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Payment Gateway vs Payment Processor

Payment Gateway vs Payment Processor

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A payment gateway and payment processor are two key players in processing online payments. As an e-commerce merchant, you’ve likely heard these terms before. But, what’s the difference between a payment gateway and a payment processor?  

The main difference is that a payment gateway captures and sends the cardholder's payment information to the payment processor. It also communicates declined or approved transactions to you and your customers.

Payment processors securely route data between the customer, the issuing bank, the acquiring bank, and the merchant. This happens behind the scenes in a few seconds and finishes with the settlement of funds into your bank account (as long as the payment has been approved).

This article provides a deeper look into the subtle differences between a payment processor and a payment gateway, how they work together, and how to choose the right provider for your e-commerce business.

What's the Difference Between a Payment Gateway and a Payment Processor?

To understand the difference between a payment gateway and a payment processor, we first need to look at the industry’s terminology and how payments work, both in brick and mortar stores and online.

Payment Terminology

Get familiar with the terminology used in payment processing. Here are the main terms you need to know.

  • Customer - The cardholder who is paying for products or services. The customer enters credit card information and initiates the transaction.
  • Issuing bank - The customer’s bank that issued their credit card.
  • Merchant - The business supplying goods or services for sale. This can be in-person or online.
  • Merchant account - A merchant account is a special account that lets you accept and process digital payments. This includes purchases made with credit or debit cards and other forms of electronic payments.
  • Acquiring bank - The bank that hosts the merchant’s credit card processing account.
  • Payment processor - The service that sends transaction info between the merchant, the issuing bank, and the acquiring bank. 
  • Point of sale - A credit card processing machine at a brick and mortar location that reads EMV chips in credit cards and sends it through the payment processor.
  • EMV chip - This computer chip is part of smart cards. EMV stands for Europay, Mastercard, and Visa, which were the three original processing firms that agreed to implement these chips in their cards. An EMV chip card generates a one-time use transaction code that helps prevent fraud when a card is used at a point of sale.
  • Payment gateway - The equivalent to a point of sale system for online transactions, it encrypts and transmits information to the payment processor. A payment gateway provides integrations into different e-commerce platforms and APIs to perform transactions. It also receives authorization for the banks to move money from the customer to the merchant.
  • Payment tokenization - The process of converting the customer’s card to another number to secure their private information for the online purchase.

Further reading: What is Tokenization? And its Benefits for E-commerce

What is a Payment Gateway? 

A payment gateway is the equivalent of a credit card terminal but it’s made specifically for online transactions. Without a card physically present, the payment gateway has to authenticate the card without help from an EMV chip. The gateway also encrypts the customer’s information to keep their bank info secure.

How Does a Payment Gateway Work? 

When customers check out in an online store, they enter their payment info on the checkout page. This is where you need to have the payment gateway in place. Usually, payment gateways have easy integrations into different e-commerce platforms and developer-friendly APIs / SDKs if you want a custom integration into your own system. The gateway encrypts the data and sends it to the acquiring bank’s payment processor. 

The acquiring bank sends the payment request to the issuing bank through the payment processor, and the issuing bank returns an approval or denial. If the transaction is approved, the payment gateway relays approval to the customer and closes out the sale. If 3D Secure authorization is required by the bank, the payment gateway will show a confirmation screen to the customer.

What is a Payment Processor? 

You need a payment processor for both online and brick-and-mortar sales. 

For in-person payments, a payment processor sends information between the merchant, the issuing bank, and the acquiring bank. The processor issues a brick-and-mortar business a point of sale system or a payment terminal. Payment terminals have to be able to read EMV chip cards. 

There is also a payment processor for online transactions, but it works with a payment gateway instead of a physical payment terminal. The payment processor carries out the transaction once the data passes through the gateway.

How Does a Payment Processor work? 

When a customer uses their card in person at the payment terminal, the terminal will authenticate the card and then send info to the issuing bank. The issuing bank will then approve or deny the transaction.

The payment processor will relay the approval or denial to the terminal. If the transaction is approved, the payment processor also sends the payment information to the acquiring bank.

For online transactions, the customer enters their information through the payment gateway. The gateway encrypts the information, turning it into a token, and sends it through the processor. The processor will relay approval or denial back to the customer through the payment gateway. When the payment is approved, the processor will relay the payment information to the acquiring bank. 

Payment Processor vs Payment Gateway: Do I need both?

To process online transactions, you will need both a payment gateway and a payment processor. The payment gateway is the beginning and end of the transaction, where the customer will enter their credit card information and receive an approval or denial of the transaction. The payment processor moves the information between the customer’s bank and the merchant bank. Every transaction processed online needs both.

Is MONEI a Payment Gateway or a Payment Processor? 

MONEI is a payment gateway. With our payments platform, you’ll have the option to route your payments to multiple processors. This is beneficial to your business because it allows you to approve more transactions. If one processor declines the payment, it first gets sent to another processor before the final decision is made. More approved transactions lead to higher conversion rates and increase customer satisfaction.  

Sign up here to integrate your online store with our payment gateway. With MONEI, you can accept all major and alternative payment methods in a single platform.

How Should I Choose a Payment Gateway and Payment Processor for My Business?

Now that you’ve learned the basics about what goes on behind the scenes of payment processing, consider what you need in a payment processor and payment gateway for your e-commerce business.

A payment gateway should be reliable, secure, and affordable. The payment gateway is responsible for authenticating and encrypting your customers’ information. Customers want a smooth transaction, and they want their data to be secure. This is where MONEI can help.

MONEI offers you a simple and affordable solution for your e-commerce business. Our payment gateway works with multiple payment processors and banks, so all you need is an account with us. If you already have an agreement with your own bank, you can use it with MONEI+ (only in Spain for now). 

Reach out to us to learn more about setting up a reliable and efficient payment gateway and processor! 

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