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

Jun 14, 2024

The terms “payment gateway” and “payment processor” are commonly used in the context of electronic and online payments, and they refer to different components of the payment ecosystem.

What is a Payment Gateway?

A payment gateway is a technology used by merchants to accept debit or credit card purchases from customers. It acts as an intermediary that securely sends payment information from the customer to the payment processor.

When a customer enters their payment details (like credit card information) on a website, the payment gateway encrypts this data and sends it to the payment processor. It also communicates the approval or decline of the payment back to the merchant’s site.

Payment gateways implement security measures such as encryption and tokenization to ensure that sensitive payment information is securely transmitted.

What is a Payment Processor?

A payment processor is a company or service that handles the actual transaction processing between merchants and customers. It manages the transaction data and funds transfer between the merchant’s bank (acquiring bank) and the customer’s bank (issuing bank).

The payment processor verifies the transaction details, ensures funds are available, and facilitates the transfer of funds. It also performs fraud checks and validates the security measures enforced by the payment gateway.

After the transaction is approved, the payment processor helps in settling the funds, ensuring that the merchant receives payment for the transaction from the customer’s bank.

The Gateway vs. Processor During the Payment Process

The transaction process is a complex process involving several steps and multiple entities, including both the payment gateway and payment processor. Though they have different roles, the payment gateway and payment processor work closely together to facilitate electronic transactions, for instance, online payments. Here’s how the two work together.

1. Customer Initiates Payment
When a customer makes a credit card purchase and enters their credit card information on a merchant’s website, the payment gateway comes into play.

2. Payment Gateway Secure Transmission
The payment gateway securely captures and encrypts the customer’s payment information. Encrypting the data protects it as it travels through the internet, ensuring that sensitive details like credit card numbers are safe from unauthorized access.

3. Data Sent to Payment Processor
The payment gateway sends the transaction and payment information to the payment processor who works to complete the transaction.

4. Transaction Routing
The payment processor routes the payment request to the appropriate card association (Visa, MasterCard, etc.) and forwards transaction details to the customer’s issuing bank to check for sufficient funds and decide on the transaction’s approval

5. Authorization Request
The card-issuing bank reviews the transaction details, checks the customer’s account for available funds or credit limit, and performs several security checks. The bank either approves or denies the transaction and forwards their response to the payment processor.

6. Response Back to Payment Gateway
Within a matter of seconds, the payment processor forwards the authorization response to the payment gateway.

7. Communication to Merchant and Customer
The payment gateway communicates payment authorization back to the merchant’s website or payment interface for the customer to view. The merchant then completes the transaction if approved, or notifies the customer of the decline.

8. Settlement of Funds
After the transaction is authorized and completed, the payment processor plays another important role in settling funds for the transaction. The processor facilitates the transfer of the approved amount from the customer’s bank to the merchant’s bank account, typically within a few days.

9. End-to-End Security
Throughout this entire process, both the payment gateway and payment processor ensure that the transaction complies with security standards like PCI DSS to protect against data breaches and maintain the integrity of payment data.

Many Businesses Need Both

While the payment gateway serves as the front-end technology that captures and forwards payment data to the payment processor, the payment processor ensures that electronic payments are executed securely and efficiently. For most businesses, especially e-commerce and online businesses, both the payment gateway and payment processor are essential components of accepting electronic payments.

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