Payment Processor vs Payment Gateway

In the modern day, cashless payments increasingly gain usage due to their convenience. Potentially, all businesses, both digital and offline, are expected to offer ways to pay for their goods and services online. Since this option requires an established online payment flow with a payment processor and a payment gateway involved, it’s critical to learn the basics about these solutions.

In 2022, the number of cashless transactions worldwide amounted to more than 1.2 billion, which is forecast to double by 2027. It shows the ultimate significance for businesses to be able to accept payments online, since this way to purchase goods and services is becoming predominant, and not offering is equivalent to losing customers who are not willing to pay otherwise. 

In this post, you’ll discover the technical specificities and use cases of both payment gateways and payment processors. You’ll also learn key differences between them and how they work together in the payment processing flow. 

What Is Considered A Payment Gateway?

A payment gateway is an intermediary that facilitates the secure transfer of payment information from a merchant’s website or application to the payment processor.

Key functions of a payment gateway include:

1. Encryption: Encrypting payment data, such as credit card numbers
2. Authorization: Forwarding payment information to the payment processor for transaction approval and returning the response (approved or declined)
3. Integration: Providing a seamless interface for customers to enter their payment details on the merchant’s website or app
4. Fraud prevention: Implementing security measures, such as tokenization and fraud detection algorithms

What Is an Example of a Payment Gateway?

The market accommodates quite a few providers of payment gateway services.

Let’s review the five most popular of them:

1. PayPal: A well-known payment gateway for its user-friendliness, security features, and global popularity.
2. Stripe: Offers a complete set of solutions for online businesses, including payment processing and simple connection possibilities.
3. Authorize.Net: An established payment gateway that provides payment processing, fraud prevention, and recurring billing.
4. Square: Known for its point-of-sale (POS) systems, now provides a payment gateway for online transactions with simple pricing.
5. Braintree: Braintree, a PayPal division, provides sophisticated features such as multi-currency support, mobile payments, and secure data storage.

Providers vary mostly by their region coverage, pricing opportunities, fees, technology, customer support, etc.

What Businesses Need a Payment Gateway?

Here are some of the many types of businesses that require a payment gateway in their transaction processing flow:

• E-commerce: Online stores and marketplaces that sell products or services directly to consumers.
• Travel and hospitality: Businesses that offer online booking and reservation services.
• Subscription services: Companies that offer products or services on a recurring basis.
• Software as a Service (SaaS): Providers of cloud-based software applications accessible via subscription.
• Digital content: Platforms that sell or distribute digital goods like e-books, music, and videos.
• HoReCa: Restaurants and food delivery services that offer online ordering and Airbnb apartment providers. 
• Professional services: Businesses offering services like consulting, legal advice, or online courses.

Note: A payment processor is always needed, while a gateway is optional in some cases. So, businesses that need a payment gateway are basically all businesses that have a digital app or a website and want to receive payments online. 

What Is a Payment Processor?

A payment processor is an intermediary that handles the technical aspects of processing payment transactions between merchants, customers, banks, and card networks.

Key functions of a payment processor include:

1. Authorization: Checking if the customer has sufficient funds or credit available to make the purchase.
2. Settlement: Transferring funds from the customer’s bank or credit card account to the merchant’s account.
3. Security: Ensuring that payment data is transmitted encrypted to prevent fraud.
4. Compliance: Fulfilling Payment Card Industry Data Security Standard (PCI DSS) requirements.

What Is an Example of a Payment Processor?

Five of the most widely used payment processors in the modern market are:

1. PayPal: A widely used payment processor that offers a variety of payment services for businesses and individuals, including online transactions and merchant services.
2. Stripe: A versatile payment processor offering a range of online payment solutions, known for its developer-friendly APIs and seamless integrations.
3. Square: Popular among small businesses, Square provides payment processing for both in-store and online transactions with simple pricing and easy setup.
4. Adyen: A global payment processor that provides businesses with a single platform enabling to accept payments across multiple channels and geographies.
5. Worldpay: One of the largest payment processing companies, Worldpay offers a wide range of payment processing solutions for businesses of all sizes, including online, mobile, and in-store payments.

Note: PayPal, Stripe, and Square are listed in two categories as they provide both payment processing and payment gateway services. 

Choosing a particular payment provider boils down mostly to your business model and the countries your target audience is citizens of. 

What Businesses Need a Payment Processor?

Here are some of the many types of businesses that don’t usually need a payment gateway in their transaction processing flow:

• Retail stores: Physical stores that accept card payments, whether through traditional POS systems or mobile card readers.
• Restaurants: Establishments that accept credit or debit card payments for dine-in, takeout, or delivery orders.
• Service providers: Businesses offering services such as beauty salons, consulting firms, and repair services that accept credit card payments.
• Event organizers: Organizers of events like concerts, conferences, or festivals that sell tickets online or at the venue.
• Healthcare providers: Medical practices, clinics, and hospitals that accept card payments for services rendered.
• Hotels and lodging: Accommodation providers, including hotels, motels, and bed and breakfasts.
• Transportation services: Taxi companies, ride-sharing services, and public transportation ticketing.

Note: Since a payment processor is always needed, while a gateway is optional in some cases, businesses that can go without a payment gateway are those that receive transactions in person or through POS terminals. 

What’s the Difference Between a Payment Processor and a Payment Gateway?

Since the payment gateway and payment processor are two distinct participants in the payment processing flow, the comparison from the perspective of which one is better is pointless. Yet, it’s possible to distinguish factors by which they differ as software solutions or services provided by third-party vendors. 

Discover the difference between a payment gateway and a processor from the table below:

As you can observe, payment processor vs payment gateway fuifill different roles and integrate into different software solutions, yet they work in pair, which we’ll learn in detail in the below section. It’s worth mentioning that they fall within the scope of similar legal regulations, and both must have strong security mechanisms in place. 

How Do Payment Processors and Payment Gateways Work Together?

In the payment processing flow, the payment gateway and payment processor work together, bonding other parties involved, which are the cardholder, merchant, acquiring bank, merchant bank, and card network. 

The payment gateway gathers information about the payment card and the transaction and transfers it to the payment processor. In its turn, the payment processor, working with both the acquiring bank and a merchant bank, runs a balance, security, payment card belonging, and other checks. It also returns the failure or success response.

You can review the payment processing flow with the parties indicated, and both the payment processor and payment gateway are included in the infographic below.

#1 In the scenario where the transaction is conducted via a website, both a payment gateway and a payment processor are needed. 

At the same time, the merchant payment processor can handle the transaction without a payment gateway when conducting an in-person or a POS terminal-based transaction. So:

#2 In the scenario where the transaction is conducted via a POS terminal, only a payment processor is involved. 

Pro insight: From DashDev’s experience, a payment gateway and a payment processor can be a single solution for only one payment processing infrastructure vendor. At the same time, payment gateway and payment processor services can be provided by two different vendors.

Choosing one or another option doesn’t make much processing difference but can impact the project from a development perspective. 

Final Take

Understanding the distinct roles and functionalities of payment processors and payment gateways is crucial for businesses. Payment processors are responsible for handling the technical aspects of transactions, while payment gateways provide a secure interface for customers to enter their payment details online. Both components are essential for facilitating secure and efficient online transactions.

Should you intend to create a payment processing flow and develop or integrate a payment processor, payment gateway, or both, you need a trusted fintech provider. Consider DashDevs as your primary choice for a tech partner. With more than 12 years of experience and over 500 projects completed, we’re ready, willing, and able to contribute to your best project. 

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