What is a Payment Gateway? How Do Payment Processors Offer Gateway Solutions?
August 2, 2022
Reading time: 3 minutes
Payment gateways and payment processors are essential for online payment facilitation for merchants. But while they are both necessary, each has its specific function. These two functions work together in a streamlined process to create the efficient and safe execution of online and other digital transactions.
Payment gateways authorize transactions between merchants and customers. They are an encrypted virtual version of a point-of-sale terminal. They integrate with an e-commerce platform to allow merchants to accept online payments by credit or debit card, check, or other digital forms of payment. The payment gateway provides a secure connection between an e-commerce website and a payment processor, sending encrypted payment information via a virtual terminal.
A customer places an online order and enters card details using a payment gateway. These card details are encrypted using Secure Socket Layer (SSL) encryption and sent from the browser to the merchant’s web server and then to the payment processor.
Payment gateways can also integrate with other e-commerce tools, including subscription management and payment software, allowing merchants to process recurring payments. There are many payment gateways; the top names include PayPal, Apple Pay, Authorize.net, and Stripe Connect.
Payment processors are the intermediary between the merchant and the banks involved in a transaction. Payment processors provide seamless and secure routing of online payment data for credit or debit cards and other digital transactions at every purchase stage, from initiation to settlement.
How do payment processors work?
Once the payment processor receives the encrypted payment information for a transaction via the payment gateway:
- The payment processor forwards the transaction details to the issuing bank (the customer’s bank) as an authorization request
- The issuing bank:
- Receives the authorization request
- Verifies the credit is available
- Sends a response code back to the payment processor, approving or denying the request
- The payment processor passes this authorization code to the payment gateway
- The payment gateway forwards it onto the interface used to process the payment
- Once the payment is approved and processed, the merchant can fulfill the order
Payment processors also frequently provide merchant services, such as physical payment processing equipment, and assist in creating merchant accounts in-house or with third-party merchant services providers.
Do I need both?
A business does not always need a payment gateway.
- You only need a merchant account through a payment processor if you are a brick-and-mortar store with no online store.
- If you have an online store, you’ll need a payment gateway, and payment gateways are always through a payment processor.
If you need a payment gateway, you will need a merchant account set up through a payment processor. The two work together to process your online transactions and ensure everyone gets paid.
Payment Processors and Gateway Solutions
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Originally Published August 28th, 2021 | Updated June 23, 2022