In the online business world, we hear a lot of terms surrounding payment processing. Such as the payment gateway, the payment processor and more. However, people usually find trouble seperating between the two. Even though they’re each different and they play a vital role in online transactions. That’s why it’s important to thoroughly understand the way they work, especially if you’re working in eCommerce. First, we need to understand the meaning of each term.
What Is a Payment Gateway?
A payment gateway is a secure online portal that guards, authorizes, and processes online payments. It literally replaces a point-of-sale (POS) terminal allowing your customers to pay online using credit or debit cards. It acts as the middleman between your website and the payment processor. Gateways are commonly used in eCommerce because it’s illegal to transmit transactions’ information directly from your website to a payment processor due to security issues. They make sure your website complies with standard security and safety regulations such as the Payment Card Industry Data Security Standard (PCI). You may not require a payment gateway if you operated a purely physical business. However, the more complex your transactions get, the more you’ll need a payment gateway.
What Is a Payment Processor?
It’s the financial institution that works in the background to provide online payment processing services to merchants. It makes transactions happen by transmitting your customers’ data between your business, the issuing bank, and the acquiring bank through the payment gateway back and forth. Payment processors also conduct standard security measures to ensure fraud does not occur by making quick checks on the customer’s card information. Once the process gets the approval, the payment processors take the money from the cardholder’s bank account and deliver it to the merchant’s bank account. In other words, payment processors are the systems that move information in order to complete an online transaction.
What Does A Payment Gateway And A Payment Processor Have In Common?
Both the payment gateway and the payment processor play huge parts in the online payment process. They must be (PCI-DSS) compliant to ensure secure transmissions of the financial information. They also need annual auditing and certification to the most recent security standards.
How Do Payment Gateways And Payment Processors Work Together?
There are four parties involved with every credit card transaction. The merchant, the customer, the acquiring bank, and the issuing bank. On top of that, there are three elements that facilitate this process. The payment gateway, payment processor, and merchant account. When an online payment occurs all three elements work together to transfer money from the customer to the merchant. The process starts with the customer entering his credit card number. Within seconds his request gets either an approval or a denial. During this time, the payment gateway sends the transaction details via the payment processor to the merchant account. The payment processor also contacts the issuing bank to ensure that the amount is within the customer’s limit. If the amount is available, the customer’s information goes back through the credit card network to the payment processor, then the payment gateway which stores the results so that the merchant’s website can complete the transaction. Finally, the shipment goes through and the merchant gets paid.
This was a summary of online payment processing and the difference between payment gateways and payment processors. If you’re looking for a more in-depth explanation read this blog post: This is How Online Credit Card Processing Works.