As a business owner exploring various digital payment solutions, you may have come across both payment gateways and payment processors.
If you are not very well acquainted with Fintech terminology, you are not alone. In the last couple of years, we have witnessed a digital payments revolution in India, unprecedented in scale and popularity.
A majority of local businesses and SMEs have embraced cashless transactions. This has simultaneously led to widespread curiosity amongst entrepreneurs regarding various payment service providers.
The payment gateway vs payment processor query is quite common.
To comprehend the difference, we need to understand the salient features and chronology of digital payments.
Let us understand these aspects, followed by the distinct role of a payment gateway and a payment processor.
Mapping the Key Entities and Sequence of Digital Payments
Be it a debit card/credit card payment, digital wallet transaction, or a UPI payment, there are fundamental similarities amongst all.
- The issuing bank is where the customer has his/her account from which he/she is paying. So the customer’s account from the issuing bank is to be debited with the transaction amount.
- The acquiring bank is where the merchant or sub-merchant account is present. In the case of card transactions/digital wallets, the acquiring bank pays interchange fees from the transaction amount to the issuing bank.
- As far as UPI payments are concerned, there is no interchange fee. The payment is routed through a unique virtual ID enabled via Aadhaar.
- A payment gateway is software that is essentially responsible for encrypting, authenticating, and transmitting the card/wallet/UPI ID details.
- The payment processor coordinates this entire virtual payment sequence, ensuring that all entities are performing their roles correctly.
What is the Role of a Payment Gateway?
For any online business that accepts online payments from customers, having a payment gateway is mandatory.
Without this software installed in the checkout section, your e-commerce website/app is incomplete. It is only using a payment gateway that your customers can pay online for the products/services being purchased.
Being the crucial software that facilitates online payments, a payment gateway is thus akin to the POS terminal of a brick-and-mortar store.
Reasons to Install a Payment Gateway
- The secure encryption of sensitive customer information is the prime reason. All businesses that warrant online payments must install a payment gateway to ensure highly secure transactions.
- PCI DSS Compliance and adherence to the latest online data security standards is a must for online transactions. Without a payment gateway, this crucial compliance cannot be attained.
- The need to solicit payment details in person (or over the phone) is eliminated. The payment gateway receives the card details, promptly encrypts the same, and securely forwards the encrypted data ahead for processing.
- It provides your customers with flexible payment options. This reduces the frequency of abandoned shopping carts and improves conversions.
What is the Role of a Payment Processor?
The ongoing debate between ‘payment gateway vs payment processor’ will be much clearer when you consider this analogy.
In a physical retail store, a POS setup is used for accepting and streamlining customer payments. The complete hardware and software setup facilitates a smooth and safe checkout process. The payment processor is akin to this POS system in the virtual setup.
Therefore, the online POS system is the crucial intermediary entity between the merchant and the payment service provider. Earlier, payment processors had a limited capacity or range of payments acceptance that included debit cards and credit cards.
Today, this range has massively evolved to include UPI payments, QR code scanning, and even USSD payments.
Why do you need a Payment Processor?
If you sell products/services online and receive online payments from customers, you certainly need a payment processor. Its significance can be outlined with its crucial functionality as outlined below:-
- The customer purchases via a debit card or credit card.
- The payment gateway carries out the data encryption and forwards it to the processor.
- The processor conveys the transaction details to the issuing bank to seek approval.
- Once the approval is received, the payment processor conveys it to the acquiring bank.
- The acquiring bank receives and credits the transaction amount to the merchant account.
Payment Gateway vs Payment Processor: Which is right for you?
If the payment gateway is an intermediary between the merchant and customer, the payment processor is the overall payment facilitator.
The role and functions of a payment gateway are different from that of a payment processor. Since both works in conjunction with one another, confusion regarding their significance can arise.
The following points further highlight how they work separately but in close coordination with each other:-
- The payment gateway is primarily responsible for capturing the card details as keyed in by the customer. It immediately gets to the process of authenticating the details followed by encryption
- If the card details are invalid, the payment gateway immediately recognizes the same and alerts the customer.
- If the card is valid, the encrypted data is securely sent to the payment processor for enabling the payment.
- As described above, the entire payment coordination/facilitation between the issuing and acquiring banks is enabled by the processor.
- It would suffice to say that the payment processor provides a virtual infrastructure similar to a physical POS system.
Conclusion
The above postulates have established the individual significance and roles of the payment processing system and the payment gateway.
It brings us to the important conclusion that the comparison between both of them is needless. It is like comparing a POS system/payment solution provider with a card swipe machine.
A brick-and-mortar establishment requires both for optimal checkouts.
Likewise, an e-commerce site needs a payment gateway as well as a processor for secure transactions and hassle-free checkouts.
The comparison or ‘which one is right for you’ debate is needless. On the contrary, as an online business owner, it is best to look for combined solutions.
Instead of opting for a payment gateway and a processor separately, collaborate with a reliable payment provider for both.
