Gateway vs Payment Processors

What is a payment processor?

A payment processor is a company or service that carries out electronic transactions between customers and businesses by processing and authorizing credit cards, debit cards, and other digital payment methods.

A payment processor is a middleman (usually called an intermediary) between the customer’s bank and the business’s bank. The purpose of a payment processor is to make sure funds move safely from the customer’s account to the merchant’s account.

In e-commerce, payment processors verify the customer’s payment details, check for fraud, ensure compliance with relevant regulations, and authorize or decline transactions.

Processors usually charge businesses a fee for their services (e.g. a transaction fee or a percentage of the transaction amount).

What is a payment gateway?

A payment gateway securely sends payment information between the customer, the business, and the payment processor. It allows for information exchanges for processing payments. A payment gateway is the digital version of the point-of-sale (POS) terminal used in physical retail stores.

Using a payment gateway means all that sensitive payment information is secure, as payment gateways follow strict security standards and encryption protocols like the Payment Card Industry Data Security Standard (PCI DSS).

What are the differences between payment processors and payment gateways?

Payment processors and payment gateways are used in electronic payments, but they have different purposes. Here are the differences:

In transactions

Payment processor: A payment processor processes and authorizes payments, making sure funds are transferred securely between the customer’s bank and the business’s bank.
Payment gateway: A payment gateway communicates and securely transmits payment information between the customer, the business, and the payment processor.

Services

Payment processor: Payment processors offer fraud detection, chargeback management, compliance with payment regulations, and transaction processing.
Payment gateway: Payment gateways oversee the secure transmission of payment data. They do not usually provide other services like fraud detection or chargeback management.

Integrations with business systems

Payment processor: Payment processors may require businesses to create a merchant account to process transactions.
Payment gateway: Payment gateways easily integrate with business solutions such as APIs, plugins, and prebuilt modules.

How do payment processors and payment gateways work together?

Payment processors and payment gateways work together to enable secure and quick electronic transactions for businesses and customers, by communicating and transferring data between parties.

Here’s how they work together:

The customer initiates the transaction

To make a purchase, the customer enters their credit card information on the business’s website or app.

Payment gateway’s role

The payment gateway securely encrypts the customer’s payment data and sends it to the payment processor.

Payment processor’s role

The payment processor receives the encrypted payment data from the gateway and sends it to the customer’s bank, requesting authorization for the transaction.

The bank’s response

The customer’s bank checks the payment details and funds availability to approve or decline the transaction. The bank sends their response to the payment processor.

Processor to gateway communication

The payment processor shares the bank’s response (approval or denial of the transaction) with the payment gateway.

Gateway to business communication

The payment gateway shares the response to the business’s website or app, which lets the customer know whether the transaction was approved or declined.

Settlement of funds

If the transaction is approved, the payment processor coordinates the funds transfer from the customer’s bank account to the business’s bank account. This is called settlement and it takes a few business days to complete.