Payment Gateway Vs. Payment Processor: What’s the Difference?

Digital payments have also become a part of the ‘new normal’ for people in India and across the globe. You might not be surprised to know that the total number of digital payments across India stands at a whopping 43.71 billion in the year 2021.

Source: Statista

While sending and receiving payments online has become a common part of the consumer’s lives, it is gradually picking up pace towards the business side. To accept payments online, business owners need various digital payment products, one of which is a payment gateway.

While the Indian payment gateway market is growing at a fast rate, a large proportion of business owners do not know much about the digital payment terminology. It includes EDC machines, payment links, payment processors, to name a few.

In this blog post, we will cover some of the most common questions people have in mind around payment gateway vs. payment processor.

Fundamentals of digital payments

When you, as a merchant, accept payments online, you might have thought there are only parties involved in the transaction – you and your customer.

However, there are five parties or players involved during every digital payment transaction:

Steps involved in an online payment process

• A customer chooses to buy a product or service
• During the payment process, the issuing bank debits the amount related to the purchase from his/her account
• The acquiring bank accepts and then deposits money into your (merchant’s) account

You might be wondering –

What’s the role of a payment gateway or payment processor in between?

Let’s dig deeper.

What is a payment processor?

A payment processor handles the customer transactions in the backend, enabling the buyers to shop for your products or services. The primary role of a payment processor is to relay the information from the buyer’s cards or accounts towards the issuing and acquiring banks.

In other words, a payment processor acts as a mediator between sellers and the financial institutions (banks) involved in a transaction. It can also authorize transactions and facilitate transfer of funds to ensure timely settlements at the merchant’s side.

Besides this, some payment processors also provide equipment for card payment acceptance, PCI-DSS compliance assistance, and other value-added services. They also follow advanced security measures to reduce the risk of fraudulent transactions. In case of offline transactions, the payment processor company provides the POS or Point of Sale interface to you.

How is a payment processor linked to a payment gateway?

A payment gateway refers to the path that connects the customer’s bank account or cards to your merchant account. For most businesses, payment gateways play the role of a third party that enables seamless transfer of money from a customer’s account.

Also, a payment gateway transmits the payment-related data to the payment processor, thus acting as an intermediary that completes the transaction lifecycle. It also connects payment processors to card networks and merchant accounts.

Also Read: What Makes Paytm Payment Gateway the Best in India?

Payment gateway vs. payment processor: The difference

The most basic difference between a payment processor and a payment gateway was that the former facilitated a payment transaction between you and your customers, while the latter captured payment details. Once a payment gateway has relayed the details (of a card or bank account) to the processor, it then communicates the status of the transaction between merchants and customers.

However, as per the RBI guidelines, payment gateway and payment processor are combined to become one entity. Now, payment gateways and payment aggregators are intermediaries that play a significant function in facilitating online payments.

Payment gateway vs. payment aggregator: The difference

On one hand, a payment aggregator allows merchants to start accepting payments online through their websites or mobile applications without having to create an in-house payment integration system. On the other hand, a payment gateway allows you to accept payments via different payment sources by providing the required technology infrastructure.

You should also know the following pointers about payment aggregators:

• A payment aggregator can sign you as a merchant and provide a unique merchant identification number, also known as MID
• All the transactions are processed with your merchant account
• Merchants also become ‘sub-merchants’ of a payment aggregator. It is different from the previous process in which each merchant had to create a merchant account with a bank
• Payment aggregators take the load of integrations with various payment service providers and card companies, thus making it easier for you to accept payments online
• With the help of a payment aggregator, you can enable both online and offline payment acceptance at various touchpoints
• Under the hybrid model, a digital payment company in India can work as a payment aggregator with some banks and a payment gateway provider with others

Payment gateway vs. payment processor: Which one do you need?

The need for them depends on specific situations, as given below:

• For in-person card payments

In such situations, you only need a payment processor. The general steps involved in such a payment transaction are as follows:

• You will receive a payment terminal through the payment processing company
• Here, the terminal authenticates customers’ cards and then send the payment information to the issuing bank
• Depending on whether the status for processing is approved or declined, the payment processor passes the information to the physical terminal
• Once the payment gets approved, it will send the details to the acquiring bank

As you can see, a payment gateway is not required to process such transactions. However, if you want to sell both online and offline, you will need both a payment processor and a payment gateway.

• For online payments on a website or app

For such transactions, you will need a payment processor along with a payment gateway. Read the generic steps involved to understand it better:

• A customer adds products to the cart and proceeds to checkout
• After receiving the payment details, the integrated payment gateway authenticates the same
• Then the payment processor moves these details from the payment gateway to the card network
• The processor also confirms if the payment details are valid
• In the next step, payer authorization occurs in which the merchant plug-in sends a PAReq (Payer Authentication Request) or PARes (Payer Authentication Response) to the access control server and then the CVV is verified
• If it authorizes as expected, the server generates an Account holder Authentication Value (AAV), which is then sent to the acquirer and later to the issuer
• If the customer has adequate funds or credit limit, the authorization occurs and the amount gets deducted
• Consequently, the money is then transferred to your merchant account

Now that you know about the need for a payment processor and payment gateway, let’s proceed towards the selection criteria.

How to choose a payment processor

Third-party payment processors are quite important for any business that wants to accept card payments. While selecting a payment processor, you must consider the following factors:

• Software compatibility

If you want to sell products online, you must ensure that the payment processor you select supports the e-commerce software you are using.

• Fraud prevention

While accepting payments online, fraud prevention is yet another concern. Hence, you should select a payment processor that can ensure security of payment information.

• PCI compliance

The tokenisation of card details is mandatory as per the recent RBI guidelines. Therefore, your payment processor must select the PCI compliance requirements related to the payment industry.

How to select a payment gateway for your business

A payment gateway gets you paid when customers pay you online using any of the payment sources. To choose a safe and reliable payment gateway, consider the following factors:

• Payment security
• Merchant onboarding process
• Supported payment sources
• Ease of integration
• Customer support
• Settlements
• Pricing

You May Also Like to Read: Payment gateway selection for an online business

Payment gateway vs. payment processor at a glance

Conclusion

Both payment gateways and payment processors support the process of accepting online payments for merchants like you. You need both of them to create a seamless buying experience for your targeted customers across various channels and devices. The final selection depends on the specific needs of your business.

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