Payment gateway vs. payment processor

‍Payment gateways and payment processors both play unique roles in the payments process.

Between them, they ensure the safe transfer of information and funds between merchants and their customers.

While you may have heard these terms being used interchangeably, there are many distinctions between the role and function of a payment gateway vs payment processor.

eCommerce and brick and mortar stores should understand these differences. After all, it impacts customers' payment experience in many important ways.

What is a payment gateway?

A payment gateway is a technology system that receives and then transfers electronic transaction information between cardholders and merchants.

It enables online payments, debit and credit card payments made at the point of sale (POS), mobile phone payments, and more.

In each case, it encrypts payment details and also sends approval or denial notifications to customers and merchants for transactions.

As its name suggests, a payment gateway is the 'gate' customers' cards need to step through in order to initiate a payment.

What is a payment processor?

A payment processor is a type of technology that manages the electronic transaction processes. It acts as a facilitator for the payment processing system by managing verification and instructions on when and where to send funds.

In other words, it is the payment service provider responsible for communicating between the merchant's bank account and cardholder's banks.

Some payment processing services also provide equipment for card acceptance, security solutions, implementation of PCI compliance, customer support, chargeback management, and other value-added services.

Similarities between payment processors and payment gateways

Payment gateways and payment processors are both types of payment processing services that play roles in transaction authorization and verification.

They are important links between the main four parties involved in electronic payments:

• The customer (often referred to as the cardholder)
• The merchant
• The customer’s bank (known as the issuing bank)
• The merchant’s bank (known as the acquiring bank)

So, both are often compliant with industry security standards such as high PCI compliance levels and AVS and CVV checks for fraud prevention.

Differences between payment processors and payment gateways

1. Role in the payment process

Payment gateways and payment processors' roles bring them into direct contact with one another. However, their roles are still different.

Payment gateway: intermediary between customer and merchant

A payment gateway transmits transaction details from the point of payment to the payment processor and communicates transactions' approval or decline to both the cardholder and merchant. It does not directly connect with the other parties involved in the processing chain.

Payment gateway: intermediary between cardholder's bank, merchant, and merchant's bank

A payment processor, on the other hand, works further along the payment process. It receives information from payment gateways and transmits it via card networks to merchant banks and issuer banks via card networks.

In short, it comes into contact with most parties in the payments process.

2. Encryption

Encryption is an important part of part of the payments process. It is when data is converted into a code that cannot be read by those without the relevant decryption key. This significantly reduces the chances of unauthorized access to the data.

Payment gateways: Encryptor

Payment gateways encrypt cardholder and transaction information through SSL (Secure Sockets Layer) or TLS (Transport Layer Security) encryption tools. This protects the cardholder details and other payment information (name, card number, expiry date, CVV) from being intercepted by unauthorized parties.

Payment processor: Handler of encrypted information

Payment processors transmit encrypted transaction data, but don't actually encrypt it themselves. This payment data is decrypted by the issuer and merchant banks once the payment processor has sent it.

3. Level of fraud prevention

Fraud prevention measures are designed to prevent or reduce bad actors from submitting false payment requests. Payment gateways play a smaller part in this aspect of payment processing than payment processors do.

Payment gateway: Basic card checks

As a part of this, a payment gateway verifies that CVV (Card Verification Value) codes entered on payment pages match cards used in transactions. And they conduct AV (Address Verification) checks, which compare billing addresses to addresses the customer has on file with the issuing bank.

Payment processor: Sophisticated card checks

Payment processors verify the validity and security of each transaction before authorising and instructing payments.

To do this, they may use a sophisticated set of tools and datasets such as algorithms, real-time analytics, machine learning and historical data. These help them to identify patterns and when there's need for holds and/or manual reviews.

4. Integration requirements

There are many different types of payment service providers businesses can choose from. Smaller businesses often use full-service payments solutions that come with merchant accounts. These include the use of payment processors and payment gateways.

However, some businesses prefer more bespoke solutions. This can help them customize the payments flow and reduce fees.

Payment gateways: Simple and quick

Payment gateways provide simpler integration options for businesses, such as APIs, plugins, and prebuilt modules, enabling them to start accepting online payments quickly.

Payment processors: Varies according to type of payment processor

Payment processors usually require merchants to open a merchant account. They will often integrate payment technologies for them.

How this is done depends on what type of payment processor is being used.

A payment processor's Application Programming Interface (API) needs to be integrated into a merchant's existing e-commerce platform (app or website) and point-of-sale system. Businesses also have the option of using hosted payment pages to reduce security compliance burdens.

Are both payment gateways and payment processors necessary?

A merchant needs both a payment gateway and a payment processor to ensure the secure transaction of funds and transmission of information.

For brick-and-mortar stores, a payment processor and a point of sale (POS) system card reader may do the trick, but the cardholder’s information is still not entirely safe.

A customer submits their payment information (typically card details and name) into the online checkout of the ecommerce platform and presses ‘pay’. Customers can also introduce their card into the retail point-of-sale (POS) card reader device or use a digital wallet, like Apple Pay.

Conclusion

Understanding the roles of a payment gateway vs payment processor is crucial for both online and physical stores. Each significantly affects the customer's payment experience.

While both services share similarities, including compliance with security standards and fraud prevention measures, they also have distinct roles.

Payment gateways act as the first line of defence, encrypting and transmitting transaction details, adding an essential layer of security.

Payment processors, on the other hand, serve as the conduit for the actual flow of funds. They interact directly with financial institutions and implement additional fraud detection measures.

For seamless and secure transactions both services are indispensable. In physical stores, a payment processor coupled with a POS system might suffice, but without the added security of a payment gateway, cardholder information remains vulnerable.

Consequently, the integration of both services is often the best approach to strike a balance between security and efficiency. This enhances customer trust and satisfaction in the long run.

Another way of looking at it is: Without a payment processor, electronic card payments are not possible. Without a payment gateway they are possible but not secure.

By taking the time to understand and implement these components effectively, merchants not only safeguard their operations but also improve the overall quality of their customer service.