With more customers using digital payment methods, business owners must understand the distinctions between payment processors and payment gateways. Both are important for businesses but fill different roles. A payment gateway securely sends payment data, while a payment processor authorizes the transaction and moves the money between banks.

Understanding how these components work together is a key part of delivering smooth and reliable payment experiences. Below, we’ll cover the main differences between payment processors and payment gateways, their respective roles, how they interact, and how Stripe approaches their functions in a unified, comprehensive way for platforms and businesses.

What’s in this article?

• What is a payment processor?
  
• What is a payment gateway?
  
• What are the differences between payment processors and payment gateways?
  
• How do payment processors and payment gateways work together?
  
• Payment service providers (PSPs)
  
• How Stripe Payments can help
  

What is a payment processor?

A payment processor is a company or service that facilitates electronic transactions between customers and businesses by processing and authorizing credit card, debit card, and other digital payment methods. A payment processor acts as an intermediary between the customer’s bank (issuing bank, or issuer) and the business’s bank (acquiring bank, or acquirer), ensuring that funds move securely from the customer’s account to the merchant account.

Payment processors play an important role in ecommerce and retail by verifying the customer’s payment details, checking for fraud, ensuring compliance with relevant regulations, and authorizing or declining the transaction. Typically, they charge the business a fee for their services, which may include a per-transaction fee, a percentage of the transaction amount, or both.

What is a payment gateway?

A payment gateway is a technology or service that securely transmits payment information between the customer, the business, and the payment processor. It acts as a bridge between the parties involved in a transaction, enabling the exchange of information required for processing payments. A payment gateway is the digital equivalent of a point-of-sale (POS) terminal found in physical retail stores.

Using a payment gateway ensures that sensitive payment information is handled securely. Payment gateways adhere to strict security standards and encryption protocols. These security features can include data encryption, automated fraud detection, Payment Card Industry Data Security Standard (PCI DSS), and tokenization, which masks customer payment information.

What are the differences between payment processors and payment gateways?

Both payment processors and payment gateways are important components of the electronic payment ecosystem, but they serve different functions. Here are the key differences between them:

Role in the transaction process:

• Payment processor: A payment processor is responsible for facilitating the transaction by processing and authorizing payments, as well as ensuring the secure transfer of funds between the customer’s bank and the business’s bank.

• Payment gateway: A payment gateway is the connective component responsible for facilitating communication and securely transmitting payment information between the customer, the business, and the payment processor.

Scope of services:

• Payment processor: Payment processors offer a broad range of services, including fraud detection, chargeback management, and compliance with payment regulations, in addition to processing transactions.
  
• Payment gateway: Payment gateways focus primarily on the secure transmission of payment data and typically do not provide additional services like fraud detection or chargeback management.
  

In most cases, businesses need both a payment gateway and a payment processor. However, many providers bundle payment gateway and processor services into a single solution, so businesses don’t have to manage them separately.

Integration with business systems:

• Payment processor: Payment processors usually require businesses to establish a merchant account to process transactions and may involve more complex setup procedures. A merchant account is a type of bank account that allows businesses to accept card payments. Traditionally, these needed to be set up through a bank, but many payment providers offer them as part of their suite of services.

• Payment gateway: Payment gateways often provide easier integration options for businesses, including application programming interfaces (API), plugins, and prebuilt modules, allowing businesses to start accepting online payments quickly.

Costs and fees:

• Payment processor: A payment processor typically charges per-transaction fees or a percentage of each payment to cover the costs of authorizing and transferring funds between banks.
  
• Payment gateway: A payment gateway often charges setup or monthly subscription fees for maintaining the secure technical connection, sometimes including a small, flat fee per transaction.
  

Some companies offer both payment processing and payment gateway services as part of an integrated solution. For example, Stripe provides end-to-end payments services, making it easier for businesses to manage their online transactions.

How do payment processors and payment gateways work together?

Payment processors and payment gateways play different but complementary roles in facilitating secure and efficient electronic transactions for businesses and customers. Together, they enable frictionless communication and data transfer between parties.

Here's a step-by-step overview of how payment processors and payment gateways collaborate during an online transaction:

• Customer initiates the transaction: When a customer is ready to make a purchase, they enter their credit card information (or other payment information) on the business’s website or app.

• Payment gateway’s role: The payment gateway securely encrypts the customer’s payment data and sends it to the payment processor.

• Payment processor’s role: The payment processor receives the encrypted payment data from the payment gateway and forwards it to the customer’s bank (the issuing bank) to request authorization for the transaction.

• Issuing bank’s response: The customer’s bank verifies the payment details, checks for available funds, and either approves or declines the transaction based on its assessment. The issuing bank sends this response to the payment processor.

• Processor to gateway communication: The payment processor shares the bank’s response (approval or denial of the transaction) with the payment gateway.

• Gateway to business communication: The payment gateway relays the response to the business’s website or app, which displays the appropriate message to the customer (transaction approved or declined).

• Settlement of funds: If the transaction is approved, the payment processor coordinates the transfer of funds from the customer’s bank account to the business’s bank account. This process, called settlement, typically takes a few business days to complete.

Throughout this process, the payment gateway and payment processor work together to handle sensitive payment information securely and efficiently, while adhering to industry standards and encryption protocols such as PCI DSS.

Payment service providers (PSPs)

A payment service provider (PSP) combines payment gateway and payment processor functionality into a single service, simplifying setup and management for businesses. Stripe, for example, functions as both a payment gateway and a payment processor through a single, integrated platform for businesses.

How Stripe Payments can help

Stripe Payments provides a unified, global payments solution that helps any business—from scaling startups to global enterprises—accept payments online, in person, and around the world.

Stripe Payments can help you:

• Optimize your checkout experience: Create a frictionless customer experience and save thousands of engineering hours with prebuilt payment UIs, access to 125+ payment methods, and Link, a wallet built by Stripe.
  
• Expand to new markets faster: Reach customers worldwide and reduce the complexity and cost of multicurrency management with cross-border payment options, available in 195 countries across 135+ currencies.
  
• Unify payments in person and online: Build a unified commerce experience across online and in-person channels to personalize interactions, reward loyalty, and grow revenue.
  
• Improve payments performance: Increase revenue with a range of customizable, easy-to-configure payment tools, including no-code fraud protection and advanced capabilities to improve authorization rates.
  
• Move faster with a flexible, reliable platform for growth: Build on a platform designed to scale with you, with 99.999% historical uptime and industry-leading reliability.
  

Learn more about how Stripe Payments can power your online and in-person payments, or get started today.