Online sales are experiencing unprecedented growth and everyone needs a fast, secure, and hassle-free way of payment while shopping online.
The concept of online payment is not new. It has been in practice for the past few decades. But it was never in widespread use.
But the recent past has seen the rise of e-commerce like never before. That development has prompted people to use fast and secure payment methods while shopping online. This whole new development has included two new entities in the payment ecosystem between customers and banks – payment gateway and payment processor.
This article presents an analysis of payment gateway vs payment processor.
A payment gateway is basically a merchant service that accepts payments from various modes. These modes can be credit cards, debit cards, or any other payment methods. Recently QR based and customized link-based payments have also become a big part of the payment gateway system.
It is called an online version of the Point Of Sale method. Merchants can get payment gateway service from either their bank or a specialized fintech company. PayPal, PhonePe, PaytM, and GooglePay are fintech companies that provide payment gateway services.
Here we discuss the three major types of payment gateways.
These payment gateways host the payment page separately from the e-com checkout page. So when you click the ‘buy’ or ‘proceed to pay’ icon, it redirects to the payment hosting company. Once the payment is complete, it automatically brings you back to the shopping checkout page.
These companies offer a high level of security, easy to set up, and come with flexibility. PayPal is a popular hosted payment gateway that is used by merchants worldwide along with other international payment gateway like PayPal
Self-hosted payment gateways offer to integrate payment processing on the same shopping site. It doesn’t redirect you to any external page for payment.
The benefit is that complete payment data is stored on the merchant website itself. On top of that, it is more convenient and reduces the chances of payment failure. On the downside, technical support will be less available for this gateway.
Shopify and Stripe are the two most popular self-hosted payment gateways.
These payment gateways use the Application Programming Interface to process payments. Right from storing customer payment data, initiating payment, and completing a payment, everything happens within the merchant website. Merchants can even customize payment processing for different users.
Sounds great! Right?
But the downside here is the merchant is completely responsible for security and data protection. They even have to comply with local payment regulations.
A payment gateway initiates the transaction by transferring the payment information between the payment portal of the merchant side and the acquiring bank. These payment portals could be a website, a mobile phone, or an interactive voice response service.
When customers want to check out after selecting a product on the shopping site, they have to enter their payment details on the checkout page. That’s where a payment gateway comes in for taking the information further to complete the payment.
These are the basic steps showing how a typical payment gateway works.
Customers click the Checkout or equivalent button on the shopping website.
Customers are redirected to a payment gateway page.
They enter the payment details like card details or bank details.
Next, the payment gateway takes the user to the issuing bank’s page to authorize the transaction.
Once the transaction is approved, the bank checks for the sufficient balance.
If the balance is sufficient, the payment transaction is complete and the customer gets a message about the successful order placement.
If the balance isn’t sufficient, customers get an error message about the failure of the possible transaction.
For successful transactions, the bank and payment gateway settle the amount and the merchant receives the payment.
A payment processor is basically a mediator between the merchant and the banks involved in the process. It transmits the transaction data between the merchant, the issuing bank, and the recipient bank.
It can also process card-based payments such as credit card payments. For this, the processor has to comply with the Payment Card Industry Data Security Standard. Furthermore, it should have the underlying technology to read EMV encryption during card payment transactions.
Suggested Read: List of Best International Payment Gateways in India
There are typically two types of payment processors: online and offline payment processors.
Online payment processors are integrated with the online stores and e-com websites. They work completely in the digital platform where merchants don’t need any other hardware support. The merchant and the customers both need to be online for this payment processor to work.
These payment processors enable the merchants to collect payment through offline platforms. They include a POS like card-swiping machine to facilitate card payment. It checks and validates payment transactions without the need for merchants and customers to be online.
The payment processor works almost in the same way as the payment gateway. Here is how a payment processor works:
Customers go to the checkout page and click to pay by credit or debit card.
Customers submit their card details.
The information is relayed to the payment gateway.
The payment gateway then passes on the transaction information to the payment processor integrated with the merchant.
The payment processor then transfers the transaction details to the card network.
The card network finally relays the information to the customer’s bank, which checks for sufficient funds in the customer’s account.
If there is sufficient funds available, the bank approves the transaction. Then it relays the fund deduction information back to the customer and merchant via the payment processor and gateway.
The fund is simultaneously deposited in the merchant account.
Payment gateways and payment processors are like front-end and back-end in any system.
Payment gateway relays the card details and other necessary payment details to the payment processor. This processor then interacts with the involved financial institutions to complete the payment.
A payment gateway initiates the transaction and the payment processor completes it. A processor also helps in fraud prevention by the gateway in your e-commerce business.
Suggested Read: What are eCommerce Payment Systems in India: Types, Examples & Advantages
In other words, a payment gateway is essentially a tool or an online mode of POS service. By integrating it, merchants can provide a wide range of payment options to the customers.
And payment processors, on the other hand, execute the transactions and collect the payment on behalf of the merchant.
| Payment Gateway | Payment Processor |
| Payment gateway is a tool/service to accept payment. | A payment processor is an intermediary that completes the payments and collects funds. |
| No need for any merchant account for integrating a payment gateway within a website or online store. | A merchant needs a merchant account where the payment processor collects funds and deposits. |
| It initiates the payment process. | It completes the payment process. |
| It interacts between the customer and the payment processor. | It interacts between the merchant and the financial parties involved in the transaction. |
Any online business needs both a payment gateway and a payment processor. They both work together to complete payment processing. Without one, the other one can’t complete the transaction.
For example, if you don’t have a payment processor, the payment gateway only initiates the payment process. However, the process will not go through and result in a failed payment.
Similarly, the payment processor can’t process the payment if it doesn’t receive the initiation from the gateway. So, for this reason, you can’t have an online store without a gateway. Also, without a gateway, you can’t offer various payment modes to the customers, which might impact your sales.
Choosing the right payment gateway will simplify collection of payments from customers. Some of the important factors to keep in mind include:
Costs incurred: A payment gateway usually collects setup fee, transaction fee, and monthly fee from its users. You must consider your user base, the value and volume of your annual transactions, and upcoming expansion plans to determine what payment gateways offer the services you want within your budget.
Payment and currency support: Your gateway must support multiple payment methods to enable customers to pay through whatever mode they want. It must also have currency support for all the countries in which most of your customers reside.
Integration options: Your payment gateway must offer integration with your existing accounting and invoicing software to streamline the entire process. Otherwise, you will have to keep track of all payments and update them manually in the system. This feature will avoid manual errors and save time.
Holding time: Payment service providers usually take 1-7 days of time before settlement of payments. Depending on your cashflow, select a payment gateway that has a holding time within your acceptable limit.
Limit: Some gateways have a monthly transaction limit. You must have a buffer between the number of transactions processed usually and what your payment gateway offers to avoid losing potential clients.
Payment processors must be chosen after utmost research. Major factors to consider while selecting are:
Security: A payment processor is responsible for validation and approval of payments. As financial information is highly sensitive and there are higher chances of fraud, your payment processor must offer reliable fraud protection services. It should encrypt data and deny risky transactions.
Setup and support: The payment processor must not be overly complicated to set up. The vendor must provide support to help you resolve issues you face during any transaction.
Fees: Payment processors may charge additional fees for batch processing, withdrawals, and cancellations. The rates vary according to the payment mode a customer chooses and several other factors. So, make sure that you consider all the fee rates before choosing your processor.
Suggested Read: Payment Reminder Email Templates to Get Timely Payments
Conclusion
Finding the right combination of payment gateway and payment processor is important for your online store to thrive. Secure and fast payment is the key to your success, which can be achieved with trusted gateways and processors.
FAQs
The main difference between a payment processor and a payment gateway is their function. Payment processors process the payment between banks and collect funds for the merchant. A payment gateway offers different payment options and initiates a transaction during online shopping.
Yes, you need both a payment gateway and payment processor for a smooth online shopping experience. They both function together to complete a payment during online purchase.
No, a payment service provider(PSP) is not the same as a payment gateway(PG). A PSP is the entire system from integrating payment methods to setting up merchant accounts and collecting funds to depositing in merchant accounts. A PG is only a part of the PSP.
Yes, you need a payment processor for your e-commerce business. Without a payment processor, you will not be able to accept card payments. Also, the payment gateway cannot function alone while initiating payment transactions.
A gateway enters the transaction process at the start to take the customer’s payment information and after processing to display an approval or rejection of the transaction. A processor validates information received by the gateway at the start and approves requests for transfer of funds.
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