Credit card payment processing is a complicated process that involves several key players. You’d probably hear various terms describing the major participants in the process of processing your payments and for someone unfamiliar with these elements, it is possible to be confused by these terms. Two of such terms are Payment Gateway and Payment Processor. While both terms sound similar, they are not the same, and understanding the nuances between them is important to understanding or credit card payment processing works.
So what are payment gateways and payment processors and how do these two work together in credit card payment processing?
What is a payment gateway?
One could say that the payment gateway is the virtual equivalent of the Point Of Sales terminal or ATM used to take payments in regular in-person credit-card transaction. A payment gateway is a platform or technology which serves the purpose of connecting a merchant’s website to the credit card processing company in order to securely transmit transaction information to the company.
A good payment gateway encrypts the payment data, verifies the authenticity of the information, and transmits it securely to the credit card processing company. This information is then passed down to the card-issuing bank and the merchant bank for authorization.
The payment gateway also receives the authorization status of every transaction and transmits the status of the transaction back to the user while the funds are delivered to the merchant’s bank account for successful transactions.
What is a payment processor?
A payment processor handles all debit and credit card transactions of your business. While the purpose of a payment gateway is to move encrypted data to the appropriate ends, the payment processor is in charge of moving funds from the issuing bank account to the merchant account.
Payment processors work on both the front-end and bank end of credit card transactions. The job of the front-end processors is to coordinate the connection between the settlement services and the card network. Front-end payment processors are also in charge of managing merchant accounts.
Back-end processors on the other hand are in charge of transaction settlement. This process involves the movement of funds from the issuing bank down to the merchant’s account.
So which of these do you need?
To put it in simple terms, a payment gateway is not always needed, but if you intend to take card payments through any method (online, POS terminal, or over the phone) then you will need the services of a payment processor. Payment gateways are only needed if you need to accept credit or debit card payments over the internet. You do not need one for offline payment like Point of sales terminals or through any other offline method. But for virtual channels of any kind, you’d need both a payment gateway and a payment processor.