Merchant account vs. payment gateway: What’s the difference?

Last updated August 4, 2023
  1. Introduction
  2. What is a merchant account?
  3. Who needs a merchant account?
  4. What is a payment gateway?
  5. Who needs a payment gateway?
  6. How do merchant accounts and payment gateways work together?
  7. Merchant accounts vs. payment gateways
  8. How Stripe can help

Merchant accounts and payment gateways are important tools for businesses that accept electronic payments, such as credit and debit card transactions. With 82% of US customers using digital payment methods in 2021, accepting electronic payments can help businesses be competitive and thrive in the digital economy. By processing transactions securely and reliably, these components of modern payment systems help businesses expand their customer base, increase sales, improve cash flow, process payments more efficiently, reduce the risk of fraud, and increase customer satisfaction.

It can be complex to set up the various components of a payments system. But it’s necessary to navigate this complexity, since a company’s payments infrastructure, hardware, and software forms the backbone of customer payment experiences and transaction processing.

Before you build a payments system that meets your business’s particular needs, you first need to understand what each part does and how they work together.

Let’s take a closer look at what merchant accounts and payment gateways are, how they’re different, how they work together, and how Stripe’s comprehensive payment solutions provide merchant account and payment gateway functionality to businesses.

What’s in this article?

  • What is a merchant account?
  • Who needs a merchant account?
  • What is a payment gateway?
  • Who needs a payment gateway?
  • How do merchant accounts and payment gateways work together?
  • Merchant accounts vs. payment gateways
  • How Stripe can help

What is a merchant account?

A merchant account is a specialized bank account that enables businesses to accept electronic payments, such as credit and debit card transactions. Businesses use merchant accounts specifically for processing and settling electronic payments, while they use regular business bank accounts for general banking transactions, such as deposits and withdrawals.

When a customer pays for goods or services using a credit or debit card, the merchant acquirer requests the card issuer to authorize the transaction. If the issuer authorizes the transaction, the acquirer “captures” the funds, meaning they send a request to the issuer to transfer the funds from the customer’s account to the merchant account. The merchant account provider then processes the transaction, deducts any fees, and deposits the remaining funds into the business’s regular bank account.

Who needs a merchant account?

Any business that wants to accept electronic payments needs a merchant account. This includes businesses of all sizes and types, from small startups and local retailers to large multinational corporations.

Electronic payments are particularly important for businesses that operate in industries with high transaction volumes, such as retail, ecommerce, hospitality, and healthcare. They are also important for businesses that want to grow their customer reach, improve their cash flow, and streamline their payment processing operations.

Electronic payments are the preferred method of payment for many customers. Globally, noncash retail payment transactions have increased at a compound annual growth rate of 13% per year, between 2018 and 2021, with growth as high as 25% in some markets. Businesses that want to remain competitive and meet the expectations of modern customers need to have access to merchant account functionality.

That said, the need for merchant account functionality doesn’t mean every business needs to open its own merchant account. Further below, we’ll explain how Stripe offers businesses full merchant account functionality without requiring them to open and maintain their own merchant account.

What is a payment gateway?

A payment gateway is an online service that gives businesses the ability to securely accept electronic payments over the internet. It acts as an intermediary between the business and the customer’s bank, processing the transaction and ensuring that the funds transfer securely.

When a customer makes a purchase on a website, for example, the payment gateway securely collects and encrypts their card information and transmits it to the customer’s bank for verification. Once the transaction is authorized, the payment gateway sends a confirmation to the business, which then allows the customer to complete their purchase.

Payment gateways typically charge a fee for each transaction processed, as well as other fees such as setup fees and monthly maintenance fees. They usually also offer a range of features and services, including fraud detection and prevention, chargeback management, and multicurrency support.

Who needs a payment gateway?

For the most part, any business that needs a merchant account also likely needs a payment gateway. This applies to businesses in a vast range of industries, markets, and stages of development.

For instance, any business that has a website or an online store will need a payment gateway to enable its customers to make purchases electronically. Even if a business primarily operates in-person, such as a brick-and-mortar retail store, it can benefit from a payment gateway to accept contactless payments and improve the checkout experience for its customers.

A business may also need a payment gateway if it wants to improve customer acquisition and retention and drive more revenue. Again, since electronic payments are the preferred method of payment for customers in most global markets, businesses that don’t offer this option will have a hard time staying competitive.

A business might also need a payment gateway if it is experiencing challenges with its current payment processing system, such as long processing times, high transaction fees, or a lack of support for different payment methods.

How do merchant accounts and payment gateways work together?

Merchant accounts and payment gateways work together to process payments for merchants in a secure and efficient manner. Here’s how the process typically works:

  1. A customer makes a purchase on a business’s website or through a point-of-sale system and chooses to pay using a credit or debit card.
  2. The payment gateway securely collects the customer’s payment information, such as the card number, expiration date, and security code.
  3. The payment gateway encrypts the payment information and securely transmits it to the customer’s bank for verification.
  4. The customer’s bank verifies the card’s validity, available balance, and whether the transaction is authorized by the cardholder.
  5. If the transaction is approved, the customer’s bank sends a response to the payment gateway indicating that the funds are available.
  6. The payment gateway then sends the payment information to the business’s designated merchant account for processing.
  7. The merchant account verifies the payment information, processes the transaction, and transfers the funds from the customer’s bank to the business’s bank.
  8. The payment gateway sends a confirmation back to the business’s website or point-of-sale system, allowing the customer to complete their purchase.
  9. The funds are settled into the business’s designated bank account, typically within a few business days.

Merchant accounts vs. payment gateways

Merchant accounts and payment gateways are important payment-system components that enable businesses to accept electronic payments. Although they are closely related and work together to process payments electronically, they serve different functions:

  • The payment gateway acts as an intermediary between the customer and the business, securely transmitting payment information and authorizing transactions. It encrypts payment data and sends it to the business’s designated merchant account for processing.
  • The merchant account is a specialized bank account that enables businesses to accept electronic payments, process transactions, and settle funds. It receives payment information from the payment gateway, processes the transaction, and transfers the funds from the customer’s bank to the business’s bank.

Merchant accounts and payment gateways provide a simple payment processing experience, ensuring that transactions are authorized, processed, and settled as quickly as possible, while upholding strong security standards.

How Stripe can help

By offering the combined functionality of a payment gateway and merchant account, Stripe simplifies payment processing for businesses, reducing the need for multiple systems and providers. Benefits include increased efficiency, reduced costs, simpler implementation, fewer system disruptions, and a payments ecosystem where the components are more integrated, which improves internal operations and generates a better customer experience.

Stripe’s comprehensive solution replaces traditional merchant account and payment gateway setups, enables businesses to accept electronic payments, and handles the payment processing cycle from start to finish. When a customer makes a purchase, Stripe securely collects and encrypts their payment information and authorizes the transaction. It then processes the transaction and settles the funds into the business’s designated Stripe account, typically within a few business days. The business can then transfer the funds to its regular bank account.

Stripe charges fees for each transaction processed through its platform, but these fees are typically lower than those charged by traditional merchant account providers. Additionally, Stripe offers a range of features and services, including fraud detection and prevention, chargeback management, and multicurrency support. To find out more about how Stripe’s suite of solutions can be tailored to solve your needs around in-person and online payments, start here.

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