or via credit card. Here’s a more in-depth analysis of the two.
What is a payment processor, and how are they categorized?
Payment processors are the companies responsible for sending data among you, your bank account, and your customer’s bank account. Your payment processing company usually provides your company with credit card scanning machines and other kinds of equipment used to accept credit card transactions.
To accept payment via a credit card at your company, you can set up a merchant account. Merchant service providers will set up your merchant account for you.
Payment processors are so important because they move money from one account to another. There are two kinds of payment processors – they’re known as front-end and back-end processors.
Back-end processors are responsible for settling transactions – they move money from your customer’s issuing bank into your company’s bank account (the merchant’s bank). These back-end processors ultimately send funds to your merchant bank account when all is said and done.
Front-end processors, on the other hand, maintain online connections to the data obtained from your card networks and settlement services. They also manage merchant accounts on behalf of you, the business owner. They work in tandem with back-end processors to deliver your money safely to your company’s bank account.
Payment processing companies routinely carry a pricing structure and cost a fee to use. These factors vary by the number and value of transactions your company is making. Generally, each payment processing company you decide to work with will firstly charge a percentage of each sale you make. Often, there will also be several other small fees to pay (including a per-transaction fee, a monthly account statement fee, a monthly minimum fee and an annual PCI compliance fee, and nonnegotiable, interchange rates ) – but don’t balk yet. The services of payment processing companies are ridiculously affordable.
They’re worth every penny they charge for the sheer number of inconveniences they can resolve for your company.
Payment Gateways – The other piece of the credit card puzzle
Payment gateways work to facilitate online credit card payments from a customer to merchant and a needed step for any business that does have “card-present’ transactions. Payment gateways make use of technology that can create a secure connection between you and your payment processing company – in essence; they serve as the secure “gateway” between your company’s website and the customer’s credit card account. Payment gateways are standard for businesses with “card-not-present” transactions, or cases of recurring payments which require prior authorization.
This security comes in the form of data encryption, where the payment gateway’s secure connection is utilized to encrypt sensitive credit card data for each transaction. Through using data encryption techniques, your payment gateway company can verify the authenticity and validity of any transaction made via credit card. This keeps personal information out of the hands of phishers and other malicious individuals who might be looking to steal your customers’ hard-earned money.
Having a payment gateway established within your company to ensure the integrity of credit card transactions is an essential box to check if you want returning customers. Without a payment gateway, the confidentiality of your customers’ most sensitive information (their credit card number and their three-digit security code) is at stake.
It only takes one data breaching incident orchestrated by a malicious hacker to tank a business’ revenue sources for months or even years – just look at Equifax, a credit card company that experienced a data breach involving 147 million people. They ended up paying around $125 to each impacted person who took advantage of the class-action settlement Equifax released – that’s a loss of more than $18 billion because of an isolated incident involving a data breach.
How can I protect my payment gateway?
Even if a payment gateway is encrypted, human error is always a possibility. To be sure your payment gateway is secure, work with a professional processor who has experience in the industry. The other key thing to protect your credit card payment gateway is to make sure your business is following PCI Compliance.
Every business with a merchant account will need to follow PCI Compliance guidelines to protect their customers’ data they process.
Does my business need a payment processor and a payment gateway to process credit cards
Again, it depends on the type of business you have. A company that is a retail store with no online store would only need a merchant account through a payment processor. However, payment gateways are always through a payment processor; therefore, if you need a payment gateway, you’ll have to have a merchant account set up through a processor.
A payment gateway can be viewed as the secure tunnel your customer’s money goes through to get to your bank account safely. Setting up a payment gateway for accepting credit cards on your company’s website is very important. Doing so can offer unmatched data security and the knowledge that your client’s most sensitive information – and your money – are safe and sound. Virtual terminals (those accessed through your computer) require the use of a payment gateway to accept all sales conducted via credit card.
Some businesses (which as Doctors offices or legal firms) may need an option to store recurring payment methods on file, as well as swipe a physical card in their office. The good news is, payment gateways are perfect for this situation. We have several options to make it easy to safely store a payment method, as well as swipe a card at the front desk.
Get payment processing account and equipment today
Are you a business owner looking to make the transition to an online marketplace during COVID-19? If so, you need a credit card payment processor and gateway first. With the cheapest fees available, there’s no way your company can go wrong by protecting itself and making it easier to accept credit card transactions by phone, online, or at the point of sale.
If you’re interested or have any questions about the payment processing and gateway we offer, don’t hesitate to reach out.