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Wondering what is the difference between a payment processing gateway and a payment processor? Click to learn the differences & why they are important for your business.
Payment gateway, payment processor, and payment aggregator.
These three terms are often confusing. After all, the lines between them can be quite blurry.
So, how do we differentiate between them? More importantly, how can we choose a payment gateway and payment processor that suits our business needs?
This blog answers those questions for you.
This blog is a two-parter. In the first part of this series, we will help you differentiate between a payment gateway (PG) and a payment processor. (PP). Our next blog will help you differentiate between a PG and a payment aggregator (PA).
But before we dive deeper, let’s understand the four key players that are involved in a business transaction.
The four players in business transactions
The first two players are the most obvious ones.
The first player is the customer that chooses to transact with your business.
You, the merchant, are the second player. You offer a product or service that the customer is willing to pay for. Then, the customer enters the payment details and goes forward with the purchase.
After this, comes the third player: the issuing bank. Your customer’s bank account is hosted by the issuing bank. This bank offers payment card to the customer on behalf of card networks like Visa or Mastercard. It is responsible for the financial backing for any transaction made by the customer through that card.
The term “merchant account” refers to the merchant’s bank account. Its host bank is called the acquiring bank. And THIS is our fourth and final player.
So, the process of online payments would typically look like this:
- Customer buys a product/service
- Payment is processed
- Issuer bank debits the required funds from customer’s account
- The acquiring bank deposits the money into your (the merchant’s) account.
But then, where do the payment processor and payment gateway come in?
Well, to understand this, we need to know how the payment gateways and processors work.
But first, let’s get down to the basics.
What is a payment processor?
A payment processor is a service that handles your customer transactions and enables them to buy your products and services. It relays the payment information from your customer’s cards to the issuing and acquirer banks.
Moreover, if a company charges the customer indirectly, the payment processor is in charge of rectification. Hence, if there is a case of refund or an error during checkout, you (the merchant) incur a small fee. This fee is basically to transfer the money from your account to the payment processor and then, back to the customer.
Furthermore, the payment processing company follows security measures for safe transactions. Through this, they reduce the chances of fraudulent transactions.
In offline transactions, the payment processor service will provide a point of sale (POS) interface to you. They will typically provide the payment collection infrastructure. For instance, card machines and other equipment.
What is a payment gateway?
On the other hand, a payment gateway transmits the payment data to the processor. Think of it as an agent that completed the transaction lifecycle. It connects the payment processor to the merchant account and card companies like Visa or MasterCard.
A payment gateway is mostly used by eCommerce websites for card-not-present transactions. Essentially, it is a POS terminal for online transactions.
The payment terminal authenticates the customer’s physical card. Similarly, the payment gateway authenticates the digital credentials before forwarding the payment details to the payment processor. However, authentication of transactions online is a prolonged and sensitive process.
Difference between payment gateway and payment aggregator
A payment gateway can allow you to process transactions on your website or mobile application. Essentially, a PG provides the technology infrastructure that facilitates online payment transaction processing. It can offer diverse payment options like net banking, cards, UPI, PayLater options, and many more. It does not handle the funds.
However, a payment aggregator (PA) is a service provider that allows you (the merchant) to accept different payment instruments without setting up separate payment integrations. A PA can facilitate the connection between the merchant and the acquirer. During this process, a PA receives payments from customers and then transfers them to the merchants.
Moreover, a Payment aggregator can sign you (the merchant) under its own merchant identification number (MID).
So, the transactions will be processed through a single master account.
Traditionally, each merchant had to get their own merchant account from the bank. However, PA allows merchants to become “sub-merchants” of the aggregator.
Payment Aggregators save a lot of hassle as merchants no longer require a pre-existing individual merchant account. The PA takes the heavy load of integrating with all payment service providers and card companies.
Moreover, a payment aggregator facilitates transaction across offline and online touchpoints. The offline touchpoints can range from billing counter to infield to kiosk payments.
Now, here is where it gets interesting.
A payment company in India can work as a payment gateway with some banks and a payment aggregator with others. Hence, this would be considered a hybrid model.
Here’s a simple example:
In some instances, Cashfree could work as a PG and a PA. In other instances, Cashfree could work as a PA, while the bank works as a PG.
Difference between payment gateway and payment processor
Here is the difference between a payment gateway and a payment processor.
A payment processor makes the transaction between two parties possible.
However, a payment gateway (PG) captures the customer’s payment details and relays it to the processor. Thereafter, the PG communicates the transaction status between the customer and you. (the merchant)
Payment gateway vs payment processor : Which one do I need?
Now that we have covered the concept of PG and PP, let’s dig in a bit deeper.
Do you require a PG and a PP at all times?
Let us look at two different scenarios.
When the payment is completed using the PP
In the case of in-person card payments, you only need to use the PP.
Here, a typical payment cycle would look like this:
- The payment processing company will provide you (the merchant) with a payment terminal.
- The payment terminal will authenticate the card. Then, it will send the payment information to the issuing bank which will approve or decline the transaction.
- Finally, the PP will send the transaction status (approval or denial message) to the physical terminal. If the transaction is approved, it will send the details to the acquiring bank.
Needless to say, a payment gateway will not be required in in-person card transactions.
However, most companies today choose to sell online and require diverse payment methods. This is where a PG becomes necessary.
Let’s have a look at the payment cycle when both the PG and the PP are present.
When payment is completed using the PG and PP
- The customer selects a product/service and heads to checkout. They submit their payment details.
- The payment gateway authenticates the customer’s account number and checks if it is a part of the issuer’s card. The payment processor moves the data from the PG to the card network and back. It also confirms if the card is valid and if it is a part of the 3D-secure platform.
- Now, the process of payer authorization takes place. The merchant plug-in sends a Payer Authentication Request/Response (PAReq/PARes) to the Access Control Server. Here, the customer’s CVV is verified.
If this step is successful, an Accountholder Authentication Value (AAV) is generated by the Access Control Server (ACS). As part of the authorization request, The merchant sends the AAV to the acquirer after which it is forwarded to the issuer.
After this, the merchant sends a request to the acquirer (or the payment aggregator). Then, the payment aggregator will submit the request to the issuer bank.
If the customer has sufficient funds, the authorization is made and funds are deducted. Consequently, the authorized money is transferred from the customer’s account to the merchant account.
The Card network informs the Merchant Plug-in and the issuer bank that the card is authorized.
Finally, the transaction takes place and the funds are transferred from the customers’ account to your account.
Pro Tip: Read this blog for a detailed explanation of how a payment gateway works.
That was a LOT of information.
However, if you are looking for a payment gateway or a payment processor, you need more information.
Let’s look at the factors you should consider before settling on a PG and a PP.
How to choose a payment gateway?
Pro Tip: Read this blog to understand how to choose a payment gateway.
We have summarized those points for you here:
1. Mode of payments
Today, customers are looking for a seamless experience.
Having diverse payment options will increase your customer’s comfort to purchase. They can choose to pay via their preferred method. You can offer your customers payment options like net banking, cards, UPI, wallets, PayLater options and more.
Moreover, this will lead to lower cart abandonment rates as it will optimize the checkout experience.
Pro Tip: Optimising your checkout can increase your conversions by 35.62%
2. International payment support
The best payment gateways will provide support for multiple currencies with swift and easy onboarding.
3. Payment settlement cycles
Look for payment gateways that provide faster settlement cycles. Cashfree provides settlements cycles of T+1 or T+2 days at most.
4. Integration support for your platforms
You could be using a platform built on PHP, Ruby, Python etc. Alternatively, you could be using third-party platforms like Magento or Shopify.
Look for PG that offer plugins for these platforms and detailed integration guides for major languages (PHP, Ruby, C# etc)
5. Swift onboarding experience
Opening a merchant account with a PG can be a lengthy process.
Make sure that the PG you choose has a swift and seamless onboarding experience.
6. Reliable and timely support
Opt for a PG that offers reliable and consistent support. Having a dedicated account manager can ease your onboarding experience and flatten the learning curve.
7. Payment analytics
Look for a PG that provides detailed reports and analytics of all your transactions. These reports can contain your transaction history with payment volume, payment method, distribution of payment over time and geography etc.
This will help you chalk out your future marketing and product strategies.
8. Personalised checkout experience
Did you know that 80% of customers prefer to buy products or services from brands that offer personalized experiences?
This is why we cannot stress this enough: Choose a payment gateway that allows you to tailor your own checkout page. You can include your brand logo, colours and font.
This is where your brand language can make a difference.
Ensure that your PG can provide a pricing plan that fits your business needs like transaction volume and geography.
Have a look at this blog to understand the payment gateway charges.
Now, let’s move on to the factors you should consider when looking for a payment processor.
How to choose a payment processor?
1. PCI compliance
Your PG will store your customer’s card details temporarily while it is processed. Ensure that your processor meets the compliance requirements of the payment industry.
2. Software compatibility
If you are planning to sell products or services online, this is a must. All the pieces of your online platform need to work in harmony for successful transactions.
Make sure your payment processor has a software that is compatible with the one you have.
3. Fraud prevention
High profile data breaches and cyberattacks are a major threat today.
Opt for a PP that ensures information protection and security. The PP will work in sync with your PG that will have automated tools to combat transaction frauds.
The difference between a payment gateway and a payment processor can be a bit confusing. However, we hope that this blog helped clear out some of those doubts.
When looking to settle on a payment gateway, or payment processor ensure that they meet all your business requirements.
What are your thoughts? Let us know in the comments!