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

What’s the difference between a payment processor and a payment gateway?

If you find yourself stumped by this question, you’re far from alone. 

The payments industry is flush with confusing terminology, none so perplexing as “payment gateway” and “payment processor.” Although often used interchangeably, the terms represent two entirely different payment system components. With the payment space becoming increasingly digital, it is vital to understand the difference between the two and the critical role each plays in the payment process.

For anyone confused about the difference between payment processors and payment gateways — this guide is for you. Together, we can demystify this sometimes perplexing payment terminology to establish a better overall understanding of a well-functioning payment system. 

Defining Key Terms: Payment Gateway vs. Payment Processor 

Distinguishing a payment gateway from a payment processor begins with clear definitions. 

A payment gateway is an online portal (“gateway”) for customers to make payments on a merchant’s website. Payment gateways verify the customer’s card information, acting as a middle layer between the customer and the payment processor. This digital gateway provides a secure environment for verifying the cardholder information before sending it along to the next step in the payment process. 

As the name suggests, the payment processor is responsible for processing payments. To accomplish this, payment processors send the card data from either a point-of-sale (POS) system for in-person payments or a payment gateway for online payments to the card network or bank associated with the data. 

Though noticeably intertwined, payment gateways and payment processors perform distinct roles within the broader payment system. 

Different Types of Payment Gateways: Third-Party vs. Integrated Gateways

Not all payment gateways are built the same.

Depending on your specific needs and digital resources, you can generally choose between two types of payment gateways:

• Third-Party Payment Gateways: Third-party payment gateways redirect a customer away from the merchant’s website to either a separate webpage or a pop-up window to complete the checkout process. Once the checkout process is complete, the secondary webpage or window closes and the customer is returned to the merchant’s website. While this involves less developmental effort on the merchant’s behalf, it also creates friction in the checkout experience. 
• Integrated Payment Gateways: Integrated payment gateways are built directly into a merchant’s website or platform, allowing customers to complete the checkout process entirely on the merchant’s website. This simplifies the process and provides a better overall customer experience, helping to build greater trust along the way. However, it does require developmental ingenuity, resulting in many merchants turning to payment service providers or payment orchestration platforms that offer integrated gateway capabilities. 

Do You Need Both a Payment Gateway & a Payment Processor?

In all payment scenarios involving cards, you need a payment processor to transmit the information to the relevant financial institution. Without a payment processor, completing transactions is impossible. 

Meanwhile, a payment gateway is not always a necessity.

As stated, payment gateways act as a middleman between the customer and the payment processor by validating the customer’s card information before sending it to the processor. This entire procedure is designed to secure online payments better and protect cardholder data. 

You do not need a payment gateway if your business performs only in-person transactions. Instead, you must select a POS system that fits your needs and can connect to the right payment processors.

However, in today’s digital world, it is unusual to find a business — especially a merchant — that does not operate an online storefront. In many cases, merchants may not even have a traditional brick-and-mortar store, eliminating the need for a POS and necessitating a payment gateway. 

So, to answer the posed question, you always need a payment processor and you sometimes need a payment gateway — though, more than likely, you will require both to facilitate safe online payments.

Choosing a Payment Gateway & Payment Processor

Just as the two terms represent distinct components, choosing which payment gateways and payment processors to use requires you to consider different factors.

Let’s break down the basics of choosing a payment gateway and payment processor as a merchant: 

How to Choose a Payment Gateway

One of the biggest considerations when choosing a payment gateway is what payment methods each specific gateway supports. As a merchant, offering your customers their preferred payment methods — which can vary from region to region — is vital.

While you always want to select a payment gateway that supports card payments and complies with all card payment regulations, it is also essential to consider what alternative and local payment methods a payment gateway supports. In many cases, a merchant may need multiple payment gateways to offer customers a full scope of payment method options, especially if they operate in multiple regions.

Additionally, merchants must consider the integration and security of each gateway. If a merchant wants a fully integrated payment gateway, they need either a gateway provider with such integration capabilities or a payment platform that supports seamless integrations with a variety of payment gateways. 

How to Choose a Payment Processor

Cost efficiency is a major consideration when choosing a payment processor as a merchant.

Every payment processor charges various fees to process and complete transactions. Paying close attention to these fees is crucial, as these costs can quickly add up. Finding a payment processor with transparent and fair fees can be vital to keeping costs low and payment revenue high. 

Merchants should also consider selecting a secondary payment processor to optimize payment conversions. For instance, if a payment processor were to experience downtime, having an existing relationship with another payment processor ensures the merchant can remain operational. 

Like with payment gateways, integration is also a key factor to keep in mind. Merchants must find the right solutions for integrating both payment processors and gateways into one central platform.  

Connect to a Network of Payment Gateways & Processors with Spreedly

Understanding the distinction between a payment gateway versus a payment processor is only the first step in the larger process of optimizing your payment system.

At Spreedly, our payment orchestration platform connects you to a global network of payment service providers, tools, and more — including a wide array of both payment gateways and payment processors. With our PCI-compliant solution, you can integrate the solutions and services you need instantly, allowing you to serve your customers better and efficiently expand into new regions. 

Get in touch with the Spreedly team today to experience the advantage of payment orchestration.

Download the Multiple Payment Gateways eBook Below