Merchant account vs. payment gateway: Understanding the differences between the two

When it comes to accepting credit cards, debit cards and other types of payments, the terminology involved can quickly become confusing. What is a merchant bank account? What is an online payment gateway? What is a payment gateway vs. a payment processor?

Merchant accounts and payment gateways are two essential components of payment processing. In this comprehensive guide, we’ll explain the difference between merchant accounts and payment gateways – and how they can help securely process customer transactions.

What is a merchant account?

A merchant account is a holding account for business funds. It’s similar to a business bank account, which enables a company to electronically accept and process transactions, particularly credit card transactions and online payments from customers.

What is a payment gateway?

A payment gateway is the method used to process a customer’s credit or debit payment. After processing, the payment is deposited into a business’s merchant account and briefly held before being transferred into the business’s main bank account. The payment may be processed through a physical card reader in a brick-and-mortar store, or a payment page on an e-commerce site.

Payment gateways encrypt and securely transmit payment data between the customer, merchant, and financial institution. A secure and reliable payment gateway is essential for online businesses to keep themselves and their customers safe from payment fraud. Increasingly common and costly, one study found e-commerce organizations in the U.S. and Canada face nearly 40% more fraudulent transactions compared to brick-and-mortar businesses.¹

What are the key differences between merchant accounts and payment gateways?

Merchant accounts and payment gateways have completely different functions. A merchant account is a bank account, while a payment gateway is a software service. It’s easy to get confused when considering the differences between the payment processor vs merchant account or, worse still, the payment gateway vs payment processor vs merchant account. Let’s break it down.

The merchant account is where the funds reside. It checks to make sure the customer can pay for the product or service. It works with the payment processor to process the transaction, and then takes the funds from the customer’s issuing bank and moves them to be available for the seller’s bank. Merchant accounts often charge multiple fees for different services, including monthly fees, transaction fees, and chargeback fees. All those fees can be hard to follow.

The payment gateway, on the other hand, is responsible for the transaction authorization. It takes the customer’s credit card data, encrypts it, and then sends it to the payment processor. Once funds are cleared, the payment gateway is responsible for sending a confirmation from the customer’s issuing bank back to the point-of-sale device (in store) or to the seller’s online credit card processor.

Understanding payment processing: How merchant accounts and payment gateways work together

What does a payment processor do, exactly? An online payment process flow is triggered when a customer uses their card or mobile wallet to pay a business online or in-person.

• The customer decides they want to make a purchase.
• The customer chooses if they want to enter information from their physical card or from a digital wallet.
• They enter their card data to start the transaction.
• The payment gateway takes the card data and encrypts it so it will be safe during the transaction.
• The payment gateway then takes that encrypted data and sends it to your payment processor or merchant bank.
• The payment processor contacts the customer’s issuing bank or their credit card company to see if there are available funds.
• The payment data is decrypted, and the customer’s account is checked for available funds or credit.
• If there are not enough funds, or if there is a risk of fraud, the payment is denied. If that happens, the customer can try the purchase again either with the same payment method or a new one.
• Let’s assume for this example that the charge is authorized successfully by the issuer.
• Funds are then transferred from the customer’s bank to your payment processor.
• The payment processor deposits the money into the business’s merchant account.
• The payment gateway sends the confirmation to the point of sale, telling the merchant the sale has been authorized.
• The seller delivers the goods to their customer.

Throughout the entire payment processing journey, customer payment details are securely transmitted and completely unreadable to potential fraudsters. This all happens in seconds.

Choosing the right merchant account and payment gateway for your business

As a business owner, it’s important to research and compare different service providers to ensure ease of integration and the highest possible level of security.

So, if you ever wondered how to choose a merchant account, here are some different factors to consider when selecting a merchant account and payment gateway:

Which security features are included?

Secure transmission is extremely important for protecting both businesses and their customers. Secure transmission refers to the encryption and protection of sensitive payment information as it travels between the customer, merchant, and payment processor, and uses ID verification, two-factor authentication, 3D security, in addition to encryption to protect data.

In the United States, there is a standard of compliance called the Payment Card Industry Data Security Standard (or PCI DSS) that all reputable payment processors will follow. Steer clear of any organization that does not say they adhere to these standards.

A payment gateway and merchant account collaborating with these security features may help prevent identity theft, chargeback fraud, card-not-present fraud, and many other types of fraud.

Are there any extra fees?

Selecting a payment gateway comes with costs, but they’re not always clear upfront. During your research, compare setup costs and transaction fees across different providers before committing. This can help ensure you’re getting the best deal. It’s likely that the payment gateway will just have per transaction fees, but there could possibly be others as well. PayPal gives you the chance to bundle all these services together, making pricing simpler to understand without surprise fees.

Does it integrate well with existing digital processes?

When looking for a payment gateway and merchant account, check to see if it can easily integrate into existing business software and processes. The ease of integration can vary depending on the provider you choose, your existing software, level of support provided, and more. PayPal makes it easy to integrate into the services and equipment you already use as well.

Transaction volume and industry types

When choosing a payment gateway, you also want to take into consideration how many transactions your business will be conducting, the amount of your average transaction, and what type of industry your business fits into.

Your business will be assigned a merchant category code (or MCC) which will be taken into consideration when pricing is applied to your business. Perhaps you run a business that is more likely to have chargebacks if you provide professional services or if your product is delicate and runs the risk of damage in transit.

You also want to consider what kind of sales you make. Do you sell fewer, more expensive items? Maybe you’ll want to lean toward a payment provider that charges a higher per transaction fee in lieu of other fees. Or if you have many small sales throughout the day, say, at a coffee shop, then you’re going to look for a lower per transaction fee, because spending ten or fifteen cents on every single charge, won’t make sense for your business.

Using PayPal to accept payments

Merchant accounts and payment gateways have different functions and processes but can work together smoothly to make payment processing more secure and simple for businesses.

PayPal can serve as a small business’s payment processor, providing online checkout and POS systems that can integrate seamlessly with your existing business software and processes.

Better still, PayPal can serve as both your merchant account and payment gateway. This can make the process of accepting credit cards a lot simpler for you. You don’t need a separate bank account for holding funds, and you don’t have to reconcile fees from multiple service providers.

PayPal’s solutions empower businesses to securely accept a broad range of payment methods, helping provide convenience, security, and peace of mind for both owners and their customers.

See how you can use PayPal solutions for your business.