Payment gateway vs payment processor vs merchant account

Payment gateway vs payment processor vs merchant account featured image

By Rob Binns | Senior Writer

Jargon-busting the most confusing terms in the card payments industry

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The payments industry is full of so much jargon that five minutes of research is enough to drive a person mad. Gateways, processors, providers, merchant accounts… just what does it all mean?

It can be hard to get a solid answer to that question. The internet’s full of conflicting information, and hair-tearingly complex explanations. Different terms get used interchangeably, or are badly misused.

That’s why our in-house experts have sprung into action, providing a go-to guide to those key terms you’re always hearing about in the payments space. Get clued up, impress your family and friends, and find out everything you need to start taking card payments for your business.

Before we start:

When your customer buys something from your business, the transaction goes through a payment gateway and is approved by a payment processor. The funds then arrive in your merchant account, where they are settled by the acquiring bank, before arriving in your business bank account.

What is a payment gateway?

A payment gateway is the technical component in a card transaction. It’s basically a piece of software that does the initial security checks when you sell something online.

A payment gateway authorises the transaction and helps prevent fraud. It also makes sure your customer has enough money to complete the payment.

So why do you need one?

Well, because card details are sensitive, it’s actually illegal to transmit them directly from your website to a payment processor. That’s why a payment gateway is an essential step in the whole data transfer process.

A payment gateway is provided either by your acquiring bank, or by a Payment Card Industry (PCI) compliant merchant services provider.

There’s also the option of going with a third party payment gateway provider, such as Authorize.Net. These are separate payment gateways that integrate with your existing merchant account. They provide a more dynamic – but less simple – solution for your ecommerce website.

An acquiring bank (or just acquirer) is a bank that processes credit and debit cards for merchants.

An issuing bank is a bank that provides cards for consumers to pay with.

What is a merchant account?

A merchant account is what your business needs to accept credit and debit card payments. It’s not the same as a business bank account – it’s where the funds you accept go before they reach your business account. A kind of waiting room, or holding pen.

A merchant account can be thought of as the contract between the merchant (that’s you), the acquiring bank, and a payment processor. The goal is to let you accept mobile, credit, debit, and contactless card transactions.

Merchant accounts are provided by merchant acquirers like Worldpay, Elavon, and Barclays. These suppliers offer a dedicated merchant account, and look after the relationships with big card networks like Visa and Mastercard.

You can also get a merchant account through an Independent Sales Organisation (ISO). These are companies like takepayments, Handepay, Paymentsense, and Retail Merchant Services. They partner with the acquiring banks to recruit small businesses, and support them in accepting card payments.

ISOs use their big networks of small merchants to get lower rates from the acquiring bank. This means they can offer great savings when it comes to taking card payments.

What are the types of merchant account?

Dedicated merchant account

Exclusive to your business. Funds are deposited via your acquiring bank – not by a third party company. It’s a safer way of doing things, but can be cumbersome to set up and expensive in the long run.

Aggregated merchant account

Batches your transactions together with those of other merchants. Funds are held by the payment service provider, and when it deposits them is at the provider’s discretion – so make sure you read the small print.

High-risk merchant account

Tailored to businesses with bad credit, or that operate in a high-risk industry like travel or online pharmaceuticals. As you’d expect, these accounts come with larger fees.

Merchant account providers

  • Worldpay
  • Global Payments
  • Sage Pay
  • CashFlows
  • First Data
  • Lloyds Pay Cardnet

▶ Read more: UK merchant account comparison 2019

What is a payment processor?

Payment processors are third party financial platforms. They work with both banks and merchants to move money around the card networks.

A payment processor is what connects your bank with that of your customer. It quickly relays information between the two parties to ensure fast, secure transactions. The goal? Making sure your money ends up in the right place.

This ‘connecting the dots’ used to all be done by the acquiring banks themselves. However, these days it’s generally outsourced to payment processors, such as First Data.

Payment processors as merchant accounts

Payment processors also work with banks as a kind of ‘reseller’. This means they can offer merchant services directly to businesses. Big companies like PayPal, Amazon Pay, Square, and Stripe do this – they’re known as aggregated processors. Unlike traditional merchant account providers, they process your transactions in batches – through their own merchant account.

This option is easier to set up, and is a more flexible and cost-effective way for SMEs to start taking card payments. It also comes with less of the intensive underwriting and credit checks done by merchant account providers.

However, because funds are being held by a third party (rather than directly with the merchant bank), you don’t have as much control over them – or when they’re paid out.

What’s the difference?

The payment gateway is the technical element; the software that transfers the cardholder’s information to the payment processor.

The payment processor is the company that then takes over, authenticating the transaction and relaying information between the acquiring (yours) and the issuing (your customer’s) bank accounts. It secures – and ultimately approves – the transaction.

The merchant account is where the funds are settled by the bank, before they’re paid out after an agreed period to your business bank account.

Payment gateway vs payment processor vs merchant account

Thankfully, accepting card payments is easier than understanding the lingo!

The payment process (in plane English)

  1. The process of a card payment transaction is like a journey – so let’s look at it like going through an airport and getting on a flight abroad.
  2. The payment gateway is the first bit. You check in, grab your boarding pass, and flash your passport. This is the first bit of verification that you – like the funds – have to go through. You’re authenticated, identified, and beckoned through to customs.
  3. Customs acts like the payment processor. It’s where the transaction (or the holidaymaker) undergoes further thorough checks, and is approved by security. If everything’s above board, that transaction gets approved – and you’re through to the departure lounge.
  4. The departure lounge is like the merchant account. It’s where the funds have to sit briefly before they can be paid into your business account. And it’s where you have to spend a bit of time before you’re ready to take off.
  5. Once that’s all done, the money’s in your business account, and you’re on a plane, margarita in hand – ready to spend your hard-earned takings in the sun.

Next steps

Grass is green, water is wet… and the terminology of the payments ecosystem is still frustratingly complex. Fully getting to grips with the nuances of all the slippery semantics involved is not an easy task.

Thankfully, though, it is easy to start taking payments. We work with providers that offer all-in-one solutions for accepting card transactions – payment gateways, card machines, merchant accounts, the lot. To get quotes from our approved suppliers, take a minute to complete our quick form. It’s free of cost – and jargon!

Rob Binns Expert Market
Rob Binns Senior Writer

Rob writes mainly about the payments industry, but also brings industry-specific knowledge of CRM software, social media monitoring, and invoice finance. When not exasperating his editor with bad puns, he can be found relaxing in a sunny corner, with a beer and a battered copy of Dostoevsky.

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