Payment Gateway vs. Payment Processor

• Payment processors oversee the transaction process from start to finish, whereas payment gateways only approve or decline transactions.
• E-commerce businesses should opt for payment gateways; in-person retailers whose point-of-sale terminals aren't virtual can use payment processors.
• Excellent payment processors include Clover, Merchant One, Fattmerchant, ProMerchant and Payment Depot.
• This article is for small business owners interested in obtaining a payment gateway or payment processor for their credit card transactions.

In 2019, credit cards comprised 23% of transactions, which was 2% more than in 2017. It's probable that this figure will continue to increase, making your business's need for robust credit card processing infrastructure all the more important. As you research your credit card processing choices, you'll also encounter the option of payment gateways. What exactly is the difference between payment gateways and payment processors? Learn all about the two options below.

What is a payment gateway?

A payment gateway securely delivers transaction data to a payment processor to ensure the transaction runs smoothly. When a payment gateway approves a transaction between your business and a customer, the payment process can begin. Payment gateways essentially function as digital points of sale, making them great for credit or debit card transactions that don't require tangible cards. 

How does a payment gateway work?

It's often easiest to understand payment gateways through the eyes of the issuing bank (the bank behind the customer's card) and the acquiring bank (your bank). Here's how these banks are involved in the payment process:

1. The customer makes a purchase using their credit or debit card.
2. The payment gateway encrypts the customer's card data and sends it to the acquiring bank.
3. The payment gateway identifies the credit card network behind the card and sends transaction data to the issuing bank.
4. The issuing bank determines whether the transaction is valid or fraudulent.
5. The issuing bank checks the customer's available credit, if applicable, to see whether the transaction can be verified.
6. The issuing bank approves or declines the transaction.
7. The payment gateway conveys the issuing bank's decision to the acquiring bank, which informs you that the purchase is paid.

How can you set up a payment gateway?

Typically, your credit card processing company can set up a payment gateway. Experts recommend this route because compatibility issues are rare when your credit card processing and payment gateway infrastructure overlap. Additionally, going in-house for your payment gateway often means you'll avoid setup fees.

Sometimes, your credit card processor will have its own payment gateway. In other cases, your credit card processor will maintain a relationship with a third-party company. Either way, you should read your contract's terms and conditions closely to see how much you'll pay for payment gateway access.

What is a payment processor?

A payment processor transmits data among three parties crucial to a transaction: your business, the issuing bank and the acquiring bank. Payment processors typically provide your physical infrastructure for accepting payments. They can also help set you up with a merchant account, which you'll need before accepting credit and debit card payments. 

Payment processors can be divided into two categories:

• Front-end payment processors connect with credit card networks and transaction settlement services to manage merchant accounts. 
• Back-end processors oversee the actual movement of funds among accounts. Front-end payment processors typically contract with back-end processors to provide full services to clients.

Like payment gateways, payment processors charge fees for their use. Read your contract's terms and conditions closely to determine whether you owe the following fees:

• Flat per-transaction fees
• Variable percent-based fees per transaction
• Monthly statement fees
• Monthly minimum fees 
• Annual Payment Card Industry (PCI) compliance fees

Payment gateway vs. payment processor: What's the key difference?

The above payment gateway and processor information is full of potentially confusing language that can obscure what is, in fact, a relatively straightforward difference between the two. Payment processors link customers, merchants and banks using data that a payment gateway captures. Payment gateways also determine whether transactions are approved or declined.

Key takeaway: Payment processors oversee the entire transaction process, whereas payment gateways are solely for approving or declining transactions.

There are additional differences between payment gateways and processors based on the kinds of sales you make and the data encryption needed. These distinctions can help you determine whether you need a payment gateway, a payment processor or both.

How to determine if you need a payment gateway or a payment processor

If you accept in-person sales only (a restaurant is a great example), you need a payment processor. An exception arises if your point-of-sale terminal is virtual and can be accessed via computer only. In this case, the digital infrastructure that comes with a payment gateway is required.

The digital makeup of payment gateways also explains their most common use; namely, payment gateways facilitate almost every online purchasing platform you've ever used. Any time you've typed your credit card information into a website when buying something, you've encountered a payment gateway. 

Payment gateways govern all online transactions, which are typically called “card-not-present transactions.” Phone and e-commerce sales also fall into this category, so any online business should have a payment gateway. However, any business with a payment gateway should also have a payment processor. As explained above, a payment gateway can't work without a payment processor.

Both payment gateways and processors offer excellent data encryption. You can also use both to send transaction data for processing. The below table explains where processors and gateways do and don't overlap:

Tip: You should use payment processors for in-person, non-virtual points of sale, and both payment processors and gateways for online and phone sales.

Recommendations for payment processors

Ready to set up your payment gateway and processor? Let us help you out with our credit card processing best picks. Below, learn about our five top picks and which business types work best with each.

1. Clover

Clover is our top choice for combined POS system and credit card processing technology. In fact, you can only get both together, not just one of the two. You'll get top POS software and hardware alongside a merchant account, lightning-fast transactions, sales reporting and a comprehensive customer engagement platform. You'll also obtain access to merchant cash advances that you can use to fund all sorts of small business initiatives.

Alongside Clover's comprehensive features come flexible contracts and pricing. You'll pay between $9.95 and $39.95 per month, with transaction fees of, at most, 3.5% + $0.10. These prices don't include the cost of Clover's POS hardware, which ranges from $69 to $1,649. Whatever you pay, you'll get access to 24/7 customer support. Learn more in our Clover credit card processing review.

2. Merchant One

We've highlighted Merchant One as the best for easy approval because it boasts a high (98%) approval rate for all new applicants. It's a great choice if you've ever worried that your business, whether due to high-risk services or a poor borrowing history, won't be approved for a merchant account. Alongside its high approval rates comes a fast turnaround: Most accounts are ready for use within 24 hours.

Once you're all set with Merchant One, you'll get access to features such as a merchant account, POS system and credit card terminal. Merchant One also offers its own payment gateway and tools for accepting mobile payments. You'll pay $6.95 per month for your account, with transaction fees up to 1.99% and annual PCI compliance fees of $100 per year at most. Learn more in our Merchant One credit card processing review.

3. Fattmerchant

For small business credit card processing, Fattmerchant's Stax platform may be your best bet. You can use Stax to accept online and phone payments, track refunds, and generate sales reports. High-end Stax plans have features for creating recurring payments and invoices, working alongside a dedicated account manager, and custom-branding your credit card forms. The highest tier includes customer data management tools that resemble CRM platforms.

Stax pricing varies depending on your credit card transaction volume. Businesses with under $80,000 in annual credit card transactions pay, at most, 2.9% + $0.15 per transaction. Businesses that exceed this pay a $99 annual fee in addition to their standard plan fees, which range from $49 to $129 per month.

4. ProMerchant

If you work in a high-risk industry in which credit card processors often deny applicants, look no further than ProMerchant. The company specializes in taking on high-risk clients and offering a variety of payment processing solutions to restaurants, retail, e-commerce and everything in between. ProMerchant can also facilitate mobile, phone and mail orders while functioning as a POS system.

ProMerchant charges either a flat rate plus percentage-based fee per transaction or a flat rate per transaction for its services. It's best to contact the company directly for exact pricing. Whatever you pay will come with access to a personalized customer support team that's available 24/7. Learn more in our ProMerchant credit card processing review.

5. Payment Depot

If you expect to process a high volume of credit card transactions, try Payment Depot. It offers four pricing tiers, and with each increase in monthly payment comes a decrease in the cost per transaction. The company's introductory tier costs $49 per month and 15 cents per transaction; its most expensive tier costs $199 per month and 5 cents per transaction. Payment Depot claims that this sliding-scale model can save you up to 40%.

Payment Depot features include a merchant account, credit card hardware and rapid transaction processing times. You can also use Payment Depot to access working capital loans of up to $500,000. Several types of free equipment also come with certain pricing tiers, and virtual terminals that work with payment gateways and processors are also available. Learn more in our Payment Depot credit card processing review.