Merchant accounts and payment gateways both play vital roles in the payment process. Yet, many businesses that are new to the world of online payments may find themselves asking:
“What is a payment gateway vs. a merchant account, and do I need both?”
The short answer is, yes, both are necessary for accepting payments. A merchant account identifies your business to payment processors and other entities, while a payment gateway enables communication between your business and financial institutions.
Why understanding the difference matters
Knowing the difference between a merchant account and payment gateways matters greatly, as both are necessary in the payment process and can have a major impact on your operational costs.
The right payments setup streamlines debit and credit card payments by reducing friction at checkout. Having a clear understanding of how merchant accounts and payment gateways work together can help you make the most of digital payments, a market set to grow to more than $36 trillion (USD) by 2030.
What is a merchant account?
Definition and role
A merchant account is a bank account used to settle card payments. It holds the funds while the transaction is verified and completed, then transfers the money from the customer’s bank to the merchant’s business bank account. Merchant accounts are required to accept electronic payments.
Who needs a merchant account?
Simply having a business bank account is not enough. Any business that accepts electronic payments via cards or alternative methods needs a merchant account.
This can include, but is not limited to:
- E-commerce merchants and marketplaces
- Physical retailers
- Restaurants and hospitality businesses
- Subscription service providers
What is a payment gateway?
Definition and role
A payment gateway is a technological solution that allows merchants to accept credit and debit card payments online. The payment gateway facilitates communication between the merchant’s payment system, the payment processor, the customer’s bank, and other payment service providers.
Who needs a payment gateway?
Online payments cannot occur without a gateway solution. If you plan on accepting electronic payments, you must integrate a payment gateway.
The types of businesses that need a gateway include:
- Ecommerce merchants and marketplaces
- Online platforms offering services, like sports betting or affiliate platforms that offer payouts
- SaaS providers and other subscription-based online businesses
- Any company that wants to accept online payments
How they work together (and where a payment processor fits in)
Merchant accounts and payment gateways serve different purposes in the payment process. Payment service providers can determine the efficiency of your payment gateway and electronic payments.
The transaction flow step-by-step
- A customer enters their payment information at checkout.
- The customer’s card data enters your payment gateway.
- The payment gateway initiates the payment process and sends the information to the payment processor for validation and authorisation.
- The payment processor verifies the merchant’s identity via their merchant ID, after which the funds are temporarily transferred to the merchant account.
- Once the transaction is approved, the merchant account settles the funds in the merchant’s business bank account.
Payment gateway vs. payment processor vs. merchant account
A payment processor comes into play after the transaction passes through the payment gateway. Payment processors facilitate the transfer of funds to the merchant account, where they are then settled.
Merchant account vs. payment gateway: key differences
| Feature | Merchant account | Payment gateway | Payment processor |
| Account set up | You will need to present documentation that shows your business’s legitimacy and your ownership of a business bank account. You must also check your eligibility across factors like payment volume, geographic location, and other key criteria. | The payment gateway setup process starts with choosing a provider. Once you’ve selected a provider (or multiple providers) and created an account with them, you can move on to the integration step. | Setting up a payment processor can depend on the payment gateway solution you have chosen, as some gateway providers also offer payment processing services. Generally, merchants do not work directly with the payment processor, relying on their gateway to facilitate this communication. |
| Integration | Once you have your merchant account set up, any further integration of that account with your payment systems occurs on the provider’s end. There is no additional integration set up for merchants to complete for the account itself. | Payment gateways are integrated through APIs. To connect to the gateway API, you must have created an account with the gateway provider and obtained API keys that enable this connection to occur. | Like merchant accounts, payment processor integration typically falls outside the merchant’s realm of responsibility. Payment gateways offer the technology to connect to payment processors as part of their solutions. |
| Stability | Merchant accounts are operated at the technical level by financial institutions, requiring little to no maintenance work on the merchant’s end. In terms of stability, merchant accounts are highly reliable due to banks and acquirers having to adhere to strict compliance standards. | The stability of a payment gateway all comes down to the quality of the provider, making it incredibly important to work with reputable providers with a proven track record for handling high transaction volumes across different regions. | Payment processors, like merchant account providers, offer a high level of stability thanks to the strict regulatory standards they are held to. Processors use advanced technologies to maintain high uptime and avoid outages, preventing disruptions that would impact multiple financial institutions. |
| Merchant ID | When you open a merchant account, you are also issued a merchant ID that is used to identify that account during transactions. | During a transaction, your payment gateway is responsible for relaying all relevant payment information to the payment processor, including your merchant ID. | Payment processors work with acquiring banks to manage merchant IDs and verify which merchant to transfer funds to during a transaction. |
| Fees | The specific fees you pay for a merchant account can vary depending on the provider, but typically include one-time setup fees, monthly minimum fees (charged if you do not reach a minimum amount of sales), annual maintenance fees, batch processing fees, chargeback fees, and early termination fees. | Most payment gateways charge an initial setup fee, though some may forego a setup fee in exchange for a monthly subscription. However, gateways make the bulk of their profit by charging merchants a small percentage for every transaction that passes through the gateway. Additional fees can vary by provider and may include chargeback fees, cross-border transaction fees, and currency exchange fees. | Payment processors have their own markups and fees for their services that merchants must pay. If you have a bundled gateway and processing service, these fees may be a part of your monthly or annual gateway fees. |
| User experience | Once opened, a merchant account operates in the background of all transactions and affects the merchant’s user experience minimally. Merchants interact with their merchant account through the provider’s dashboard or platform. | Payment gateways have a major impact on the user experience for customers at checkout. The gateway you choose will determine what payment methods a customer can use and the speed at which transactions take place. | Payment processors influence the user experience behind the scenes through payment speed, approval rates, and reliability. |
| Chargebacks | Most merchant account providers will have specific terms surrounding chargeback rates and ratios. If your chargeback ratio becomes too high, you risk losing your merchant account altogether. | Payment gateways do not directly handle chargebacks, but they do play a key role in communication between merchants and payment processors when a chargeback occurs, as well as performing fraud detection to prevent chargebacks. | The chargeback and dispute process is handled by the financial institutions involved, including the payment processor and the customer’s bank. |
| Transaction volume | Your transaction volume is an important factor in determining what merchant account you qualify for. Most merchant accounts come with a standard transaction volume minimum that can be increased as your business grows. | Your ability to handle high or fluctuating transaction volumes is very dependent on the scalability of your payment gateway. If you anticipate rapid growth in your transaction volume, or if you experience sudden spikes in payments, you need a gateway that can keep up without sacrificing transaction speed or security. | Payment processors play a role in setting the transaction volume requirements for merchant accounts, as well as for setting the fees associated with different transaction volumes. |
| Fraud protection | Some merchant account providers may offer built-in tools for monitoring risks. However, most of the fraud protection falls to the payment gateway. | Payment gateways have a major responsibility to provide adequate fraud protection, as these providers perform initial identity verification and fraud checks. Along with tokenization and 3DS, look for gateways that offer tools for monitoring analytics and automatically flagging suspicious transactions for review. | Once a payment reaches the payment processor, even more fraud detection and prevention processes come into play. The processor verifies the customer’s payment information with the issuing bank and follows critical PCI DSS protocols to validate and protect that data. |
| Customer support | Merchant account customer support is accessed through your provider’s platform or dashboard and can provide assistance with settlement, chargebacks, and other payment-related issues. | Payment gateway customer support should be comprehensive, offering key assistance with communication with financial institutions, gateway integration, payment method setup, and other factors. | Payment processor support teams handle problems like transaction failures, network issues, and settlement questions. The availability of this support can vary. Ideally, you want a gateway that can prevent issues from escalating to the payment processor’s support team. |
How to choose the right setup for your business
Choosing the right merchant account and payment gateways for your business is essential for maintaining excellent operational efficiency and low costs.
Key questions to ask
- What is your business size in terms of payment amount and payment volume?
- What risks do you face both online and offline?
- Do you need support for both online and offline transactions?
- Who is your acquiring bank?
- What fees do different providers charge, and do the fees differ globally and/or locally?
Cost considerations
- Setup & monthly fees: Both merchant accounts and payment gateways can have setup fees and monthly fees to account for.
- Transaction fees: These fees can vary with each provider, with some offering flat fees and others charging percentage-based fees.
- Ongoing fees: Make sure to pay attention to maintenance fees, transaction volume minimums, and other important factors that can drive up costs.
Integration & technical requirements
When choosing a payment gateway, look for a simple API integration that offers checkout UI and UX support. If you handle in-store payments as well, look for a provider who offers both payment gateway and in-store POS terminal solutions.
As for your merchant account, you don’t have to worry as much about integration. Just make sure your chosen provider matches your business needs.
Summary & what you should do next
The choice of payment gateway and merchant account providers depends on your needs. Do your research, define your business requirements, and seek out providers that align with your goals.
At payabl., we offer the payment gateway services you need.
Contact us today to get your payment gateway set up, or for a consultation to discover our capabilities.
FAQ
What exactly is a merchant account?
A merchant account is a specialty account that temporarily holds payment funds before settling them to your business bank account.
What is the difference between merchant services and payment services?
Merchant services support merchant accounts and other necessary payment acceptance requirements, while payment services are a broader category that include advanced tools and technologies.
What are the four types of payment gateways?
Payment gateways cannot be broadly sorted into just four categories. Each gateway provider differs in the scope of solutions, services, and features they offer.
What is the difference between a payment gateway and a payment processor?
A payment gateway transmits payment data to a payment processor, who then validates and authorises the payment in collaboration with the issuing bank.