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How do Payment Gateways and Payment Processors differ?

Features & updates - 6 Mar, 2024

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In today’s digital world, secure and seamless online transactions are crucial. Two key players behind the scenes are payment gateways and payment processors. But what exactly do they do, and how are they different?

While their names sound similar, payment gateways and processors serve distinct purposes in facilitating online payments. Understanding the difference can help businesses choose the right tools for their needs. This article will explore the roles of each and how they work together to ensure smooth and secure online transactions.

Payment Gateway: What is it?

A payment gateway is the front-end technology responsible for authenticating and securely transmitting payment data between different parties involved in the payment process. It reads payment cards and sends customer information to the merchant-acquiring bank for processing. It acts as a network through which your customers transfer funds to you.

Payment gateways typically handle a variety of payment methods, including credit cards, debit cards, net banking, UPI, and even digital wallets. They ensure a smooth and secure checkout experience while safeguarding the financial information of both you and the merchant.

What is the meaning of Payment Processor?

A payment processor is your trusted partner for handling electronic transactions in the business world. Imagine them as the bridge between your business and your customers’ banks. When a customer pays for your goods or services using a credit card, debit card, or digital wallet, the payment processor steps in to securely handle the following:

Authorization: They verify the customer’s card details and ensure sufficient funds are available.
Transfer: They facilitate the secure transfer of money from your customer’s bank account to yours.
Settlement: They handle the final settlement of the transaction, ensuring you receive the funds minus any processing fees.

Outsourcing payment processing frees your team to focus on what matters most - running your business. Payment processors also provide additional benefits like fraud prevention and data security, allowing you to accept payments with peace of mind.

Difference Between Payment Gateway & Payment Processor

Two key players work behind the scenes in online transactions to ensure smooth and secure payments: payment gateways and payment processors. While their functions are intertwined, they serve distinct purposes.

Here’s a breakdown to help you understand the difference:

Feature	Payment Gateway	Payment Processor
Definition	A secure online portal that collects customer payment information and transmits it to the processor.	A financial service that authorizes and settles the payment between the customer’s and merchant’s banks.
How it Works	Acts as a middleman, encrypting customer data and sending it to the processor for verification. It also displays payment options and handles the user interface during checkout.	Handles the communication between banks, verifies funds, and facilitates money transfers. It operates in the background, invisible to the customer.
How to Choose	Consider factors like transaction fees, supported payment methods, security features, and ease of integration with your online store.	Look for reliability, processing speed, fraud prevention tools, and customer support options.
Use Cases	Ideal for online businesses accepting payments through websites or mobile apps.	Essential for all businesses processing card payments, both online and in-person.
Facilitates Payment	Yes, indirectly. It securely transmits payment information but doesn’t handle the authorization or transfer of funds.	Yes. It’s the core engine that verifies and settles the transaction.

Choosing the Right Partner

A payment gateway and a payment processor are crucial for businesses accepting online payments. When choosing these partners, prioritize security, transaction speed, and cost-effectiveness. Some companies, such as Easebuzz Payment Solutions, offer both services combined.

By understanding the distinct roles of payment gateways and processors, you can make informed decisions to ensure a smooth and secure online payment experience for your customers.

Elements Involved in Payment Processor

A complex web of participants works together for every seamless online transaction to ensure a smooth and secure money flow. Here’s a breakdown of the critical elements involved in payment processing:

Customer: You are the individual making the purchase. You initiate the transaction by entering your payment information on a merchant’s website or app.
Payment Gateway: This acts as the bridge between your web browser and the banks involved. It securely transmits your payment details to the relevant parties for authorization.
Acquiring Bank (Merchant’s Bank): The bank holds the merchant’s account where payments are received. The acquiring bank receives the transaction request from the payment gateway and verifies that the merchant’s account is active.
Card Networks (e.g., Rupay, Visa, MasterCard): These networks act as intermediaries between the acquiring and issuing banks, facilitating communication and ensuring the validity of the card details. They also set global standards for secure transactions.
Issuing Bank (Customer’s Bank): Your bank holds the account linked to your debit or credit card. The issuing bank receives the authorization request from the card network, verifies your account details and available funds, and approves the transaction based on pre-set security measures.

The Flow of a Transaction

You initiate the payment on a merchant’s website.
The payment gateway securely transmits your card information.
The acquiring bank receives the request and verifies the merchant.
The card network facilitates communication between banks.
Your issuing bank verifies your account details and approves the transaction.
The acquiring bank credits the merchant’s account and you receive confirmation.

This streamlined collaboration ensures a secure and efficient payment experience for you and the businesses you patronize.

How Does a Payment Gateway Work?

A payment gateway is a secure bridge between your business and customers during online transactions. It ensures a smooth and safe flow of information, protecting both parties. Here’s a breakdown of how a payment gateway works:

Data Encryption

When customers enter their payment information on your website or apps, the payment gateway encrypts it. This scrambles the data using complex algorithms, making it unreadable to anyone who might intercept it. This protects sensitive information like credit card numbers from falling into the wrong hands.

Secure Connection

The encrypted data is then transmitted over a secure connection established by the payment gateway. This connection uses protocols like HTTPS, which adds an extra layer of security to prevent data breaches.

Authorization Request

Once the secure connection is established, the payment gateway sends an authorization request to the customer’s (issuing bank) bank. This request includes the encrypted payment information and the transaction amount.

Bank Approval

The issuing bank receives the request and verifies the customer’s details and available funds. If everything checks out, the bank approves the transaction and sends an authorization response back to the payment gateway.

Transaction Complete

Upon receiving the bank’s approval, the payment gateway finalizes the transaction. It sends a notification to your business system confirming the successful payment, and the customer also gets a confirmation message. Finally, the funds are transferred from the customer’s account to your merchant account, typically within a few business days.

Payment gateways handle these steps securely and efficiently, ensuring a smooth and trustworthy online payment experience for your business and customers.

Where can the Payment Gateway be used?

Payment gateways are the workhorses of modern commerce, enabling businesses of all sizes to accept secure online payments. Here’s how they can benefit your business:

E-commerce Stores

This is the most common use case. Payment gateways allow customers to pay seamlessly for products and services on your website. This flexibility is crucial for attracting customers who prefer the convenience of online shopping.

Small Businesses

Payment gateways eliminate the need for complex merchant accounts, making it easy for small businesses to accept online payments. This opens doors to a broader customer base and simplifies transactions.

Subscription Services

Payment gateways are ideal for recurring billing models like subscriptions. They can securely store customer payment information and automatically process payments at designated intervals, ensuring a smooth and uninterrupted service experience for your customers.

Donations and Fundraising

Payment gateways make it easy for donors to contribute to your cause online. This allows you to reach a wider audience and streamline the donation process, boosting your fundraising efforts.

Beyond these core applications, payment gateways can be used for:

Selling digital products: eBooks, software, online courses, etc.
Taking bookings and appointments: Schedule appointments and collect payments simultaneously.
Ticketing events: Sell tickets for events online and manage registrations efficiently.

In short, a payment gateway can be valuable if your business involves any online transaction. It streamlines the payment process for your customers, improves security, and opens doors to new revenue opportunities.

When can a Payment Processor be used?

In today’s digital age, convenient payment options are crucial for business success. A payment processor is a behind-the-scenes hero, streamlining transactions and ensuring smooth cash flow. But when exactly does your business need this powerful service?

High Transaction Volume

If you handle many daily transactions, a payment processor becomes indispensable. Manually processing each payment can be time-consuming and prone to errors. A payment processor automates the process, saving you valuable time and resources.

Credit Card Payments

A payment processor is a must if you want to accept credit cards. They handle the complex authorization process by issuing banks, ensuring secure transactions, and protecting your business from fraud.

Point of Sale (POS) Systems

Many businesses use point-of-sale (POS) systems for in-person transactions. These systems often integrate seamlessly with payment processors, allowing you to accept various payment methods, from contactless cards to digital wallets, all at a single terminal.

Global Expansion

Are you planning to expand internationally? Payment processors can be a game-changer. They often support multiple currencies and global payment networks, simplifying cross-border transactions.

Beyond the Basics: Additional Advantages

Payment processors offer a range of benefits beyond core functionalities. Many provide features like:

Fraud prevention tools to minimize the risk of unauthorized transactions.
Detailed reporting to gain insights into your sales trends and customer behaviour.
Inventory management solutions (integrated with some processors) to streamline stock control.

Making the Choice

Whether to use a payment processor depends on your business size, transaction volume, and future goals. Suppose you’re dealing with a high volume of transactions, accepting credit cards, or planning international expansion. In that case, a payment processor can be a strategic investment that boosts efficiency and fuels your business growth.

Conclusion

Do you need clarification about choosing a payment gateway and processor for your business? Don’t worry—it’s a common hurdle. Here’s a quick recap to simplify your decision.

Payment gateways prioritize security as a bridge for customers to enter their payment information during online purchases. They encrypt sensitive details and handle the initial authorization process. Payment gateways are ideal for businesses starting with e-commerce, typically charging per transaction.

Payment processors, on the other hand, excel in handling high transaction volumes. They work directly with banks to verify funds and facilitate transfers. Processors often charge based on volume, with additional per-transaction fees.

A payment gateway is a significant first step for an online store that prioritizes customer security. However, a payment processor can ensure efficient, high-volume processing for businesses that process many transactions.

FAQ's: Choosing the Right Payment Processing Solution for Your Business

Finding the perfect payment processing solution can feel overwhelming. This FAQ aims to simplify the process for businesses like yours:

How many payment processors are there to choose from?

There isn’t a single definitive answer. The landscape constantly evolves, with new providers emerging alongside established players like PayPal, Easebuzz and Stripe. The key is to find a processor that aligns with your specific needs and transaction volume.

What are the different types of payment processors?

Payment processors generally fall into five categories:

Traditional Merchant Account Providers: These offer a complete suite of services, including merchant accounts, payment gateways, and risk management tools. Ideal for established businesses with high transaction volumes.
Payment Gateways handle the secure transmission of customer payment information and initial authorization but rely on a separate processor for settlement. They are well-suited for businesses starting with online payments.
Payment Aggregators simplify the setup process by bundling merchant accounts, gateways, and other services. Often, it is a good option for smaller businesses or those in high-risk industries.
Mobile Wallets: Think Apple Pay or Google Pay. These allow customers to pay directly from their smartphones, offering a convenient checkout experience.
Cryptocurrency Payment Processors: As the name suggests, these handle transactions involving cryptocurrencies like Bitcoin. They are suitable for businesses looking to cater to a tech-savvy audience.

Can a payment gateway function without a payment processor?

No. Think of the Gateway as a secure entry point for customer information. It captures the data and sends it to the payment processor, which verifies the transaction and handles the funds transfer.

How do payment processors help manage risk?

Payment processors employ sophisticated security measures to protect your business from fraudulent transactions and chargebacks. They analyze transactions for suspicious activity and may require additional verification steps for high-risk situations.

Payment Gateway vs. Payment Processor: What’s the Difference?

Both are crucial for online payments, but they play distinct roles:

Payment Gateway: This Gateway encrypts and transmits customer payment information for axuthorization. Imagine it as a secure checkout counter on your website.
Payment Processor: The payment processor handles the behind-the-scenes work, verifying funds, facilitating bank transfers, and settling the transaction. Think of it as the back office that ensures everything runs smoothly.