Online sales are growing. In the wake of the pandemic, companies have shifted towards a more digital way of selling and have started to find ways to provide digital payment methods in-store. In fact, according to this survey from American Express Digital Payments, 71% of merchants agree that their annual online and mobile sales have increased. As a business, how are you managing this shift?
To sell online, you must first have the right systems and processes in place. Yet, finding and sourcing a payment provider can come with challenges, especially if you are new to the space. As the world has continues to become a digital marketplace, and you work to bring your company into the future, you may have found yourself asking questions such as:
What is a merchant account?
What is a payment processor, and what is the difference between that and a payment gateway?
What options do I have for providing my customers with different payment methods? Will it cost me money?
These are all common questions around payments, each with a nuanced answer. In this blog, we will take a look at one of the most important things you need to know about setting up online payments: payment gateways vs. payment processors.
What is the role of an online payment gateway?
It’s essential for any business that accepts electronic payments online, no matter the volume, to have a payment gateway to facilitate the process.
Payment gateways are essentially the “online” equivalent of a physical credit and debit card reader. If you are familiar with in-store payment systems, look at payment gateways as the equivalent of a point of sale (POS) terminal, but online.
Where POS terminals are primarily designed for in-person/in-store transactions, online payment gateways allow for card-not-present (CNP) transactions. These transactions are ones where the buyer and seller never meet face to face (online). In essence, a payment gateway transfers the data between the point of entry – be that a POS terminal, website, or mobile device – to the payment processor to continue the payment lifecycle.
To summarize: payment gateways act as in-between facilitators. They provide a service of processing information inputted during checkout and managing the authorization or fulfillment of payments made for online retailers. It doesn’t just stop there, though. As we mentioned, they are also used in brick-and-mortar establishments.
So, why use a payment gateway?
To begin, they take charge of online purchasing’s many small tasks, including:
- encrypting (i.e. securing) sensitive info, such as credit card payments
- And helping you hit specific standards for online data security, ensuring safe transactions between you and your customer.
More importantly, gateways save you time and work as a business owner. They help to remove the need for you to input any payment info received on your end manually. Payment gateways also give flexibility in the types of payments that your customers can use. And remember: flexibility is good. It can increase sales by opening up accessibility for customers with a myriad of different payment types.
Fun fact: did you know that customers are likely to abandon their carts due to a lack of payment options? It’s true! Picking the right payment gateway can help you curb abandoned or lost customers. That’s why offering payment flexibility is absolutely vital to remain competitive.
At this point, we’d like to remind you that not all providers are built the same. Security and reliability of payment gateways differ depending on the product or payment gateway provider you choose to use for your business. As a merchant, security and fraud should always be top of mind when configuring payment methods for you and your customers. Working with the right payment gateway can help you simplify payment processing, consolidate vendors, and ease reporting and reconciliation.
Different types of payment gateways
Now that you know the main difference between a payment gateway and a payment processor let’s dive into the different payment gateways.
Traditional Payment Gateways
A traditional gateway helps merchants to accept payments for goods and services online. With a traditional gateway, payment information is most commonly:
- Entered into an eCommerce website when purchasing a product. It can also be entered into a hosted payment form, or mobile app, depending on how the payment flow is designed.
- Generally, customers are required to hand-key their information into a virtual terminal.
Digital Payment Gateways
Payment gateways have gone beyond just the “online world.” In the last few years, gateway technology has expanded to create a virtually “frictionless” purchasing experience across all sales channels and devices, no matter what industry you are in.
Beyond what a traditional payment gateway offers, these online payment gateways can be used to:
- Make in-store purchases easier. They allow for easy processing of swiped or dipped transactions at a point-of-sale (POS) or mobile device.
- Integrate payments with existing software systems that merchants and consumers both use daily
- Accept tapped transactions using near field communication (NFC) technology.
So, how exactly does a Payment Gateway work?
When a customer pays, the encrypted payment details are sent to the payment processor via the gateway. You may know some of the more famous payment gateways, from Amazon Payments, Wepay, Stripe and Paypal; these brands are a part of our everyday lives.
But as easy as it can be to find something we like on a site, click it, and checkout with no problem, a lot is going on behind the scenes. Here is a step-by-step breakdown of what happens during a purchase:
- The payment processor notifies the card-issuing bank. Then the transaction is either approved or rejected.
- The payment processor delivers the authorization (or decline) back to the payment gateway provider.
- The payment gateway sends the approval or declines to the person who started the transaction (this is either the merchant or the customer).
- If approved, the funds are then deducted from the customer’s account and sent to the merchant’s bank account.
- From there, merchants have the option to upload transactions one at a time or in batches.
On top of all that, data communication from the gateway is always encrypted. This adds that extra layer of work (and security) through the process.
Picking the right payment gateway provider can help you make your work easier. How do you know which one is right for your business? A payment gateway should deliver to help optimize payments and provide a seamless processing experience + security, growth with your business, etc. Check out Knit Payments today to learn more about how we can support you in accepting payments from your customers.
What is the role of a payment processor?
Now that we understand payment gateways, we’re going to turn our heads to payment processors. Like two peas in a pod, you need both to run a successful business and accept payments.
Payment processors are an intermediary between your business and the financial institutions involved in a merchant transaction. When your customer swipes their card, the processor takes care of everything, from encrypting their information, sending that information to their bank for confirmation, and finally to your bank.
Ways to accept payments as a merchant:
- Credit and debit cards
- Bank/ACH payments
- Contactless payment (e.g., Apple Pay or Google Pay)
- And the emerging cryptocurrency.
Who’s involved in each translation?
For an online payment transaction to go through, the following players must be accounted for:
- Your technology partner
What is the primary difference between the two?
Payment gateways essentially capture and transmit credit card data to the payment processor. They communicate approvals or rejections of payment to you and your customer. To break it down even more:
- Payment processors work behind the scenes by securely routing data to the different parties from the beginning of the process to the settlement of funds in your bank account.
- The payment processor facilitates the transaction.
- A payment gateway is a tool that communicates the approval or decline of transactions between the company and customers.
How do they work together?
To process online transactions for your business, you need both a payment gateway and a payment processor. The gateway is the beginning and end of the transaction. The customer will enter their credit card information and receive an approval or denial of the transaction.
The payment processor moves the information between the customer’s bank and the merchant bank. Every transaction processed online needs both.
You cannot have one without the other; Here is how the payment authorization process works and how payment processors work with payment gateways:
1. The customer buys an item on a site with a credit or debit card.
2. Info goes through the payment gateway,
- Gateway encrypts the data for security purposes and sends it to the processor.
3. The payment processor then sends a request to the customer’s issuing bank. This is a check to see that they have enough credit to pay.
4. Issuing bank responds with an approval or denial.
5. Payment processor sends the answer back to the merchant that the sale was approved then tells your merchant bank to credit your account.
Finding the suitable Payment Processor
Choosing a payment processor might seem like a challenge. There are lots of options; they all claim to be the ideal solution for your business. You want to make sure this is chosen with care since it will impact your customers as well. When selecting your provider, you have to understand what your company specifically needs. From there, you need to find a provider that offers many different payment options. These include cash, cashless cards, digital wallets, etc.
Other considerations for choosing the right payments provider:
- Cost / Fees
- Lower fees are always preferable!
- Existing bank-related processors can raise fees, ultimately eating into your bottom line.
- Integrations and third party services
- Customer Support
- A product that can grow with you
Benefits of an All-In-One Solution
While payment gateways were primarily designed for traditional eCommerce transactions, gateway technology has evolved to keep pace with the changing payments landscape.
Modern gateways can also manage payment processing across a much more comprehensive range of channels and devices. This helps to deliver a more seamless omnichannel experience for merchants and customers alike. This includes:
- I.e. CRM, ERP, or accounting platforms, automatically logging sales as they come in to help with your payroll.
- POS systems allow card-present payments that are swiped, dipped, or tapped on a credit card reader.
While you could obtain your merchant account, payment gateway, and payment processing from different providers, it can create difficulties whenever issues or disputes arise. By purchasing all three from the same provider, you minimize issues/disputes. Whenever you face a problem, there is only one provider you need to call.
Give your customers the support they deserve with all-in-one payments, payroll and HR solutions, like Knit Payments.
Knit payments integrate seamlessly with any existing technology that your company already has, or you can take advantage of all of Knit’s other products to unify your back-end systems. Learn more or try it out for 30 days, free.