Table of Contents
Introduction
Online payment gateways have become an essential part of modern business operations. As more and more transactions are conducted online, businesses need robust credit card processing infrastructure to meet customer demands. In this article, we will explore the benefits of online payment gateways and how they differ from payment processors.
What is a Payment Gateway?
A payment gateway is a secure platform that facilitates the transfer of transaction data between a business and a payment processor. It acts as a digital point of sale, enabling smooth credit or debit card transactions without the need for physical cards.
How does a Payment Gateway Work?
To understand the workings of a payment gateway, let’s consider the involvement of the issuing bank (customer’s bank) and the acquiring bank (business’s bank) in the payment process:
- The customer makes a purchase using their credit or debit card.
- The payment gateway encrypts the customer’s card data and sends it to the acquiring bank.
- The payment gateway identifies the credit card network and sends transaction data to the issuing bank.
- The issuing bank verifies the transaction’s validity and checks the customer’s available credit, if applicable.
- The issuing bank approves or declines the transaction.
- The payment gateway conveys the issuing bank’s decision to the acquiring bank, confirming the purchase is paid.
How to Set up a Payment Gateway
Setting up a payment gateway is typically done through a credit card processing company. This ensures compatibility between the credit card processing and payment gateway infrastructure, reducing the risk of compatibility issues. In some cases, the credit card processor may have its own payment gateway, while in others, it may have a partnership with a third-party company. Carefully review the terms and conditions of your contract to determine the fees associated with payment gateway access.
What is a Payment Processor?
A payment processor facilitates the transmission of data between three crucial parties in a transaction: the business, the issuing bank, and the acquiring bank. Payment processors provide the infrastructure for accepting payments and can assist in setting up a merchant account, which is necessary for accepting credit and debit card payments. Payment processors can be categorized into front-end and back-end processors.
Front-End Payment Processors
Front-end payment processors connect with credit card networks and transaction settlement services to manage merchant accounts.
Back-End Processors
Back-end processors oversee the actual movement of funds among accounts.
Front-end payment processors often contract with back-end processors to provide comprehensive services to clients. Payment processors charge fees for their services, including per-transaction fees, percent-based fees per transaction, monthly statement fees, monthly minimum fees, and annual Payment Card Industry (PCI) compliance fees.
Payment Gateway vs. Payment Processor: Key Difference
The key difference between payment gateways and payment processors is that payment processors oversee the entire transaction process, while payment gateways are primarily responsible for approving or declining transactions. The distinction between the two lies in the types of sales and the level of data encryption required. Understanding these differences can help businesses determine whether they need a payment gateway, a payment processor, or both.
How to Determine if You Need a Payment Gateway or Payment Processor
Businesses that only accept in-person sales, such as restaurants, typically require a payment processor. However, if the point-of-sale terminal is virtual and accessible through a computer, a payment gateway is necessary. Payment gateways are commonly used for online purchasing platforms, facilitating card-not-present transactions. Online businesses must have a payment gateway for online sales, including phone and e-commerce transactions. It is important to note that a payment gateway cannot function without a payment processor. Both payment gateways and payment processors offer excellent data encryption and can be used to transmit transaction data for processing.
The following table summarizes when to use payment gateways, payment processors, or both:
| Use | Payment Gateway | Payment Processor |
|——————————|————————————————————|————————————————————–|
| Card-present transactions | Only necessary if the POS terminal is virtual | Necessary |
| Card-not-present transactions| Necessary | Necessary, but payment gateway handles customer-facing work |
| Data transmission and encryption | Excellent choice | Excellent choice |
Conclusion
Online payment gateways play a crucial role in facilitating secure and efficient transactions for businesses. They provide a digital point of sale for credit and debit card transactions and ensure data security through encryption. Payment processors, on the other hand, oversee the entire transaction process and provide the infrastructure for accepting payments. By understanding the benefits and differences between payment gateways and payment processors, businesses can make informed decisions on which option suits their needs best. With the increasing popularity of online transactions, having a robust payment gateway and payment processor infrastructure is essential for businesses to thrive in the digital age.
