What’s the difference between a payment processor and a payment gateway?

By Brandon Banks

When it comes to adding payment functionality to your software, it can be easy to get overwhelmed by the different options available. Payment processors, payment gateways, merchant accounts… it can all start to feel like a foreign language. Let’s start with the basics.

What is a payment processor?

A payment processor is the intermediary between your business and payment networks (i.e. credit card companies, banks, etc.).

Even though it only takes a few seconds for a consumer to swipe a card — or hit “checkout” on their online shopping cart — there’s a lot of complicated steps to transfer money from the consumer’s bank account to the business’s bank account. A payment processor gathers all the technology and services necessary to complete those steps into a single platform.

Without a payment processor, your business would need to accumulate the necessary technology and services yourself. You’d be responsible for ensuring the each piece of technology or software is compatible with the others, and that every step of the process actually works. You’d also carry much of the liability if something went wrong.

Popular payment processors

What is a payment gateway?

A payment gateway is a type of technology that facilitates payment processing. It serves as the bridge between payment processors and your business account (aka merchant account).

The actual functionality of a payment gateway is quite technical and complicated. The most important thing to understand is that payment gateways enable businesses to securely accept, process, and authorize a payment transaction online. This is an essential link in payment processing, one that can make or break a successful transaction.

Popular payment gateways

*Many payment processors also have a proprietary payment gateway.

Do you need both a payment processor and a payment gateway?

The short answer is yes, you need both.

Many — but not all — payment processors and platforms have a built-in or proprietary payment gateway. Other solutions (like Nexio) have integrations for multiple payment gateways so you can pick the one that makes the most sense for your business.

How do payment processors and payment gateways work together?

Payment processing is similar to taking the subway. Your customer’s payment information is the passenger, the payment processor is the actual train, and the gateway is the turnstile at the station.

A payment processor is like the train because it’s the backbone of the journey. It transports your customer’s payment information from point A to point B. The processor takes care of the heavy lifting, like encrypting sensitive data and communicating with the bank. It’s the behind-the-scenes workhorse that makes sure your customer’s payment gets where it needs to go.

A payment gateway is like a turnstile because it’s the point of entry and exit for the payment. The gateway is the interface between your business and the payment processor. It’s what your customer interacts with directly and allows them to enter their payment information. The gateway also acts as a security checkpoint, making sure only authorized transactions can pass through.

Without the train, the passenger has no transportation; without the turnstile, the passenger cannot even enter the station. Together they form a seamless path that takes passengers from start to finish with ease.

This is why both the payment processor and payment gateway are essential for an effortless transaction.

How do you pick the right payment processor and gateway for your business?

There are numerous payment processors and payment gateways ranging from basic services to custom solutions with a dedicated account manager. In order to find the right fit for your business, you should consider the following:

  • Business type — Standard businesses (or merchants) have different payment needs than SaaS companies, which have different needs than service providers like doctors and lawyers. You want to work with a processor that has experience with similar businesses to ensure your payment needs are covered.
  • Business industry — Many people don’t realize how much of an impact business industries have on payment processing. Processors often specialize in different industries since the payment needs and challenges can vary drastically. Working with a processor that doesn’t understand your industry can result in decreased revenue, held funds, and terminated accounts.
  • Processing volume — How much revenue you bring is a big factor when deciding what payment processor to work with. Processors that work with large processing volumes typically have more technology and services that could be too expensive for business with small processing volumes.
  • Ambition for growth — Your payment processor should be able to offer payment solutions that can grow with your business. Too many business owners and executives block their growth potential by not thinking about the future.

Ultimately, understanding your business’ needs and researching carefully will help ensure that you get the best payment processor or gateway for you. It’s always a good idea to weigh a few possible options before settling on one.

Nexio’s payment solutions

With Nexio, you’re not just buying the technology to facilitate payments, you’re partnering with a team of experienced professionals that help you maximize the value of the technology. We’re invested in helping you achieve your business goals and will help guide you to make strategic decisions and changes at the time that makes the most sense for your business.

Whether you’re looking for payment processing services, embedded payment solution, or payout provider, we can curate a solution that meets your unique needs and goals. Contact us today to see what Nexio can do for you.

FAQs

What is a Payment Processor?

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A payment processor is a vital link in financial transactions, especially with electronic payments. It acts as an intermediary between a merchant and financial institutions. When a customer pays using a credit or debit card, the processor verifies the transaction, ensuring the details are correct and the funds are available. It then facilitates the transfer of funds from the customer’s bank to the merchant’s account.

In addition to handling transactions, payment processors provide merchants with technology for payment acceptance, like terminals and gateways, and ensure compliance with financial regulations and security standards. This makes them essential for secure, efficient, and compliant digital commerce.

What is a Payment Gateway?

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A payment gateway is a crucial technology in the e-commerce and retail sectors, serving as a conduit for secure and efficient card transactions. Its primary role is to facilitate the smooth transfer of payment information from the customer to the payment processor, but it encompasses much more.

When a customer enters their debit or credit card information on a website or at a physical store’s checkout, the payment gateway comes into play. It first encrypts the sensitive card details to ensure that the transaction is secure. This encryption protects the customer’s financial data from potential security breaches or fraud.

After encryption, the payment gateway securely transmits this data to the payment processor. Here, the processor verifies the transaction details, ensuring that the card is valid and the funds are available. This verification is a critical step in preventing fraud and errors in transactions.

The gateway’s role is not limited to just data transmission. It also performs various checks for fraud prevention, such as verifying the digital signature or CVV number on the card. This adds an extra layer of security to the transaction.

Payment gateways are designed to be compatible with various payment methods and currencies, making them versatile tools for global commerce. They often offer additional features like recurring billing, invoice management, and integration with accounting software, which are invaluable for businesses.

A payment gateway is more than just a path for payment data. It is a multifaceted tool that plays a critical role in the security, efficiency, and versatility of digital payments. It not only facilitates transactions but also ensures they are secure and compliant with international standards, thus fostering trust and reliability in the digital marketplace.

How do Payment Processors and Gateways Work Together?

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Payment gateways and processors collaborate seamlessly in electronic transactions. The gateway initially captures the customer’s payment information, encrypting it for security. This encrypted data is then sent to the payment processor, which plays a central role in verifying and authorizing the transaction. The processor confirms the transaction’s validity with the customer’s bank, and upon authorization, facilitates the transfer of funds to the merchant’s bank. This partnership ensures transactions are not only efficient and convenient but also secure, underpinning the reliability of modern e-commerce and retail transactions.

Can a Business Use a Payment Processor Without a Gateway?

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Yes, a business can use a payment processor without a payment gateway, particularly in specific transaction types. The most common scenario where this applies is in ACH (Automated Clearing House) payments. ACH payments are electronic payments made through the ACH network, often used for direct deposit of payroll and for paying bills. In these cases, the payment processor can handle the transaction directly, without the need for a gateway to encrypt payment information, as ACH operates on different principles compared to card transactions.

However, the dynamics change when it comes to online credit card transactions. Here, a payment gateway becomes a critical component. For online transactions, the security of payment information is paramount. The payment gateway encrypts the cardholder’s data before it is transmitted over the internet, ensuring that sensitive information like credit card numbers remain secure.

Can Payment Processors and Gateways Help with Compliance?

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Absolutely, payment processors and gateways are instrumental in helping businesses maintain compliance with various industry standards, notably the PCI-DSS (Payment Card Industry Data Security Standard). This role is critical in ensuring that payment processing is not only secure but also adheres to legal and regulatory requirements.

 

PCI-DSS is a set of security standards designed to ensure that all companies accepting, processing, storing, or transmitting credit card information maintain a secure environment. This compliance is not just a recommendation but a mandatory requirement for any business handling credit card transactions. Payment processors and gateways play a pivotal role in achieving this compliance. They implement robust security measures such as encryption, tokenization, and fraud prevention techniques, which are essential components of the PCI-DSS requirements.