Payment Gateway & Payment Processor - What's the Difference?

Online sales have grown exponentially, especially after the Covid-19 pandemic, when many companies decided to shift towards digital ways of selling. However, a business needs to have several systems right in place to sell and accept payments online. To begin with, there are four key parties involved in an online payment: the customer buying the product, the merchant selling the product, the issuing bank (the buyer’s bank), and the acquiring bank (the merchant’s bank).

Both payment gateways and payment processors are vital components of online payments, but there are differences in their working and role. Below are the key differences between a payment gateway and a payment processor.

Understanding What They Are

Payment Gateway: Gateway is responsible for transmitting digital payment information to the payment processor to execute a transaction. It is a software system that sends the customer’s payment details to the processor after encrypting it to ensure security. Customers enter their payment details on a website’s checkout page, which is actually the merchant’s gateway. The technology of SSL (Secure Socket Layer) encryption keeps the customer’s data confidential while transmitting from the customer’s device to the issuing bank.

Payment Processor: A payment processor handles customers’ transactions when purchasing something online. An online payment processor is responsible for relaying payment details from the customer’s system to the issuing and the acquiring banks. If the amount gets deducted from the buyer’s account without completing the transaction, the processor is the party responsible for rectifying the issue. Furthermore, it follows advanced security measures to ensure safe transactions between the parties involved, reducing any chance of fraud.

Different Roles in a Transaction

Payment Gateway: These are the steps involved in how a payment gateway India works:

The gateway sends encrypted payment details from the customer’s device to their issuing bank
The gateway decodes the data and presents it to the issuing bank in an understandable format
The issuing bank declines or authenticates the payment
After authentication, the gateway delivers the payment details to the processor to continue the transaction

Payment Processor: These are the steps involved in how a payment processor works:

Upon receiving encrypted payment details from the gateway, the processor sends them to the merchant’s acquiring account
The acquiring sends a payment request to the buyer’s issuing bank to verify the details and authenticate the transaction
The issuing bank rejects or approves the payment by sending a message to the gateway, further transmitting it to the processor.
If the payment is approved, the transaction completes once the merchant receives the payment.

Some Major Points of Difference

Here are a few points of difference between the two parties involved:

A gateway is a service/tool that gets a transaction declined or approved between a customer and a merchant. A processor is an institution that securely executes transactions and obtains funds from the issuing bank.
A gateway can plug into an eCommerce store or business accounting software to process online transactions within the existing program. A processor sets up a merchant account to process digital payments.
Gateway is a source to accept payments online. The processor ensures proper disbursal of funds by helping direct transfers from the issuing bank to the acquiring bank.

Which one is more important in an Online Transaction?

A merchant will need both a payment gateway and a payment processor to accept payment online. The gateway starts and ends a transaction, where customers enter their payment details and receive denial or approval of the transaction. On the other hand, a processor is responsible for transmitting data from the issuing bank to the acquiring bank to authenticate the transaction. Therefore, both are equally important for online payments.

Choosing the Best Gateway and Processor for a Business

After understanding what happens behind the scenes while processing online payments, it’s time to choose the best gateway and processor for an eCommerce business. Most importantly, it should be secure, affordable, and reliable. Since it is responsible for encrypting and authenticating the customers’ payment details, it should ensure smooth transactions while keeping their data secure. There are hundreds of payment gateways and online payment processors in India. The best is the one that works with multiple banks and payment systems to accept payments in multiple currencies.

The differences between a payment gateway and a payment processor must be apparent now. Both have different roles in online transactions, so it is essential to have both in an online payment system. However, choosing a reliable, efficient, and accurate service that keeps customers’ data protected with high-end security measures is critical.