Regardless of whether you plan on launching a traditional brick-and-mortar business, wish to take advantage of the growing eCommerce industry and operate a strictly online business, or want to cater to prospective customers both online and off, one of the most important areas you need to address before you get started is how you’re going to process payments.
Two terms that you’ve likely come across in your research are payment gateways and payment processors. The problem? Understanding these payment systems can be a complex undertaking, making it difficult to know which payment support you need in order to operate the business model that interests you most.
What is the difference between these two, and which one will your business need in order to successfully process payments and meet the expectations of customers who buy products and services from you?
In this comprehensive guide, we will take a closer look at payment gateways and payment processors to better understand what they are, what purpose they serve, and, most importantly, which one is the best fit for your business.
What Is a Payment Processor?
As the name suggests, a payment processor is a vendor that handles all of the work that goes on behind-the-scenes in regard to accepting payments.
Basically, payment processors are responsible for transmitting essential payment data to you, the customer, your bank, and their bank when a customer places a payment using a debit or credit card. It’s important to remember that the processor’s involvement stops there.
While a payment processor is important for businesses to have if they anticipate having card purchases (which is standard in nearly every business, except maybe those that have high-risk business models, in which case you can look for alternatives like a service that will allow you to pay by check online), their only job is to manage the backend logistics of online or in-person card payments.
This can be confusing for some prospective owners who may believe that payment processors and payment gateways are an either-or choice. However, this is not often the case. This is where payment gateways come in…
What Is a Payment Gateway?
So, what is a payment gateway, and how does it tie into payment processors? Aptly named, payment gateways are the tools that you use to accept payments online or in person. Every physical business has a credit card terminal where users can swipe or scan their cards (or their phones) to allow them to make a payment.
Payment gateways essentially act as the beginning and the end of payments, transmitting the card data to the processor for approval or denial as well as communicating with your bank account.
However, payment gateways aren’t just limited to physical solutions. If you operate an online business, there are payment gateways known as virtual terminals (cloud or web point-of-sale software) that allow you to accept payments online.
Given that many businesses will operate solely online or offer a mix of both brick-and-mortar stores and an online experience, these will be essential to many, too. No matter what type of business you would like to start, a payment gateway will be an essential physical product or software solution that you will rely on.
What Do I Need to Use to Successfully Operate My Business?
Most businesses need both a payment processor and a payment gateway to run their business as one does not operate successfully without the other.
The payment gateway is what allows you to accept card payments online or in person, while the payment processor manages the logistics of payments and gives the final denial or approval. There are some exceptions to the rule, which we cover below, but generally speaking, payment gateways and payment processors work hand-in-hand.
What Are Some Considerations to Keep in Mind?
As with most business decisions, you shouldn’t leap for the first payment processor or payment gateway that appears to be a good fit.
There are many considerations to make that will impact what type of experience you have when processing payments: how much you will pay in order to process payments, and how well your payment processor or gateway integrates with other systems and processes currently in place. Let’s take a look at a few notable considerations that will influence the decision-making process.
- Some payment processors will provide equipment to help you accept payments offline, essentially lumping payment gateways and processors into one convenient service that will allow you to approach one instead of both (thereby answering the question, which should your business use?).
If you operate a physical store and you don’t anticipate shifting over to an online model anytime soon, you may only need to start a merchant account with a payment processor that can provide you with the equipment you need to process payments. Additionally, some companies offer end-to-end payment services that eliminate the need to get a payment gateway and a payment processor when you start an online business.
Make sure you do your research so that you have a clear understanding of what services are on the market and which will be the best fit for your business.
- All card transactions and card equipment costs, but these costs may vary between processors and gateway providers. It’s important that you find one that works best for your needs and will help you maintain profitability rather than absorbing a considerable amount of each sale.
Some companies may even offer customized subscription plans that allow you to receive features you want and eliminate those that are not appropriate for your business model. Shop around to see which products and services are currently on the market and what they have to offer you. While a percentage of each sale and monthly memberships are to be expected with payment gateways and processors, they don’t have to become a major issue that impacts your ability to grow your business.
- Take some time to understand how your payment gateway interacts and integrates with other software that is essential to your business. For example, some payment gateways can integrate with your CRM.
Why might you need this? Choosing to integrate your payment gateway with your CRM can help you get paid faster, consolidate some of the tools that you rely on to run your business for greater efficiency, and maintain a central customer database (although this may not be something that everyone needs). See what types of features are offered with each payment gateway and how they can support your business before committing to any one service.
Payment Processors and Payment Gateways Work Together to Process Payments for Your Business
Payment processors and payment gateways sound like two distinct services, which can lead many business owners to believe that they need to choose one or the other for their business. However, payment processors and payment gateways work together to allow your business to properly accept and process payments, regardless of whether you’re operating an online, brick-and-mortar, or hybrid business.
No matter what type of business you plan on opening, the guide above will provide you with all the information to understand how each of these services works and what you will need to consider before integrating any digital or physical solutions into your business.