Payment Processor vs. Payment Gateway: Which one do you need for your Business, and How much does it Cost?

Payment Processor vs. Payment Gateway: Businesses have witnessed so many changes in the last ten years that they could easily surpass the changes of the previous 100 years!

With the advent of many groundbreaking technologies, business owners have rewarded with many opportunities to customize customer experience, offer more services/products, generate more than one revenue stream, optimize the sales life-cycle and, of course, earn more.

These technologies are mobile development, web development, machine learning, business intelligence, IoT, and many more. However, there is one technology that has completely revolutionized the shopping experience, which is online payment technology.  

According to Paypers Payment Methods Report, nearly 2.1 billion people will use the digital payment method by the end of 2019. This number shows us how fast people are adopting an online payment ecosystem.

Since people prefer to pay using online methods, business owners don’t have any option left than accepting payment online. But here comes the tricky part.

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To receive the payment online through any mobile app or web site, the business owner should ask the app development company to add a payment module in it which processes the customer card’s details and transfer the payment from the customer’s bank to the merchant bank. But writing code to accept payment is a very complex task.

Thus, businesses acquire payment processors and payment gateways to receive the payment. Payment processor and gateway are nothing but the well-engineered payment tools provided by top FinTech companies to accept online payment.

However, there are many significant differences between the payment gateway and the payment processor. And the majority of business owners are unaware of it. As an upshot, they end up choosing the wrong one and pay extra.

So, today I will share the significant difference between a payment gateway and payment processor, which one do you need, and how much does it cost. I will also share why choosing the right payment gateway, or a payment processor is essential.

But before all of this, let’s first understand how online payment works because this learning is very crucial before knowing the difference between the payment processor and payment gateway.

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How does online payment transaction work?

People are paying online many times in a day but still do not know what type of magic happens after they touch the card at POS or adds card details to mobile app or websites. Ironically, business owners who are accepting online payment also don’t know about the working of online transactions!  

Generally, in online transactions, a lot of actors get involved, and every actor relies on another actor for the completion of its task. The following are the actors involved in online payment and their roles.

• Customer: Who owns the credit/debit card and pays through it.
• Issuing Bank: Bank which issues a card to the customer. Generally, a bank where the customer holds its account.
• Card provider: Independent companies which provide debit/credit card to customers.
• Merchant: Who accepts the payment through Point Of Sale system or the online window of the mobile app and website.
• Payment Aggregator: Payment aggregate is nothing but the payment processor and payment gateway providing companies. Using products of these companies, the merchant can accept payment online.
• Merchant bank: Where a merchant holds an account, and when a customer pays online, Money gets transferred from issuing bank account to merchant bank account.

Now, I should not forget to mention that a merchant can ask customers to pay in two ways:

1, Either customer can pay by tapping or swiping his credit/debit card at the point of sale system or customer can pay by entering his card details on the online window of the mobile or

2, Web application. It means we have to talk about two separate scenarios and roles of each actor in those scenarios to learn the difference between the payment processor and payment gateway.

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 Scenario 1: Paying using POS

• Jack enters the store, makes a purchase, and comes at the front counter to pay. Here, he swipes his credit card at the point of sale system of the merchant. As soon as he swipes the card, the card reader of the POS reads the card data.
• The inbuilt program of the POS now validates the card details, and if it finds it genius, it sends those details to the merchant bank. The inbuilt program here we have mentioned is nothing but the payment processor (NOT PAYMENT GATEWAY!)
• In the third step, the card-issuing company gets the data from the merchant bank.
• The card issuing company now checks the payment request. If it does not find any suspicious activity, it shares the data with the customer bank and asks them to debit the money from the customer account and transfer it to the merchant account.
• Once the customer bank performs this task, it sends a message to the card-issuing company, and the card-issuing company forwards it to the payment processor, which later shows the confirmation message to the merchant.

Scenario 2: Paying through the payment window of the mobile app or website

• Jack buys an online t-shirt online and enters his credit card details on the checkout window and hits Enter.
• As soon as he hits Enter, a very sophisticated program triggers and checks the digitally entered details of the credit card. This program is nothing but the payment gateway. (Since validating physical information and digital information of the card requires different logic, we are living in a world where there are payment gateway and payment processor, two different things!)
• Once payment gateway validates the information, it shares it with the payment processor. And from this point, the transaction moves further as scenario 1.  

So, have you found the difference between the payment gateway and payment processor? If yes, skip the next section. If no, keep reading.

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Which one do you need? Payment gateway or Payment processor?

Let’s come straight to the point.

Payment processor and payment gateway both are available in the market, and these both are developed for different purposes.

If you are running a brick mortar store and want to accept payment via cards and point of sale system, you have to go for the payment processor. And if you are running an online store where you are accepting payment online, you have to acquire both payment processors as well as payment gateway. Thankfully, companies which are providing payment processor are also offering a payment gateway.

So, now when you know which one you should choose based on the nature of your business, let’s discuss how much does it cost to choose the payment processor or both payment processor and payment gateway.

How much does it cost to acquire a payment gateway/processor?

There are many payment gateway/processor providing companies available in the market. However, we talk about the fee structure of the top two most popular payment processors/gateway.

Stripe

Stripe is the most popular global payment gateway/processor providing company. Using Stripe’s payment gateway/processor, you can accept payment in many channels such as Visa, MasterCard, America Express, and Discover credit/debit cards, eWallets like ApplePay and GooglePay. It also supports real-time currency conversation of 100 different currencies.  

If you wish to accept payment via the online checkout window, which requires both payment processors as well as payment gateway, you have to pay 2.9% + $0.30 for every transaction.

Whereas, if you wish to accept payment via point of sale system, which requires only payment processor, you have to pay 2.7% + $0.30 per transaction. Here, it is worth talking about that. If you accept payment through an international credit/debit card, you have to pay 1% extra to Stripe.

PayPal 

PayPal is one of the oldest payment processor/gateway providing company which provides some excellent services but with the higher charges.

For payment processor as well as payment gateway service, it charges 2.9% +$0.30 per transaction. For only the service, it costs 2.7% + $0.30 per transaction. However, when a merchant accepts payment through the international card, PayPal charges a whopping fee up to 4.4% + some fixed rate, which depends on the currency.

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Why choosing the right Payment Processor/Gateway is Very Important?

Needless to say, that payment processor/gateway is the fundamental need if you wish to accept payment online or through debit/credit card. But amid the presence of many payment processor/gateway providing companies, we should address the importance of the right payment gateway/processor. For that, I will share the example of Uber with you.

When Uber started its ride-sharing service in the UK, the payment module of its app processes the online payment requests with an unable payment processor/gateway, which was not able to convert currencies. Because of this, riders of European countries had to pay in US dollars rather than Euros. But lately, Uber changed its payment processor/gateway to Braintree, which is capable of accepting payments in many international currencies. Soon after this step of Uber, they witnessed significant growth in the number of rides. The following image depicts that how fast the number of Uber rides has increased.

In a Nutshell

To survive in the cut-throat race and acquire more users, you should develop a mobile app or website for showcasing your service. And when you develop a mobile app or website, you should integrate the payment gateway/processor in the payment module.

However, you don’t need a payment gateway and only need a payment processor when you want to accept payment via point of sale system. There are a lot of payment processor/gateway providing companies available in the market and all those companies charge based on the number of transactions.