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Payment Processor vs. Payment Gateway — Any Difference?

Posted Apr 3, 2018

If you’re a small business owner, you may sometimes feel overwhelmed by all of the details of running your own business, not to mention the new vocabulary that comes along with it.

Payments, and especially credit card processing, can be challenging if you’re not familiar with the terminology used. (If you still have questions on how card processing works, check out our 6-part blog series Credit Card Processing Explained.)

As you look at accepting debit and credit cards, terms like payment gateway and payment processor may make your head swim. What’s the difference? Do you need both? Neither?

Payment Processor

A payment processor enables merchants, and in particular brick-and-mortar stores, to process credit card payments. They provide the point-of-sale (POS) systems and other equipment needed to allow a store owner to accept credit cards.

In addition to the equipment, a payment processor provides access to the network that enables the exchange of funds from the customer to the store.  The processor will send the card data, via their network, to the cardholder’s issuing bank for approval.  Once the transaction is approved, it will need to be settled, where the acquiring bank will then send the amount to the merchant’s bank account.

Wireless terminals for card processing are becoming increasingly popular for small business

Simpay’s gateway integrates easily.

And you get 1, maybe 2, FREE MOBILE card readers when you switch.

Payment Gateway

A payment gateway, on the other hand, is largely used by e-commerce merchants. A gateway provides the ability to handle card-not-present or MOTO (mail order/telephone) purchases.  It allows for the secure transmittal of the payment information to the payment processor so that the rest of the process can continue.

Payment gateways provide a number of advantages for mail-order and e-commerce merchants, including offering a secure means of automatically processing payments. Some gateways come bundled with shopping cart software, while others integrate with e-commerce software, providing self-service checkout for customers.

Payment Aggregators

We would be remiss if we didn’t also talk about payment aggregators. These services – like PayPal, Stripe, and Square – allow smaller merchants to accept credit cards. They are neither processors nor gateways.

An aggregator has established a merchant account to accept credit cards.  They have access to the card processing network. Very small merchants, those who do not process much card sales volume, can’t afford to establish their own merchant account.

An aggregator then gives access to its merchant account to these smaller sellers for a set fee per transaction.  Now the smaller merchant can accept card payments in a cost-effective manner.

However, as that smaller seller grows, there will come a point when the per-transaction fees of the aggregator exceed the cost of setting up their own merchant account.  At Simpay, we suggest any merchant who is processing $3000 a month, or more, in credit card sales, sit down for a discussion about converting to their own card processing account.

For a deeper understanding of aggregators, check out our blog, Understanding Why Your Money Takes Time To Hit Your Merchant Account & Batch Processing.

Still wondering if you need both a payment processor and a gateway? Consider if you’ll be doing online payments for your business or other kinds of non-swipe type payments. If not, then you won’t need a payment gateway. In either case, though, you do need a payment processor to handle the data communication between the different payment elements.