The pandemic accelerated the growth of online businesses. Consequently, companies have to find ways to accept electronic payments.
For a company to accept payments made online, it has to have the right payment processing system in place. That’s when such terms as a payment gateway and payment processor are gaining relevance.
Read on to know more about payment gateways and payment processors and determine which solution is best for your business.
What is a Payment Gateway?
A payment gateway is software that connects merchants and customers. The software is built into a card reader or a POS (Point-of-Sale) system and processes payments when customers use their cards to make purchases.
Most companies are integrating a white label payment gateway into their workflow to accelerate business and offer their customers a seamless payment solution. A white label payment gateway from Spell comes with all necessary payment tools for handling operations from refunds, chargebacks, and settlements, to invoicing, subscription management, and even marketing. Such a ready-to-use solution helps businesses reduce costs and scale expeditiously.
How does a payment gateway work?
Once a customer makes a transaction, the payment gateway sends the details to the payment processor. The processor then alerts the issuing bank, which either approves or rejects a transaction.
If accepted, the processor delivers the authorization to the payment gateway, and the funds are deducted from a client’s account and sent to a merchant’s account. The merchant can then process the payments in batches or one at a time.
How to set up a payment gateway?
There are various ways a company can integrate a payment gateway into its website. The first method is the hosted gateway, where the payment gateway is a third-party, and customers are redirected to a payment gateway where they’re required to enter their card details. The integration is usually done using APIs.
The other method is the direct post method, wherein customers can make payments without leaving your website. The transaction gets to the processor and gateway without being stored on your server. In this method, a vendor creates a link between its payment gateway and your shopping cart to post card details.
The last method is the integrated method, wherein a company uses a pre-built white label payment gateway that they can customize and brand as their own. No third parties are involved, and companies are responsible for verifying, storing, and securing every transaction.
What is a Payment Processor?
A payment processor is an intermediary between companies and banks involved in merchant transactions. A payment processor offers the framework for accepting payments.
There are two types of payment processors:
- Front-end: connects with payment settlement services and card networks to manage and run merchant accounts.
- Back-end: manages the movement of cash among accounts.
How does a payment processor work?
When a customer makes a payment, a payment gateway submits the information to the payment processor, which initiates the payment by sending information to the credit card network like Visa or Mastercard for approval which either declines or approves a payment request.
Once a business accepts a card payment, the processor finalizes the payments and moves the funds from a customer’s bank account to your business’s bank account. Depending on the acquiring bank or payment processor, the merchant can access these funds immediately or in several days.
How to set up a payment processor?
If you have a small website and few transactions, you can partner with a third-party payment processing service. Customers will be redirected to another website when making purchases, disrupting their shopping experience.
The best option is to integrate a payment solution into your website where customers enter their card details, and the transaction is processed on your website. Integrating a payment processor into your website creates room for flexibility and offers customers a smooth payment experience.
So, What Solution Should You Choose?
While the two terms, payment processors and payment gateways, may seem confusing, there’s a straightforward distinction between the two. Payment processors oversee the entire process, while payment gateways solely decline or approve transactions.
Deciding on the best solution between a payment gateway or a payment processor depends on your business. Payment processors are an excellent choice for businesses that accept in-person sales.
Payment gateways have a digital framework that is best for companies that accept online payments. It’s important to note that payment gateways can’t work without payment processors. Therefore, if you opt for a payment gateway, you must have a payment processor.