In order to provide a smooth payment experience to your customers, it is crucial for you as a business to know the distinction between a payment gateway and a payment processor. Nowadays, users prefer making payments through digital modes. Choosing the proper payment processing is crucial to ensure the success of your online business.
According to a survey, more than 85% of people in the UK made payments online last year. Therefore, it is intrinsic that digital payment processes are carried out smoothly and without hassle. When payments are made smoothly, you can encourage customer loyalty. In order to accept payments online, you will need a payment gateway and a payment processor.
Both of them have the same role, but they work differently when it comes to handling, processing and completing online transactions. This blog discusses the difference between a payment gateway and a payment processor and factors that you should consider while choosing them for your business.
Key differences between payment gateways and payment processors
Payment gateways and payment processes are both used to ensure smooth payment transactions online, but they have different roles.
A payment gateway collects payment data from customers and encrypts it for its smoother transfer to a payment processor. The sale is transmitted to the payment processor when it confirms the details are accurate.
Then, the role of a payment processor starts. It communicates between merchants, banks and retailers and ensures the transfer of funds from one account to another.
A payment gateway, such as PayPal, Stripe and Helcim, is customer-facing, while a payment processor is on the back end.
A payment gateway protects customer data by using encryption technology, while a payment processor verifies transactions before completing them.
Payment gateways charge monthly fees while payment processors charge transaction fees.
What is a payment gateway?
A payment gateway is a software tool that aims to collect customers’ debit and credit card details for a purchase, whether you make it through a website or a point-of-sale terminal. The best part about the payment gateway is that it encrypts data in order to protect your card details. When the payment is initiated by you, the payment gateway notifies the payment processor to complete the payment. It is the payment gateway that informs you of the payment approval or payment declined response that it receives from the payment processor.
In other words, you can say that the payment gateway is like a bridge between a customer and a business. Payment gateways provide easy integration options. There are built-in modules that help businesses start accepting online payments quickly. Various payment gateways offer multi-currency and multi-language support to carry out international payments.
There are basically two types of payment gateways: integrated payment gateways and third-party gateways. The former, also known as white-label gateways, are built into a merchant’s ecommerce platform that allows customers to stay on the merchant’s website while making a transaction. The latter redirects you to an external link to complete the transaction and then brings you back to the merchant’s website.
Payment gateway software provides enhanced protection against fraud by using CVV and address as verification methods. Examples of payment gateways include Stripe, Shopify, PayPal and Braintree.
What is a payment processor?
A payment processor is responsible for transmitting data that the payment gateway collects from customers to a card network to complete the payment. Payment apps such as Google Pay also rely on payment processors to complete the payment. A payment processor acts like an intermediary that is responsible for ensuring the customers’ identities.
Once the identification and verification are done, it notifies the payment gateway whether the transaction is approved or declined. When the transaction is approved, the payment processor smoothly moves funds from your bank account to the merchant’s account. This whole process takes a couple of seconds to complete.
Payment processors charge transaction fees. It could be calculated as a percentage of each transaction amount or per transaction. Better pricing is available for high-volume sales. Payment processors, like payment gateways, are also responsible for providing additional services such as fraud detection, refund and regulatory compliance. Examples of payment
processors include PayPal, Stripe, Adyen and Worldpay.
Factors to consider when choosing a payment gateway for your business
Choosing between payment systems can be quite challenging, whether you are running an ecommerce store or a direct lender providing loans for bad credit with no guarantor. Consider the following factors:
Your business model
First off, you need to consider your business model. Are you running an ecommerce store? Or do you need it for a point-of-sale system? Maybe you need it for both. Do you want a third-party checkout? Your business model will help you decide which one you should choose.
Transaction fees and costs
Various providers are offering these services. You should compare their fees. Some charge higher transaction fees while others charge lower. In addition, you will have to pay monthly charges and chargeback fees. Some payment gateways charge additional fees apart from the processor fees.
Security and compliance
While choosing a gateway, you must ensure that it complies with security and fraud prevention features. Each payment gateway varies when it comes to security and compliance. It is always suggested that you choose a payment gateway very carefully because otherwise, it might put customers’ personal and financial information at risk. This is especially true in the case of direct lenders.
Integration
The next thing you need to look at is the integration. The payment gateway you want to use could be integrated with your website and invoice system. Some payment gateways offer plug-and-play options, while others do not. Some payment gateways require developer support.
Customer experience
While choosing a payment gateway, you must ensure that it delivers a fast checkout process. It must be completed within a couple of seconds. The more seamless experience it offers, the better it is. Your customers will be able to trust your business as well.
International payments
If you have international clients to whom you sell products, be sure to choose a payment gateway that is able to process international transactions. It must be able to select foreign cards and currencies.
The bottom line
Choosing the right payment gateway is a must if you do not want to lose the faith of your customers. Understand your business model and then decide which one suits your business needs best. Payment gateways are connected to payment processors. So, make sure that you research all your options before finalising the one. When you choose one, you are already getting the other. Prioritise features you need to run your business efficiently.