If you are studying business administration or a related career, you may find it difficult to differentiate between Merchant Account and Payment Gateway. These terms are related to how e-commerce payments work.
If you are not studying but want to take your business to online sales while researching payments, you may have come across these concepts. Here we will help you learn about merchant accounts and payment gateways.
What is a Merchant Account, and how does it work?
A merchant account is another instrument businesses can use that allows online transactions.
Merchant accounts only receive payments through credit and debit cards; they do not accept cash. The account holder has to sign a contract with the bank explaining that they will be able to open and control their merchant account.
Transactions on these accounts begin when the customer pays for their purchase with their credit or debit card.
These funds will be deposited in the merchant account, and the holder will be responsible for transferring them to their account, which is the main difference between both accounts.
What benefits can I get through a Merchant Account?
| Benefits | |
| Reduced fraud risk | Retention of transactions and shipments in a single deposit. |
| Fast and easy returns. | Online store payments. |
- They help you reduce the risk of fraud because you have time to verify the validity of your customers’ information. Payments that seem questionable to you can be retained and not transferred to the merchant account.
- Allows you to hold all daily transactions and send them to your merchant account in a single deposit
- These accounts help make returns faster and easier
- Allows you to receive payments in your online stores
How can I choose the right Merchant Account?
You should know that there are different types of merchant accounts, so we recommend you choose the one that best suits your company and needs.
Payment Service Providers (PSPs) are used mainly by small businesses or companies starting online sales. This type of account should be shared with other merchants.
You may want to have your account, but by choosing this type, you will have the option to pay monthly, which is more affordable. However, you have a higher risk of fraud and should investigate before choosing it.
On the other hand, we have traditional and dedicated merchant accounts. You can have your merchant account in this type, but the costs are much higher.
What is a Payment Gateway?
A payment gateway is a path that money must follow to be transferred from the customer’s account to the merchant account at the time of payment after verifying the customer’s information.
We could also define it as a link between the customer’s credit card bank and the merchant account.
This gateway accepts credit or debit card payments, so every merchant account requires a payment gateway. Payment Gateway providers include WorldPay, PayPal, and Stripe.
The Payment Gateway is not the same for physical and online stores. A physical store would have a point of sale, while online stores would use the payment gateway.
However, the payment gateway does not allow the payment to be processed, so a payment processor is required.
What benefits can I get through a Payment Gateway?
| Benefits | |
| Transaction security. | Multiple ways to process cards online. |
| Reduced fraud risk | Routed data. |
| Possibility to accept or reject payments. | |
- Payment Gateways provide security; after the customer enters his card information at checkout, he enters the Payment Gateway, where the payment will be captured and encrypted.
- It allows the store several ways to process online cards in their sales
- Reduces the risk of fraudulent transactions
- Data can be routed to a merchant account or payment processor
- The merchant can accept or reject payments, so if the merchant feels that the customer’s information is incorrect, they can cancel the transaction.
How do I choose the right Payment Gateway?
As with merchant accounts, your decision will depend on your type of business and the advantages you seek.
Not all Payment Gateways work with all merchant accounts and banks, so they may not work for all customers. Therefore, it is recommended to look for other payment methods or choose the ones that include the most used ones.
Before choosing your Payment Gateway, you must ensure they offer the most payment methods. Otherwise, you could decrease sales by not providing customers with various payment methods.
Many gateways accept direct debit, mobile payments, and e-wallets as payment methods. These methods are used by most people today, so the payment gateway you choose should include them.
Another critical point to address is whether your chosen option contains fraud protection. If it does, ensure it is an excellent anti-fraud service to avoid your company’s possible losses and damage to your reputation.
Let’s remember that transactions are online, and scams are widespread nowadays on the Internet. One of the most used services nowadays is Stripe’s worldwide radar, so you could start researching this option.
Differences between Payment Gateway and Payment Processor
The Payment Gateway stores the customer’s card details and sends them to the payment processor. Once it reaches the payment processor, it will process the transaction.
The payment processor allows establishments to connect to the card networks, while the payment gateway connects merchants. If you have an online store, you should search for a payment processor that suits your needs so that you can process online payments.
When you get the payment processor, you will be provided with software allowing you to receive payments by supplying the last digits of the credit cards.
Difference between a merchant account and a Payment Gateway
After knowing how merchant accounts and payment gateways work and how they differ from merchant accounts and payment processors, respectively, we can proceed to differentiate them from each other.
The processes and functions performed by the merchant account and the payment gateway are entirely different.
A merchant account receives and holds payments for online transactions, while a payment gateway is responsible for collecting card data.
How do online payments work with a merchant account and a payment gateway?
For your online sales to be processed, you must have a merchant account and a payment gateway; both are required for the money transaction to take place from your customer’s account to yours.
First, your customer will log into your online portal. The customer will choose the products they want and, when done, can proceed to pay. To do so, he will be redirected to the payment gateway, where he will enter his credit card information.
The data will be routed to the payment processor, which will then route them through the card network to the customer’s bank.
The customer’s bank must authorize the payment so that the payment processor then routes the address to the payment gateway. The customer and the merchant will be notified whether the transaction was successful or not.
If successful, the merchant will receive their money. If unsuccessful, the customer will be refunded the payment and may have to pay a failed transaction fee.