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Updated Nov 05, 2024

Payment Gateways vs. Payment Processors

Learn all about the distinction between a payment gateway and a payment processor in this informative, in-depth guide, including which types of business need which kind of infrastructure.

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Written By: Max FreedmanBusiness Operations Insider and Senior Analyst
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This guide was reviewed by a Business News Daily editor to ensure it provides comprehensive and accurate information to aid your buying decision.
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Every business that accepts debit and credit card transactions needs the ability to facilitate payments. The world of payment processing can be an arcane and confusing place to those unfamiliar, though. 

One common source of confusion is the difference between payment gateways and payment processors and which a business might need. This guide will demystify these related, yet distinct, components of credit card processing and help you determine which is right for your business.

What is a payment gateway?

A payment gateway is a software tool that connects a customer’s payment data to a business’s merchant account by way of a payment processor. It can be used to facilitate both online and in-person transactions. 

The payment gateway is the digital tool that encrypts transaction data to ensure it is secure. It also communicates the success or failure of the transaction.

How does a payment gateway work?

It’s often easiest to understand payment gateways through the eyes of the issuing bank (the bank behind the customer’s card) and the acquiring bank (your bank). 

Here’s how these banks are involved in the payment process:

  1. The customer makes a purchase using their credit or debit card.
  2. The payment gateway encrypts the customer’s card data and sends it to the acquiring bank.
  3. The payment gateway identifies the credit card network behind the card and sends transaction data to the issuing bank.
  4. The issuing bank determines whether the transaction is valid or fraudulent.
  5. The issuing bank checks the customer’s available credit, if applicable, to see whether the transaction can be verified.
  6. The issuing bank approves or declines the transaction.
  7. The payment gateway conveys the issuing bank’s decision to the acquiring bank, which informs you that the purchase is paid.
Did You Know?Did you know
More than 33 percent of the world’s population shops online, making e-commerce a $6 trillion industry. Businesses that don’t offer customers the ability to purchase goods and services online may be missing out on serious revenue.

How can you set up a payment gateway?

Typically, your credit card processing company can set up a payment gateway. Experts recommend this route because compatibility issues are rare when your credit card processing and payment gateway infrastructure overlap. Additionally, going in-house for your payment gateway often means you’ll avoid setup fees.

Sometimes, your credit card processor will have its own payment gateway. In other cases, your credit card processor will maintain a relationship with a third-party company. Either way, you should read your contract’s terms and conditions closely to see how much you’ll pay for payment gateway access.

What is a payment processor?

A payment processor is a service that facilitates payments, often through the use of a payment gateway. Payment processors transmit data among three parties crucial to a transaction: your business, the issuing bank and the acquiring bank. 

Payment processors typically provide your physical infrastructure for accepting payments. They can also help set you up with a merchant account, which you’ll need before accepting credit and debit card payments

Payment processors can be divided into two categories:

  • Front-end payment processors connect with credit card networks and transaction settlement services to manage merchant accounts.
  • Back-end processors oversee the actual movement of funds among accounts. Front-end payment processors typically contract with back-end processors to provide full services to clients.

Like payment gateways, payment processors charge fees for their use. Read your contract’s terms and conditions closely to determine whether you owe the following fees:

Payment gateway vs. payment processor: What’s the key difference?

Payment gateways are the software tools that collect payment data, such as the customer’s bank information, their debit or credit card information, and the business’s bank information. The payment gateway then encrypts that data to ensure it is secure before communicating it to the payment processor.

From there, the payment processor takes the data the payment gateway has collected and communicates it between the issuing and acquiring banks. Payment processors are not tools like gateways but instead services that actually facilitate the payment. However, they require the information captured and secured by the gateway in order to do so.

For most businesses, both payment gateways and processors are important parts of the payment processing equation. Some businesses may be able to get away with just one or the other, though. To determine whether your business needs both or just one of these elements depends on how your customers purchase your products and services. 

TipTip
When you work with the best credit card processors, you can access payment gateways and processing services all in one place. Look for companies that make it clear exactly what you’ll pay for comprehensive payment processing services.

How to determine if you need a payment gateway or a payment processor

Payment gateways govern all online transactions, which are typically called “card-not-present transactions.” Phone and e-commerce sales also fall into this category, so any online business should have a payment gateway. However, any business with a payment gateway should also have a payment processor. As explained above, a payment gateway can’t work without a payment processor.

If you accept in-person sales only (a restaurant is a great example), you may only need a payment processor. However, if your business wants to accept online transactions too — in the case of the restaurant, this may be for curbside pickup or delivery options — you should use a payment gateway as well.

Both payment gateways and processors offer excellent data encryption. You can also use both to send transaction data for processing. The below table explains where processors and gateways do and don’t overlap:

Use

Payment gateway

Payment processor

Card-present transactions

Only necessary if your POS terminal is virtual

Necessary

Card-not-present transactions

Necessary

Also necessary, but payment gateway handles the majority of customer-facing work

Data transmission and encryption

Excellent choice

Excellent choice

Payment gateways and processors are important elements

Most businesses can benefit from using both a payment gateway and payment processor. Today, many businesses operate both digital and physical points of sale, and both components of payment processing are necessary to support these operations. Payment gateways excel at handling the digital, online sales, while payment processors are effective for in-person transactions. Working with the right payment processing company guarantees you’ll have access to all the tools and services you need to accept whatever form of payments your customers prefer.

Jacob Bierer-Nielsen contributed to this article.

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Written By: Max FreedmanBusiness Operations Insider and Senior Analyst
Max Freedman has spent nearly a decade providing entrepreneurs and business operators with actionable advice they can use to launch and grow their businesses. Max has direct experience helping run a small business, performs hands-on reviews and has real-world experience with business technology. At Business News Daily, Max covers accounting software, POS systems and digital payroll solutions, as well as leading medical software and text message marketing services. Max has written hundreds of articles for Business News Daily on a range of valuable topics, including small business funding, time and attendance, marketing and human resources.
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