Payment Gateway vs. Payment Processor: What Is the Difference?

There are many components that go into a successful online sale. Yet payment gateways and payment processors are the two important components behind every eCommerce transaction. This article explains the key differences between the two – and why you need both to begin accepting credit cards online.

Before starting, it helps to understand the key parties behind every card-based transaction (whether in-person or online):

Payment integration with third-party CRM, ERP, or accounting platforms, which removes the need to capture and report incoming sales manually.
Card-present payments that are swiped, dipped, or tapped on a credit card reader.
Phone or mail order transactions that are manually entered into a virtual terminal.

How exactly do payment processors and payment gateways fit into this equation?

The Role of a Payment Processor

Payment processors transmit the payment data among the four parties listed above (i.e., you, the customer, the customer’s bank, and your bank). In many cases, payment processors also provide merchants with the physical equipment needed to accept card-based transactions. In addition, they often help businesses create a merchant account – in-house or with a third-party merchant services provider.

The Role of an Online Payment Gateway

A payment gateway is the virtual equivalent of a point of sale (POS) terminal – i.e., the credit card readers you normally see at the cashier. Whereas POS terminals are designed for in-person transactions, online payment gateways allow for card-not-present (CNP) transactions in which the buyer and seller never meet face to face. Credit card information is entered on the website, in a hosted checkout form, or on a mobile app. This explains why payment gateways are essential for eCommerce websites.

What is the primary difference between a payment gateway vs. payment processor?

The main difference is that payment gateways capture and send credit card data to the payment processor. They also communicate approvals or rejections to you and your customer. Payment processors work behind the scenes – securely routing data among all the different parties all the way through to settlement of funds in your bank account.

Another Component for Secure Online Payment Processing

If you’re an eCommerce merchant interested in accepting online payments, you will also need a Secure Sockets Layer (SSL) certificate. This digital certificate creates a secure connection between your site and your customers’ browsers by encrypting any data sent or received. In addition to helping prevent fraud, adding an SSL certificate appends an “s” to the “http” in your website (e.g., “https”). This signals to users that your site is secure, which can help lead to higher sales and lower shopping cart abandonment.

Benefits of an All-In-One Solution

Although payment gateways were originally designed for traditional eCommerce transactions, gateway technology has evolved to keep pace with the changing payments landscape. Many modern gateways, for example, can also handle payment processing across a much wider range of channels and devices to deliver a more seamless omnichannel experience for merchants and customers alike. This includes:

Payment integration with third-party CRM, ERP, or accounting platforms, which removes the need to capture and report incoming sales manually.
Card-present payments that are swiped, dipped, or tapped on a credit card reader.
Phone or mail order transactions that are manually entered into a virtual terminal.

It’s technically possible to obtain your merchant account, payment gateway, and payment processing from different providers. However, this can create difficulties whenever issues or disputes arise. Who is responsible if your online store suddenly stops accepting credit cards in the middle of the night?

By securing all three from the same provider, however, you minimize interoperability issues. Whenever you face an issue, there is only one provider you need to call.