Payment gateway vs. payment processor


Online sales continue to grow and have increased sharply during the COVID-19 pandemic. Over the past two years, the industry has received an additional impetus for growth. According to American Express Digital Payments, 71% of online store managers agreed that their sales through mobile services have increased.

However, an online store must choose suitable systems to work through online sales successfully. Often companies face problems with the choice. This is especially true for those who are just starting and lack relevant experience. To make the right choice, you need to know what a merchant account is, how a payment processor differs from a payment gateway, and what current online payment solutions are.

What is a payment processor?

A payment processor is required to execute a transaction between three parties. They include:

  • The seller — the online store.
  • Issuing bank – the bank that issued the customer’s card making the purchase.
  • Acquiring bank – the bank where the seller’s merchant account is opened.

In addition to directly processing payments, the processor provides the necessary software for accepting payments.

Payment systems act as an intermediary between businesses and banks directly involved in a financial transaction. After the client enters their bank card details, the payment processor ensures that the transaction is carried out. In addition, it performs encryption, transmits information between participants, and receives responses from the parties.

Knowing what payment methods are available in modern online stores is also important. There are several options:

  • Credit and debit cards;
  • Electronic wallets;
  • Bank/ACH payments;
  • Contactless payment (for example, Apple Pay or Google Pay);
  • Cryptocurrencies.

You can offer customers these payment options or select specific ones. But, again, it depends on the specifics of your store and your understanding of particular tools.

What is a payment gateway?

A payment gateway is a tool whose task is to receive and transmit payment data to the payment processor. The payment gateway works at the first and last stages of the payment. After the client enters information about their payment instrument, the gateway encrypts and transmits it to the payment processor. Also, payment gateways inform about the transaction’s status – permission or refusal to conduct a financial transaction.

Main types of payment gateways

It is important to know about the main types of payment gateways for business owners who are just starting to accept online payments. There are two of them:

  • A traditional payment gateway helps merchants accept payments directly online. It provides acceptance of payment information that the client enters. This information can also be entered into a hosted payment form or mobile application, depending on how the store functionality is implemented. Clients enter data into the virtual terminal manually.
  • Digital payment gateway. These payment gateways are much more functional. They can be used not only on the Internet but are also suitable for companies with physical sales points. For example, a digital gateway allows a transaction to be processed through a PoS terminal or mobile device. With it, you can accept payments using NFC technology.

Thus, the traditional gateway payment providers are suitable for companies that operate only online. At the same time, the digital payment gateway can be used for both online and offline sales.

Payment processor vs. payment gateway: what’s the difference?

We found out what a transaction processor and a payment gateway are. However, what is the crucial difference between them? These are two completely different technologies that have completely different tasks.

The payment processor ensures that financial information is transmitted directly to banks. It transmits the data to the issuing bank and the acquiring bank, from where appropriate confirmations should come. A payment processor is essential for all financial transactions using a bank card. It doesn’t matter if the sale is online or offline.

The payment gateway is responsible for receiving payment information from the client, data encryption, and subsequent transmission to the payment system. Also, the gateway receives information from the payment processor about whether the transaction was confirmed or rejected, and the client gets the relevant information. Payment gateways are typically used for e-commerce transactions. However, they can be used to conduct transactions through bank card readers or POS systems.

What should be considered when choosing a payment gateway?

As a rule, payment gateways are used to accept payments for goods or services on the Internet. However, in the modern world, the scope of their use has expanded. For example, you can ensure conducting a financial transaction through all sales channels. Moreover, gateways can be integrated with accounting or CRM systems. If there is such a feature, it is a factor in favor of a particular gateway.

Not all merchant account providers offer proprietary payment gateways. In some cases, third-party gateways are used. This can create complications if a dispute arises. In this case, it can be challenging to determine at what stage the problem with the transaction occurred. The best option is to choose a company that offers both a merchant account and a payment gateway. When a single operator manages the process of making payments, the risk of errors is reduced; finding the “lost” transaction and simplifying approval is more accessible.

If you are not willing or able to invest in credit card readers or do not have an e-commerce website, you can use a virtual terminal to process transactions. For this, the presence of the Internet is sufficient.

How do the gateway and processor interact?

Your company needs a processor and a gateway to process online transactions. A payment gateway is a financial transaction’s first and last stages. At the beginning of the operation, clients enter the bank card details, and at the end, they receive information about whether the transactions were allowed or prohibited. The bank may deny the transaction; for example, if the number or other card details are entered incorrectly, the client does not have enough funds or the card is blocked for some reason.

The payment processor carries out the data transfer. First, it sends them to the issuing bank, which must confirm the possibility of debiting funds from the buyer’s account, and then to the acquiring bank, which must approve the option of accepting the payment. Accordingly, one cannot work without the other. The payment procedure looks like this:

  • The client purchases in the online store and enters the bank card details.
  • Information enters the payment gateway, is encrypted, and sent to the processor.
  • The processor notifies the issuing bank and receives confirmation or denial.
  • If confirmed, the processor notifies the acquiring bank.
  • The buyer receives a transaction confirmation, and the seller gets a notification of the fund’s transfer.

If a failure occurs for some reason, the payment gateway indicates the cause of the problem.


A payment gateway and a payment processor are mandatory elements for an online transaction. The gateway provides the beginning and end of the payment transaction, and the payment processor provides all the steps. One cannot exist without the other. For accepting payments in your online store to function correctly, choosing a reliable payments service provider who will provide payment processing is important.

Similar articles