Payment processor vs gateway vs merchant account: What they are and how they work together

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  1. Introduction
  2. What is a payment processor?
  3. What is a payment gateway?
  4. What is a merchant account?
  5. What are the differences between payment processors, payment gateways and merchant accounts?
    1. Role in the transaction process
    2. Scope of services
    3. Integration with merchant systems
  6. How do payment processors, payment gateways and merchant accounts work together?
    1. 1. Customer initiates the transaction
    2. 2. Payment gateway secures the data
    3. 3. Payment processor verifies the transaction
    4. 4. Card issuer authorises the transaction
    5. 5. Merchant account holds the funds
    6. 6. Payment processor settles and transfers the funds
  7. How Stripe handles payment processing, payment gateways and merchant accounts

A business's payment infrastructure can affect its ability to provide easy, secure transactions and maintain customer trust. A 2022 study found that 30% of e-commerce basket abandonment was due to website errors or lengthy, complicated checkout processes.

Three elements form the backbone of the electronic payment system: payment processors, merchant accounts and payment gateways. To make strategic decisions about payment infrastructure and to build a payment experience that retains customers, businesses need to understand these features and how they interact with each other. Below, we'll describe these important components, explain the role that each one plays in building a robust payment system and discuss how Stripe's unified approach simplifies payment processing for businesses.

What's in this article?

  • What is a payment processor?
  • What is a payment gateway?
  • What is a merchant account?
  • What are the differences between payment processors, payment gateways and merchant accounts?
  • How do payment processors, payment gateways and merchant accounts work together?
  • How Stripe handles payment processing, payment gateways and merchant accounts

What is a payment processor?

A payment processor is a company or service that facilitates the transfer of funds between a customer and a business during a financial transaction, typically one that involves credit or debit card payments. The payment processor's role is to verify and authorise the transaction in a secure and efficient way, ensure that the funds are available in the customer's account and transfer the money to the business's bank account.

Payment processors enable businesses to accept a diverse range of popular payment methods, expanding their market potential. Given that payment processors eliminate the need for more time-consuming alternatives for managing payments, they also help businesses to streamline their financial operations.

What is a payment gateway?

A payment gateway acts as a digital checkpoint, encrypting and transmitting sensitive online transaction data securely. It verifies the validity of the customer's payment method, checks for fraud and communicates with the payment processor to authorise the transaction. This allows businesses to provide a safe and simple payment experience for their online customers.

What is a merchant account?

A merchant account is a specialised bank account that allows businesses to accept and process credit and debit card payments. It serves as an intermediary between the business and the customer's issuing bank or card issuer (the cardholder's financial institution), temporarily holding funds from successful transactions. Once the payments have been processed and authorised, the funds are transferred from the merchant account to the business's normal business bank account, usually within a few working days.

What are the differences between payment processors, payment gateways and merchant accounts?

Payment processors, payment gateways and merchant accounts each serve distinct functions. Here are the key differences between these components:

Role in the transaction process

Payment processor:

  • Facilitates the transaction by processing and authorising payments
  • Responsible for the secure transfer of funds between the customer's bank and the business's bank

Payment gateway:

  • Transmits payment information between the customer, the business and the payment processor securely
  • Enables communication and the exchange of sensitive payment data between key parties during the transaction

Merchant account:

  • Receives funds from the card issuer during the transaction settlement process
  • Holds funds from card-based transactions temporarily before transferring them to the business's main bank account
  • Provides the necessary infrastructure for businesses to manage electronic payments

Scope of services

Payment processor:

  • Offers a wider range of services, including fraud detection, chargeback management and compliance with payment regulations, in addition to processing transactions

Payment gateway:

  • Focuses primarily on transmitting payment data securely and does not usually provide additional services such as fraud detection or chargeback management

Merchant account:

  • Serves as a holding area for funds from card-based transactions, storing funds securely before they are transferred to the business's primary bank account

Integration with merchant systems

Payment processor:

  • May require businesses to establish a merchant account to process transactions, which could involve more complex setup procedures

Payment gateway:

  • Often provides simpler integration options for businesses, such as APIs, plugins and pre-built modules, enabling them to start accepting online payments quickly

Merchant account:

  • Involves setting up a specialised account with a financial institution or payment provider to accept and process card-based transactions

Some companies offer integrated solutions, combining payment processing, payment gateway services and merchant accounts. For instance, Stripe provides comprehensive payment services for businesses, which simplifies the way businesses manage online transactions.

How do payment processors, payment gateways and merchant accounts work together?

Payment processors, payment gateways and merchant accounts work together to enable frictionless electronic transactions that are as secure as possible. While some details may vary from business to business, most transactions involving payment processors, payment gateways and merchant accounts operate in a similar way.

Here's a brief overview of how these players collaborate during a typical online purchase:

1. Customer initiates the transaction

When a customer is ready to make a purchase on a business's website or app, they enter their credit or debit card information on the checkout page.

2. Payment gateway secures the data

The payment gateway encrypts the customer's payment information and transmits it from the business's platform to the payment processor securely.

3. Payment processor verifies the transaction

The payment processor receives the encrypted data from the payment gateway and communicates with the customer's bank or card issuer to verify whether the transaction is valid. This includes checking for sufficient funds and confirming that the card has not been reported as being stolen or fraudulent.

4. Card issuer authorises the transaction

If the payment processor verifies the transaction, the customer's bank or card issuer sends an authorisation code to the payment processor. The payment processor forwards this authorisation code to the payment gateway, which sends it to the business's platform. The business receives confirmation that the transaction has been approved.

5. Merchant account holds the funds

Once the transaction has been authorised, the funds are transferred from the customer's bank account to the merchant account, where they are held temporarily.

6. Payment processor settles and transfers the funds

At the end of each working day, the business submits all authorised transactions (in a single batch) to the payment processor for settlement. The payment processor transfers the funds from the merchant account to the business's normal business bank account.

By working together, these components ensure an easy, safe and efficient electronic-payment experience that benefits both customers and businesses.

How Stripe handles payment processing, payment gateways and merchant accounts

Stripe is a unified payment platform that brings together payment-processing, payment-gateway and merchant-account capabilities to deliver a cohesive and efficient service for businesses and platforms. By bundling these services into a single offering, Stripe simplifies both the setup process and ongoing operations. Here's how this approach benefits businesses:

  • Simplified onboarding
    Stripe's unified solution allows businesses to quickly sign up for an account and start accepting payments online, without needing to establish separate relationships with payment processors, payment gateways or financial institutions for merchant accounts. This saves time and avoids the complexity of managing multiple service providers.

  • Seamless integration
    Stripe provides a suite of APIs, libraries and pre-built modules that allows businesses to quickly integrate payment functionality into their websites, applications or e-commerce platforms. For businesses, this reduces the complexity of cultivating a smooth and secure payment experience for customers. What's more, businesses can reap the benefits of a bespoke payment system without the hassle of building a custom infrastructure.

  • Consistent and efficient processing
    By handling all aspects of the payment process, Stripe ensures that transactions are processed consistently and efficiently. This centralised approach can improve transaction success rates and minimise payment-processing issues which may arise when dealing with multiple service providers.

  • Enhanced security
    Stripe is designed to handle sensitive payment information securely, with built-in encryption and compliance with payment-industry standards, such as PCI DSS. This reduces the burden on businesses to ensure that payment data is secure.

  • Unified reporting and analytics
    With Stripe's integrated solution, businesses can access comprehensive reporting and analytics tools that provide insight into their payment activities across all channels. This helps businesses to monitor their performance, identify trends and make data-driven decisions to improve their operations.

  • Streamlined customer support
    Businesses that use Stripe's all-in-one service can rely on a single point of contact for support relating to payment processing, payment gateways and merchant accounts. This simplifies communication and ensures a faster resolution when issues arise.

By offering an integrated service that includes payment-processing, payment-gateway and merchant-account functionality, Stripe simplifies the payment process for businesses, allowing them to focus on their core operations while maintaining a smooth and secure payment experience for their customers. To learn more and get started, take a look here.

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