Payment Gateway vs Payment Processor: Key Differences

You've probably seen the terms "payment gateway" and "payment processor" thrown around when you're setting up your online business or looking at payment options for your retail or hospitality business. While they’re often used interchangeably, they aren’t actually the same, and knowing the difference is really important. If you’ve ever felt unsure about what each one does (or why you might need both), you’re not alone.

In this complete guide, we’re breaking both terms down for you. We’ll take a good look at what payment gateways and payment processors are, how they work, and why they’re both important for handling transactions online and in person. You’ll get the 411 on things like features, benefits, the possible downsides of using each option, so you can make the best choice for your business.

Deep dive into payment gateways

First up, let's look into what payment gateways are and how they work:

What is a payment gateway?

A payment gateway is a tool that collects and verifies your customers’ credit card details when they make a purchase. It’s basically like the online version of a card reader at a checkout counter. Its main job is to authorize transactions securly, often providing a checkout page where customers can enter their payment information safely.

Now, payment gateways can either be integrated directly into your website (that’s called a white-label gateway, just a little techy lingo for you), or they might redirect your customers to a separate page to finish their purchase, that’s the third-party gateway route. And while it might seem like a free service, don’t get too comfy because fees usually pop up once the payment goes through.

After the customer puts in their credit card details, the payment gateway quickly checks the info and sends it over to the payment processor for verification. It doesn’t actually move any money, but it ensures that the card’s valid, kinda like how a card reader makes sure you’re not swiping a gift card at the grocery store.

How payment gateways work in online transactions

Payment gateways are the go-to tools for safely handling online payments. They’re like the mediator who makes sure everything runs smoothly between the customer, your website, and the banks involved. How does it actually work, you ask? Well…

• Customer places an order: It all starts when your customer is ready to buy and heads to the checkout page. They enter their payment details (credit card, debit card, or maybe their favorite digital wallet), and hit that "buy now" button.
• Data encryption: Before the customer’s payment info can go anywhere, the payment gateway scrambles it all up with encryption. It’s a bit like putting their sensitive info in a super-secure envelope so no one can peek inside.
• Authorization request: Now, the encrypted info heads over to the payment processor, which forwards it to the customer’s bank (also known as the issuing bank). The bank takes a quick look to make sure there are enough funds and that the transaction is all above board.
• Approval or decline: If everything checks out, the bank gives the green light and approves the payment. If not, it'll decline it. 
• Confirmation and order completion: Once the payment is approved, the gateway sends a confirmation message back to your website, letting both you and your customer know that the payment was successful.
• Funds transfer: Finally, the approved payment data is sent to the acquiring bank (your business’s bank) to settle the funds. This step typically happens behind the scenes, with the money landing in your merchant account within a day or two.

Features of payment gateways

Payment gateways are packed with a bunch of features that not only keep things secure but also make the whole checkout process smoother for your customers. Let's take a look at some of the highlights you'll definitely want to know about:

• Security and encryption: These guys are all about keeping things locked down tight. Payment gateways use encryption to make sure your customers' payment details are safe at every step of the transaction. We're talking about turning credit card numbers into encrypted code that’s basically hacker-proof. Plus, many are PCI DSS compliant (that's just a fancy way of saying they follow strict security standards to protect card info and avoid data breaches).
• Fraud detection and prevention: Nobody’s got time for fraud. Payment gateways come with built-in fraud detection tools that keep an eye on things 24/7. They use all kinds of tech, like address verification, card security code checks, and machine learning to catch any shady activity before the payment even goes through.
• Customer experience tools: any gateways support digital wallets like Apple Pay and Google Wallet, so your customers can pay with just a tap. Plus, they offer one-click payments for returning customers and recurring billing options for subscription services, hello, reduced cart abandonment. 

Pros and cons of using payment gateways

Let’s take a quick look at the advantages and disadvantages now. 

Pros:

• Payment gateways are easy to integrate into your website or online store
• They provide a secure and user-friendly payment experience for your awesome customers
• Multiple payment options
• Come with tools for fraud detection, chargeback management tools, and recurring payments
• Some gateways even let you add custom branding keeping that brilliant brand intact

Cons:

• Payment gateways can get pricey, with transaction fees happening for every sale
• Some gateways make you handle your own PCI compliance
• Not all gateways work well with every ecommerce platform
• Customer support is often limited to email or ticket systems

Popular payment gateway providers

Some of the most popular payment gateways are:

• Braintree
• Stripe
• Adyen

Understanding Payment Processors

Next up, let's get into what payment processors are and how payment processing takes place with them:

What is a payment processor?

A payment processor handles all the communication needed to make a transaction. It connects your business, your customer’s bank, and your own bank. When someone makes a purchase (regardless of if that purchase is online or in-store), the payment processor sends the payment info to the customer’s bank for approval, then makes sure that the funds get transferred to your account. Without a payment processor, none of this would (or even could) happen, so if you’re planning on accepting credit cards or ACH payments, it’s something you need to have. 

So we’ve established that it doesn’t matter if you run an online shop, a physical store, or a combo of the two, you’ll need a payment processor to handle payments. Many processors also offer POS systems for in-store transactions, so you can easily take credit card payments at the counter. And if you use a payment processor that’s linked directly to your merchant account, funds will be deposited straight into your account. You can also choose a third-party payment processor that manages payments for multiple businesses, which can be simpler and often comes with lower fees.

How payment processors handle transactions

Payment processors guarantee that every purchase goes off without a hitch, ensuring that the payment details are sent, verified, and approved quickly. But how does it actually work?

• Customer initiates payment: It all starts when a customer makes a purchase, either by swiping or tapping their card in-store on a POS card reader, or entering their payment details online.
• Payment processor sends data to the bank: Next, the payment processor passes along the payment details to the customer’s bank (known as the issuing bank) for authorization.
• Authorization check: The issuing bank then gives everything a once-over, checking if the card is valid and if there are enough funds available. If everything checks out, they send back an approval code.
• Transaction confirmation: Once the processor gets the green light, it lets both you and your customer know the payment is good to go. If it’s declined, your customer gets a heads-up right away (and maybe digs around for a backup card).
• Funds settlement: Now it’s time for the money to actually move. The payment processor sends the approved payment info to your bank (the acquiring bank) for settlement. This is when the cash starts making its way from the customer’s account to yours.
• Deposit to merchant account: Finally, the payment processor makes sure the funds are deposited into your merchant account.

Key features of payment processors

• Payment options and speed: A good payment processor gives your customers all the options they could want to pay - we're talking credit cards, debit cards, digital wallets, ACH transfers, you name it. The more choices, the better. Plus, speed is crucial. Your processor should handle payments in seconds,
• Settlement and fund transfer: Once the payment is approved, the next big job for the payment processor is making sure those funds get to you. This is called settlement. The processor sends the funds from the customer’s bank to your merchant account. You want this process to be quick and efficient because after all, your business needs that cash flow to keep running smoothly.

Pros and cons of using payment processors

Here’s the lowdown on the pros and cons of payment processors:

Pros:

• Payment processors provide a smooth, seamless payment solution that easily integrates with various payment gateways and e-commerce platforms
• They often offer better pricing, with lower transaction fees compared to payment gateways
• You’ll get access to a wider variety of payment options like bank transfers, direct debits, and even more e-wallets
• Many processors come with useful features such as fraud detection, chargeback management, and recurring payment setups
• They’ll handle your PCI compliance for you, taking that off your plate.
• Customer support is usually available by phone or live chat, so you’re not left hanging when you need help

Cons:

• They can be trickier to integrate than payment gateways, often requiring extra development work
• Some processors don’t provide a complete standalone payment solution, meaning you may still need a gateway for certain transactions.

Leading payment processor providers

When it comes to payment processing made easy, Epos Now is a standout. Offering integrated payments at a fixed rate with no hidden fees, it’s designed to keep things simple, no matter where or when you’re processing payments. Whether you’re running a retail shop or a hospitality business, Epos Now Payments seamlessly integrates with your point of sale system, giving you a smooth and efficient way to handle transactions.

Comparing payment gateways vs. payment processors

Now you've got a great understanding of what the two terms mean, let's get into our payment gateway vs payment processor comparison.

Key differences between payment gateways and payment processors

Payment gateways and payment processors are both essential for handling payments, but they serve different functions. Here’s a breakdown of the key differences:

Payment gateway:

• • Collects, encrypts, and verifies a customer’s credit card data
  • Acts as an online point-of-sale (POS) terminal to validate card details.
  • Serves as an intermediary between your business and the customer.
  • Must be used with a payment processor for transaction completion.
  • Best for e-commerce or card-not-present transactions.

Payment processor:

• • • Acts as an in-person POS terminal to verify card validity.
    • Serves as an intermediary between your business, the customer’s bank, and your bank.
    • Can work as a stand-alone service (no need for a gateway).
    • Best for POS and in-person transactions.

When to choose a payment gateway vs a payment processor

Payment processors play an important role in handling all types of transactions, whether they’re online or in-store. But when you’re dealing with online transactions—especially “card not present” payments (aka when the customer’s not physically swiping their card)—that’s where the payment gateway comes in to do its thing.

When customers shop online, they typically pay using credit cards, debit cards, or other payment methods through your website or eCommerce platform. In this case, a payment gateway steps in like the digital version of a POS system. It securely sends the payment data to the payment processor, handles the approval process, and then notifies you (and the customer) when everything’s good to go.

Can you use both a payment gateway and a payment processor?

You can absolutely use both a payment gateway and a payment processor together, and a lot of businesses do. The gateway handles the online transaction security and verification (like checking if a card is valid), while the processor takes care of the fund transfer between your bank and the customer’s bank. 

Cost comparison: payment gateways vs. payment processors

Payment gateways usually charge transaction fees (either a percentage or flat fee per sale) and might also tack on monthly fees. Payment processors, on the other hand, often have monthly fees that cover a set number of transactions, with extra charges if you go over that limit. So, it’s important to check the fee structure for both.

Security differences between payment gateways and processors

A payment gateway is all about keeping the customer’s sensitive information safe. It encrypts credit card details, making sure that they’re securely transmitted between the customer and your system. It also performs fraud checks to make sure the transaction is legitimate. 

The payment processor secures the transaction on the backend. It verifies that the funds are available in the customer’s account and manages the transfer of money between banks. While the gateway is focused on protecting data during the transaction, the processor makes sure the funds reach the right place securely.

How to choose the right payment solution for your business

When you're picking a payment solution, there are a few things to consider:

Evaluating your business needs

Are you just accepting payments online, or do you need a solution for in-person sales too? Do you need recurring billing or subscriptions? Understanding your specific needs will help you narrow down the best options.

Integration with existing systems

You don’t want to pick a payment solution that doesn’t play nicely with your current systems. Check if it integrates with your website, POS, or accounting software.

Pricing and fees: understanding the true cost

Look at both the setup fees and ongoing transaction costs. Payment solutions might offer low upfront costs but have higher per-transaction fees. Make sure you’re clear on the whole pricing structure to avoid surprises.

Security and compliance requirements

Ensure the payment solution is PCI compliant and offers features like encryption and fraud detection to keep both your business and your customers safe.

Customer experience and user-friendly payment options

The payment process should be smooth and easy for your customers. A clunky or confusing checkout process can lead to abandoned carts and lost sales. Make sure the solution is user-friendly and offers a seamless experience.

Global transactions: international payments and currency options

If you plan to sell internationally, make sure your payment solution supports multiple currencies and can handle global transactions.