Payment Gateways vs. Payment Processors: Key Differences

payment processors

December 27, 2021

If you’re in the business of accepting credit and debit card transactions, then you work with or have a payment gateway. 

Since the payments industry and the types of businesses in them are changing seemingly every day, the different components of a merchant’s ability to accept payments can get confusing. 

With ISO’s becoming PayFacs, and PayFacs acquiring merchants, and so forth, Agreement Express wants to clear up the differences and explain the importance of each to the merchant’s ability to accept digital payment methods.

 

The Magic Behind Card Transactions

More goes into providing merchants the ability to process digital payment methods than people think. The process involves various different players, the likes of which consist of:

  1. Issuing banks – the banks that the card used by a customer is from
  2. Acquiring banks – the bank that holds the merchant account
  3. Card networks – credit card brands that set interchange rate (percentage of each transaction for the ability to accept credit cards)
  4. Credit card processors – coordinates and transmits the purchase amount and merchant information from the merchant to the issuing bank
  5. Payment gateways – the technology that encrypts credit card information and transmits it to the credit card processor

 

In this blog, we are honing in on payment gateway providers and payment processors and the differences in the roles that both play in merchant services, as they can be confused with each other. And although they work beside each other in how they help merchants process digital payment methods, the exact roles they play in the process are different.

 

What are Payment Gateway Providers?

Payment gateway providers facilitate an online card transaction. More specifically, payment gateway providers provide the technology that securely connects a business’s website/browser and a credit card processing company.

This technology reads and transfers payment information from a customer’s bank account to a merchant’s bank account. Payment gateway providers capture this data, ensure funds are available to complete the transaction, and make sure a merchant gets the funds they are due.

The actual physical gateway includes everything from the consumer-facing interfaces that are used to collect payment information to the physical POS terminals used at checkout stores. Payment gateways can also take a more digital form as the checkout portals in online stores.

 

How Payment Gateways Work

A working payment gateway has several different components:

  1. Merchant – the business that needs the payment gateway
  2. Cardholder – the customer who will pay the merchant for their services
  3. Issuing bank – the bank that the cardholder uses from which the funds will be taken
  4. Card schemes – the credit card companies that manage the card (Visa, Mastercard, etc)
  5. Acquiring bank – the bank the merchant uses into which the funds will go

 

What are Payment Processors?

A payment processor is a company that handles the credit/debit card transactions for a merchant. Whereas payment gateways move data, payment processors move the actual funds involved in a transaction.

 

How do Payment Processors Work?

There are both back-end and front-end payment processors, and both have slightly different roles. 

Front-end payment processors maintain connections to card networks and manage merchant accounts on behalf of their clients. Back-end payment processors handle the actual movement of money from account to account during a transaction.

 

Payment Processor vs Payment Gateway

These two terms are often used interchangeably, but they refer to two different entities in the payments space.

Payment processors transfer information between the issuing and acquiring banks in order to move money into a merchant’s bank account; however, in order for payment processors to do their jobs, they need payment gateways to aid in communicating across moving parts and actually authorize the transaction.

So the payment gateway provider collects customer information, and the payment processor uses that information to complete a transaction.

 

The Bottom Line

Technology has transformed the payments process already; payment gateways allow complicated transactions to occur in mere seconds, and the industry as a whole is constantly experiencing the birth of innovative ideas that quickly become business-altering tools.

Agreement Express is one of those companies that is producing technology that allows companies to meet merchant clients’ demands for faster onboarding and underwriting processes. Our onboarding and underwriting solutions have proven to reduce merchant abandonment by up to 70% and take NIGO errors down to less than 2%.

Not only does Agreement Express’s technology allow companies to improve their merchant satisfaction, but it also helps them avoid risk with things like scorecards, risk alert flags, and automatic checks for NIGO errors. Read more about our solution for underwriting and onboarding merchants here.

 

Check out our ROI calculator to see how much you could be saving on onboarding and underwriting. Or just skip to the good part and schedule a demo today.