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How A Payment Gateway and A Payment Processor Differ

by Uneeb Khan

A payment gateway and payment processors are different in their approach and function. However, since many people do not know the differences between the two, they sometimes use them interchangeably. 

This article will look at the basic differences between these online payment platforms and the benefits they offer online businesses. 

What is a Payment Gateway? 

A payment gateway is a system that enables secure communication between various parties, i.e., merchants, customers, banks, and card networks to facilitate online transactions. It uses a series of failsafe processes to ensure there is zero risk of unauthorized access to the information shared via technologies such as encryption and tokenization making it near impossible to detect what is shared. 

What are Payment Processors? 

A payment processor is a service designed specifically to deal with customer transactions. It works by relaying payment-related information from the customer’s cards to the issuing and acquiring points. Apart from servicing online transactions, it also offers a point-of-sale interface through card machines for offline transactions. 

Key Difference Between the Two 

Let us dive deeper to understand the key differences between the two, now that we have a basic understanding of the two systems. Here is how they differ!

  • A payment processor routes information-related data securely to concerned parties from the moment a checkout has been initiated till the final fund settlement takes place.
  • A payment gateway is a communication tool responsible for communicating transaction approval/decline between the merchant and the customer

As you can see, while the former takes care of the transaction, the latter communicates the status of the payment to the concerned parties, i.e., the merchant and customer.

Do Online Businesses Need Both? 

In short, yes. Unless both the systems work in tandem, it is not possible to accept online transactions. Let us look at how the process works:

  • A customer selects a product or service, after which the relevant information is shared with the payment gateway
  • The payment gateway then encrypts that data and shares it with the payment processor
  • This information is then shared by the payment processor with the issuing bank, i.e., the customer’s bank to check for adequate funds
  • The issuing bank shares an approval/decline status with the payment processor
  • This information is then relayed back by the payment processor to the payment gateway
  • The payment gateway then shares this information with the merchant and asks the merchant bank to credit the account with the requested fund

Both systems work in conjunction to make digital transactions possible, and a business needs both systems if they wish to accept any kind of digital payment from customers.

How to Choose a Payment Processor? 

Choosing a payment processor requires figuring out a few things. Let us look at the criteria you should be watching out for!

  • Fees: It is best to compare different payment processors and choose one that offers you the most cost-effective plan at a fee that is feasible for your business.
  • Security: Choose a payment processor that comes with layers of security in place to ensure that all transactions take place securely so that a business’s reputation can be maintained.
  • Customer Support: Look for a service provider that offers excellent customer support so that any issues can be addressed. 
  • Customizable: As the size of the business grows, so should the product. It is important that the payment processor can accommodate various needs at different stages of the business.

How to Choose a Payment Gateway? 

There are several payment gateway service providers in India and you should choose one that is most cost-effective and efficient for your particular business.

  • Cost: Cost plays an important factor. From set up fees, annual maintenance charges, and monthly fees to transaction charges, everything needs to be factored in before choosing one for your business.
  • Holding Time: Although transactions happen quickly, settlements typically take anywhere between 1-7 days before finally hitting the business account. But it can take longer with some service providers; therefore, it is a good idea to find out the holding time before choosing a payment gateway service provider.
  • Multiple Currency Support: If you run an international eCommerce site, or plan to expand internationally in the future, you would need a compatible payment gateway. Check to see if a payment gateway supports international payments, and the number of different currencies it can accept.
  • Recurring Billing: If your business is into selling subscriptions, then you would want a service provider that offers recurring billing. It will ensure a smooth onboarding process for customers by allowing you to deduct the charges at specified periods without sending repeated reminders to them for making payments.

Both a payment gateway and a payment processor are crucial for accepting online payments as well as providing them with a secure and seamless transaction process. 

Now that we have covered all there is to know about these systems, we hope that as a business owner, you would be able to make an informed decision and set up your business on the way to success!

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