Merchant Account vs Payment Gateway vs Payment Processor: How They Differ

When you start conducting business online, setting up the means to accept payments from your customers is a crucial first step. Understanding the difference between a merchant account, a payment gateway and a payment processor can help you take payments efficiently and securely.

While these terms may appear intimidating at first, each serves a unique purpose in the payment journey from your customer’s pocket to your business bank account. This article unravels the mystery behind these payment facilitators so you can make an informed choice for your business.

Merchant Accounts, Payment Gateways, and Payment Processors Compared

When selling products or services online, you need a way to handle payments. This involves using a combination of a merchant account, a payment gateway, and a payment processor. Each plays a role in the payment process, ensuring transactions are completed successfully and your customers’ financial data remains safe.

Think of the process like a team, with each player having a specific role: the merchant account handles the funds, the payment gateway authorises the transaction, and the payment processor completes the payment flow. 

• Merchant account: This is where the money from card transactions is held before it’s sent to your business bank account.
• Payment gateway: A payment gateway acts as a doorway between the merchant account and the payment processor, securely taking your customer’s payment details and sending them to the right place for processing.
• Payment processor: This is the engine behind the scenes. It checks the transaction details, runs security checks, and moves the money from your customer’s bank to your merchant account.

Merchant Account vs Payment Gateway vs Payment Processor

As you can see, each component plays an important role in ensuring payments are processed smoothly. Let’s look at each of these parts in more detail.

What Is a Merchant Account?

A merchant account is a specialised type of bank account designed specifically for businesses to accept and handle payments made by credit and debit cards. Think of it as a holding pen for card payments; once a customer makes a card payment, the funds are first deposited into the merchant account before they’re transferred to your business’ standard bank account.

This account plays a central role in the card payment processing cycle. When a card transaction occurs, the payment processor communicates with the customer’s issuing bank to authorise the transaction. 

Upon approval, the funds are captured and routed to the merchant account. The funds typically sit in the merchant account for a short settlement period, which can range from a few hours to a few days, depending on the terms set by the merchant services provider.

Having a merchant account enables your business to process card payments securely and efficiently, ensuring timely fund deposits into your bank account.

Who Needs a Merchant Account?

You need a merchant account if you aim to accept debit or credit card payments directly, especially if you run an ecommerce platform or any form of business with a significant volume of card-based transactions.

That said, it’s possible to accept card payments without a merchant account with services like PayPal. Read our Merchant Account vs PayPal article for more information.

What Is a Payment Gateway?

A payment gateway is a service that facilitates the secure transfer of payment data from the customer to the merchant and onward to the payment processor. It acts as the digital equivalent of a physical point-of-sale terminal you find in retail shops. 

When you purchase an item online, the payment gateway springs into action, encrypting and routing your sensitive payment information to the appropriate financial networks for processing.

The payment gateway’s role in the transaction process begins the moment the customer hits the ‘buy’ button. The gateway encrypts their card details and securely sends this data to the payment processor. The processor then verifies the transaction with the customer’s bank. 

Once the transaction is approved or denied, the payment gateway communicates the outcome back to the website. This entire process happens almost instantaneously, ensuring a smooth and rapid checkout experience for customers.

What Else Do Payment Gateways Do?

In addition to encryption and data transmission, payment gateways often provide features such as fraud prevention tools, the ability to process multiple currencies and payment methods, and integration with other ecommerce systems, like shopping cart software.

For a business, choosing the right payment gateway is important. It needs to be reliable, secure, and user-friendly to maintain trust with customers and ensure that transactions are processed without issues.

Who Needs a Payment Gateway?

If you own an online business or accept payments through a website, you’ll need a payment gateway to secure customer payment data and link your site to the payment processor. If your business only operates in physical locations, you may not require a payment gateway.

What Is a Payment Processor?

A payment processor is a service that acts as a mediator between the merchant’s payment gateway, the customer’s bank (issuer), and the merchant’s bank (acquirer). 

Essentially, the processor executes the logistical work of transaction verification and authorisation, ensuring that payment details relayed by the payment gateway are correct and funds are available for the purchase.

After the payment gateway encrypts and transmits the customer’s card data, the payment processor receives this information and validates it against the card network and issuing bank to guard against fraud and confirm fund availability. 

Following successful authentication, the processor sends authorisation back to the payment gateway, which allows the transaction to be approved or denied.

What Else Do Payment Processors Do?

Aside from authorisation, payment processors manage the settlement of funds, transferring the approved amounts from the issuing bank to the merchant account. This includes the deduction of any applicable fees before the net amount is deposited into the merchant’s primary bank account.

Payment processors maintain the integrity of the electronic payment system by ensuring secure, efficient, and reliable transactions. They offer various services, including reporting tools for the merchant to track transactions and reconcile accounts. 

Additionally, processors must comply with industry security standards, such as the Payment Card Industry Data Security Standard (PCI DSS), to protect sensitive cardholder data.

Who Needs a Payment Processor?

Every business that accepts card payments, whether online or in-person, requires a payment processor to handle the transaction details securely and efficiently. Without this service, card payments can’t be received or settled.

How Do Merchant Accounts, Payment Gateways, and Payment Processors Interact?

To better understand the roles of a merchant account vs payment gateway vs payment processor, let’s look at how these elements work together to take credit card payments:

1. A customer decides to purchase a product or service from your online shop and proceeds to the checkout page. At checkout, the customer enters their credit card details, which activates the payment gateway.
2. The payment gateway secures the customer’s card information by encrypting the data to prevent unauthorised access during the transaction. The encrypted card details are sent from the payment gateway to the payment processor.
3. The payment processor’s role is to further facilitate the transaction by verifying and authenticating the payment details.
4. The payment processor communicates with the customer’s card-issuing bank to check if the transaction is valid and if sufficient funds are available.
5. The bank responds with an approval or denial of the transaction.
6. If authorised, the payment processor relays this confirmation back through the payment gateway to your website. Your website then displays a message to the customer confirming the successful transaction.
7. Once the transaction is confirmed, the payment processor captures the funds from the customer’s bank.
8. The captured funds are deposited into your merchant account, where they’re held temporarily.
9. After a standard settlement period, the funds in the merchant account are transferred to your business bank account.
10. You now have access to the funds from the completed sale.

This process provides a seamless transaction experience for both you and your customers.