Payment Gateway vs Payment Processor: Key Differences and More

The payment solution market is full of confusing terms. It is not so much that these terms or what they represent are complicated. It is just that they refer to concepts, tools and services that are so closely interrelated that it can be hard to tell what sets them apart. Two such terms are “payment gateway” and “payment processor”. Payment gateway vs. payment processor: what are they? How do they differ – and how do they work together? Let’s take a look at the main differences, their respective roles, and how they integrate with POS solutions.

A payment processor is a company that facilitates electronic transactions, empowering three-way communication between customers, businesses and financial institutions. This involves credit cards, debit cards and digital payment methods. A payment processor acts as an intermediary between the customer’s bank and the business’s bank, ensuring that funds move securely from one account to the other. Payment processors verify customers’ payment details, check for fraud, and ensure compliance. Payment processors usually charge a fee, which comes in the form of a fixed amount per transaction, or a percentage of the transaction amount.

Popular payment processors in Canada include Clearly Payments, First Data, Global Payments, Moneris, Square, Stripe, and Chase. Of these, Moneris is the largest, having been operating for more than two decades. It operates a tiered pricing model, and generally runs three to four-year contracts with its clients, which usually require a $250 fee for cancellation. Square is among the easiest and most affordable options, offering flat rates ranging from 2.75% to 3.4% per credit card transaction. There are no monthly fees and no cancellation fees.

Do you need a payment processor? The quick answer is yes. In most cases, you actually can’t receive payments without a processor. Aside from that, payment processors offer a number of advantages, including:

A payment gateway is a technology that transmits payment information between the customer, the business, and the payment processor. It is an electronic bridge between all of these roleplayers. It is something like the digital equivalent of a POS terminal in a physical retail store, but it serves its function primarily in an online context.

Popular payment gateways include:

The advantages of payment gateways include:

From the descriptions given above, it still may not be clear exactly what the differences between payment processors and payment gateways actually are. To clarify this, let’s see how they differ and cooperate in the transaction process, and the scope of services they each cover.

The payment processor facilitates a transaction by processing and authorizing payments, and by ensuring that funds are transferred securely between the customer’s bank and the business’s bank. The payment gateway, on the other hand, is specifically the connective technology that facilitates the communication between the two banks and the payment processor.

Payment processors are service providers that offer a wide range of services in addition to transaction processing. These include fraud detection, chargeback management, and regulatory compliance. Payment gateways are more focused and intended primarily to facilitate a secure transmission of payment data. They do not usually provide any additional services.

Payment processors require businesses to set up merchant accounts in order to process transactions. As a result, integrating them into POS and other business systems can be quite complex. Payment gateways are usually much simpler to integrate, requiring only APIs, plugins and prebuilt modules to be installed before transactions can start being processed.

When looking at payment gateways and payment processors, it is not really an either/or proposition. You really need both of them to facilitate your transactions, and they work hand-in-glove, performing complementary roles to facilitate secure and efficient payments. Together, they progress each transaction through the following steps:

First, the customer begins the transaction by entering their credit card details on your e-commerce site.

The payment gateway encrypts the payment information and sends it to the payment processor.

After receiving the encrypted payment data from the gateway, the processor forwards it to the customer’s bank, requesting authorization for it.

The customer’s bank verifies the payment details, checks that the necessary funds are available, and sends either an approval or a decline response back to the payment processor.

The payment processor shares the bank’s response with the payment gateway.

The gateway then relays the response to the business’s e-commerce platform, which then notifies the customer accordingly.

If the transaction is approved, the payment processor facilitates the transfer of funds from the issuing bank to yours. Although the approval takes place in seconds, this last step, called the settlement, usually takes a few business days to complete.

Payment processors and gateways should be used together. You should definitely have a payment gateway if you are trading online and need to accept payments through your website or app. Even then, you will still need a processor to facilitate the actual transfer of funds between the two banks and your merchant account. If you run an e-commerce platform, you will need both.

An automated payment solution integrates a POS system with a payment gateway and a payment processor. Each transaction is processed quickly and automatically, as per the procedure outlined above. As a result of this integration and automation, your business can enjoy the following benefits.

Automated payment solutions improve the efficiency of your business. From the time a customer initiates the transaction to the time it is completed, an automated solution handles the entire process, which it handles speedily. Once the transaction is complete, it is recorded on the system, and even in your accounting software if you have chosen that level of integration. The system can handle multiple transactions at once, and thus improve your levels of customer service, and help boost your sales.

Payment processors and payment gateways are designed for secure transactions, predominantly through tokenization and encryption. All the financial information moved between the processor and the various banks is kept safe from end to end.

Automated payment solutions are able to accommodate all types of digital payment options, including debit and credit cards and electronic funds transfers. 

In summation, an integrated, automated payment solution, which incorporates both a payment gateway and a payment processor, enables you to accept payments from customers all over the world, using various payment methods, while reducing the risk of fraud and theft and ensuring regulatory compliance.

Access2Pay is a scalable, customizable POS solution that easily integrates various payment gateways and payment processors. It is a cloud-based system ideally suited for retail businesses, but also perfect for auto repair shops, entertainment venues, and government offices. It includes essential features such as inventory management, cash register management, customer management and real-time reporting. It is perfect for both in-store and online transactions and works seamlessly with your chosen gateway and processor to make transactions fast, safe and efficient. 

Whether you deal in clothing, electronics, or any other retail sector, Access2Pay provides a complete, flexible and scalable point-of-sale solution for your business. It empowers you with easy, streamlined management of your sales, income and expenditure, and all other aspects of your retail business. As this discussion of payment gateways vs. payment processors shows, these elements must be used in combination with one another, as well as a powerful and efficient POS solution. Contact us for more information about our solution, and how we can customize it to suit your business.