Merchant Account vs. Payment Gateway: Do You Need Both?

How you process and manage payments matters. 

Today’s payment systems are dealing with higher volumes of transactions coming from a greater number of channels, especially digital and mobile payment methods. 

McKinsey reports that the global payments industry handled 3.4 trillion transactions in 2023, worth $1.8 quadrillion in value and $2.4 trillion in revenue. Platforms and marketplaces dominate commerce, processing an estimated 30% of purchases around the world. 

Consumer expectations have changed as the prevalence of digital payments has grown. PYMNTS reveals that security features are ranked most important among customers when choosing a primary financial institution, followed by self-service digital solutions. 

For a merchant aiming to optimize their payment setup, knowing the difference between a merchant account and a payment gateway is essential. Both have important purposes to serve, and the providers you select can impact the efficiency and resilience of your business. 

To compare the two, we must start by defining them. 

What is a Merchant Account?

Merchant accounts enable you to accept payments electronically. 

A standard business bank account handles traditional cash deposits and withdrawals. Conversely, a merchant account handles the authorization and transfer of funds for digital payments. Performing both POS-based and online transactions requires this type of account. 

Opening an account is a critical first step to take to begin accepting payments online or in-app. With a merchant account, you can start taking the next steps towards entering new markets and connecting with new customers in different parts of the world. 

How Merchant Accounts Work

Payment processing involves both your business’s acquiring bank and your customer’s issuing bank. 

Your acquirer sends a request to the customer’s card issuer to authorize the transaction, allowing the acquirer to capture the funds from the customer’s account. These funds are deposited into your merchant account before being settled into your main business bank account. Banks can apply and deduct any payment processing or service fees during this part of the process. 

To get a merchant account, your business must go through an approval process that assesses factors like your transaction volume and company finances. A few types of financial institutions can issue merchant accounts, including acquiring banks and payment service providers (PSPs).  

Before you can open a merchant account, however, you need to meet a few key criteria:

• Have a registered business
• Open a business checking account 
• Provide a company tax ID or employer identification number

Your bank may request extra information regarding your business finances and payment history before issuing you a merchant account. Additionally, some providers offer specialized accounts for merchants facing specific scenarios, such as for businesses in high-risk industries. 

While traditional merchant accounts require businesses to sign contracts and pay monthly fees, some modern providers offer streamlined alternatives with fewer requirements. Choosing the right merchant account depends on the specific payment processing needs of your business.

What is a Payment Gateway?

You need a payment gateway to accept and process electronic transactions.  

Payment gateways securely transmit data between a merchant’s payment system and the relevant financial institutions, such as the customer’s bank. 

Gateway technology allows merchants to protect customer data by acting as an intermediary between banks and businesses. Sensitive financial details like credit card numbers and other account information are completely hidden with encryption during the data transmission process. 

Ideally, you need a setup that enables you to integrate multiple gateways, creating a more dynamic payment routing system that can minimize payment failures and declines. While online businesses have the highest need for the technology, gateways can also be beneficial for brick-and-mortar merchants, as they can power alternative payments (such as contactless payments). 

How Payment Gateways Work

A payment gateway is responsible for encrypting the transactional data before sending it to the appropriate acquiring bank or payment processor. These institutions communicate the transaction to the customer’s bank to authorize the payment, at which point a success or failure notification is returned to the merchant via the gateway. 

For example, if a customer is shopping on an e-commerce marketplace and proceeds to checkout, their payment information is then sent to the merchant’s payment gateway before heading to the banks. The approval process can happen in a matter of seconds, after which the customer receives either a payment approval or a denial message in the checkout interface. 

Payment gateways can support multiple types of payment methods beyond credit and debit cards, including digital wallets and local payments. Such flexibility and freedom of choice allow you to build a more diverse payment setup customizable to the needs of your customers. 

In terms of costs, gateways typically charge transaction fees for each payment processed, as well as additional fees for services like maintenance. The specific price of fees depends on your provider and the type of payment methods you process in your system. 

How Do Merchant Accounts and Payment Gateways Differ? 

At their cores, merchant accounts and payment gateways serve a similar purpose — to facilitate electronic and online payments. However, the two differ significantly in how they function. 

To briefly recap, a merchant account is a type of financial account designed specifically for businesses to receive and hold funds from electronic purchases, while a payment gateway is a technology used as an intermediary between the merchant and the banks. 

Merchant accounts help to verify the identity of a business and simplify payments, ensuring the customer is paying the correct entity for goods or services. Payment gateways come into play alongside merchant accounts, as your business needs a merchant account to establish a partnership with any gateway. 

Unlike a merchant account, which involves fund management, a payment gateway focuses more heavily on security aspects like encryption and authorization to ensure the safe exchange of payment data.

Another key difference is flexibility. A merchant account is specific to a business and often comes with contractual obligations, fees, and compliance requirements. A payment gateway is more adaptable and can integrate with multiple payment processors without directly handling funds.

Though they may not be the same thing, merchant accounts and payment gateways are both essential pieces of the payment process. Obtaining a merchant account is your first step to maximizing online and digital revenue. Once you have the account, you can begin building connections with different payment gateway providers and integrating the gateways you want as your primary and secondary tools. 

Both of these services also typically charge fees for processing each transaction. The fee often requires a base percentage between 2% to 5%, along with an additional $0.10 to $0.30 charge. 

How the Two Work Together to Improve Transaction Efficiency

Now that we’ve discussed the individual roles of merchant accounts and payment gateways, it’s time to put the pieces together to see the bigger picture. Merchant accounts and payment gateways are the key stepping stones needed for any merchant to begin accepting electronic payments.

The process works as follows:

1. Either a customer or a merchant initiates a transaction via the merchant’s website or point-of-sale (POS) system. Customers often initiate first-time or one-time transactions, while merchant-initiated transactions are more common in recurring payment and subscription scenarios. A smooth and successful authorization process is necessary for either type of transaction to prevent disruptions to the customer experience.
2. The merchant’s chosen payment gateway collects the customer’s financial data (such as card numbers and billing addresses) and encrypts it for transmission. Depending on factors like the gateway’s internal fraud controls and the payment’s location of origin, certain gateways may be preferable over others due to a higher chance of success. In a modern open payments system, you can integrate multiple gateways and set up automatic rerouting should an unexpected error or failure occur with your primary provider.
3. The acquiring bank sends the data to the customer’s issuing bank for authorization. The customer’s bank must verify the transaction and confirm the funds are available to be withdrawn. Banks also typically employ their own fraud controls and detection mechanisms at this stage of a transaction to confirm the customer’s account ownership. 
4. Once all of the relevant information has been checked out and verified by the customer’s bank, that bank then sends an approval or denial back down the line to the payment gateway. The gateway can then send the transactional information to the merchant account for fund collection. If there are no further issues with a payment, the funds can typically be settled from the merchant account into the official business bank account in a few business days. 

Do Businesses Need Both a Merchant Account and a Payment Gateway?

Short answer: Yes.

Both merchant accounts and payment gateways are necessities for merchants and marketplaces. Accepting online and digital payments is the bread and butter for many modern-day merchants, so having these tools and resources in place ensures you can accept the current most popular payment methods. 

Many payment service providers, like Stripe and PayPal, bundle merchant accounts and payment gateways into a single solution, simplifying the setup for businesses. However, businesses that process high transaction volumes, operate internationally, or require more control over payment processing may still opt for a separate merchant account and payment gateway for greater customization and lower fees.

Why Spreedly Takes the Open Payments Approach 

What we at Spreedly always emphasize to our merchant and marketplace clients is the importance of a strong technological foundation, regardless of which providers you choose. Open payments platforms give you the freedom to integrate multiple PSPs according to your specific needs, keeping your business from becoming locked-in with a single provider. 

With Spreedly, you can:

• Connect: Spreedly allows you to build your entire payment stack on our open payments platform, which includes integrations of multiple payment gateways and merchant accounts. Our platform is developed on a single API with flexible connections to a whole realm of payment tools and providers. You can browse and experiment with as many connections as you need to customize your payment stack with precision. 
• Protect: With Spreedly, you can take a more strategic approach to fraud detection and prevention. Along with access to many of the leading fraud prevention tools available today, Spreedly’s platform also purposefully minimizes technical complexity to reduce the burden of security and compliance for your team, all while boosting approval rates. Plus, our advanced vault makes it easy to store customer payment credentials and keep them evergreen. 
• Optimize: Payment orchestration and optimization lie at the heart of Spreedly’s platform. Our trusted tools have been proven to help merchants, marketplaces, and fintechs boost their payment success rates substantially while also optimizing payment performance. Using Spreedly’s platform to build a tailored set of connections, you can achieve a highly reliable payment setup equipped with intelligent capabilities designed for recovering lost revenue. 
• Resolve: To keep your payments flowing, you need the utmost visibility across your entire technology stack. Spreedly gives you the rich reporting tools you need to gain detailed and powerful insights into the performance of your payment system. Our platform offers comprehensive reporting and reconciliation features that help you make better-informed decisions and stay ahead of your financial reporting obligations. 

Build Your Tailored Payment Stack with Spreedly

At Spreedly, it’s our mission to help you get the most out of your payments. From connections to hundreds of tools and providers, to our advanced vaulting capabilities, Spreedly has the diverse features and functions you need to optimize your payments and start earning more revenue. 

As you get your payment stack set and ready to go, Spreedly can give you the central platform you need to keep all of your payment resources organized. You can connect your merchant accounts and integrate payment gateways, all from a single platform. 

See how Spreedly works now.

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