Payments can be a hassle if you don’t have the required knowledge. Especially, when you’re taking card payments online, there may be a lot of new technology to digest. Two of the important elements in this regard are merchant accounts and payment gateway.
In this article about payment gateway vs merchant account, I will discuss the differences and similarities between the two and whether you can have an all-in-one solution for your business. Let’s start.
What is a merchant account?
A merchant account is a type of bank account that enables businesses to accept and process card transactions. When a customer makes a purchase, the funds are first temporarily held by the merchant before transferring them to the main business account. Any business accepting card transactions needs this account from their bank service.
What is the importance of a merchant account? Well, it allows the acceptance of card payments, which is integral in today’s cashless society of the UK and the world. This capability not only broadens the customer base but also enhances cash flow and sales efficiency. Without a merchant account, a business would be limited to cash or check transactions,
Payment service providers (PSPs) are making it easier for businesses to accept card payments because they integrate the merchant account functionality into their system. That means you won’t have to open a separate merchant account yourself.
Do you need a Payment Gateway
What is the purpose of a merchant account?
The question is valid. Why is a transaction payment not directly sent to the business’s account? It’s mainly to handle transaction-related processes like deducting any fee, managing any chargebacks, or potential delays before finalising the transaction payments. After a transaction is confirmed, the money is then sent to the main account so the business receives the total amount for the sale transaction. This makes it simpler for businesses to keep track of their income.
What is a payment gateway?
A payment gateway is an online service that allows the secure transfer of payment information between a customer, a merchant, and the financial institutions involved in the transaction. Acting as a digital equivalent of a point-of-sale (POS) terminal found in physical stores, a payment gateway encrypts and securely transmits sensitive payment data, such as credit card information.
How does a payment gateway work? It involves several steps.
- The gateway captures the payment information when a customer makes a purchase and encrypts it for security.
- This encrypted data is sent to the payment processor which routes it to the customer’s bank for authorisation.
- Once approved, the approval is sent from the payment processor back to the payment gateway.
- The merchant and customer are notified about the success of the payment.
This entire process takes seconds to be executed. Payment gateways offer multiple payment methods to your customers, including credit cards, debit cards, digital wallets, etc. They also provide additional features like recurring billing and fraud detection. It’s ideal for businesses of all sizes, especially e-commerce retailers and subscription-based services.
Payment gateway vs Merchant account: The Differences
To enable an online transaction, your business needs both a merchant account and a payment gateway. Although they both are part of the process, there are 2 main differences between them.
Firstly, a merchant account is a holding bank account where funds from the card transactions are deposited before being transferred to the business’s bank account. On the other hand, a payment gateway acts as an online service/technology that enables the secure transmission of payment data from the customer to the payment processor. It handles authorisation and encryption of data.
Secondly, obtaining a merchant account often involves a more rigorous application process as it requires a direct agreement with a merchant bank. Conversely, setting a payment gateway is typically more straightforward. Many payment gateways offer easy-to-use plugins, APIs, and integration tools that allow businesses to quickly add payment processing capabilities to their website or POS systems.
Payment gateway vs Merchant account: the similarities
- Both payment gateways and merchant accounts charge transaction fees for their service. These fees can generally range from 1.5% to 3% per transaction plus a fixed rate.
- Both employ certain security measures. Payment gateways integrate encryption and tokenisation while merchant accounts stick to security measures like PCI compliance.
- Both offer accessibility through mobile and web applications.
Payment Gateway vs Merchant Account Functions: At a Glance
| Payment Gateway | Merchant Account |
|---|---|
|
Transmits payment data |
Holds funds before transfer |
|
Easy setup process |
Involves an agreement with a bank account |
|
Handles encryption and authorisation |
PCI compliance to ensure security |
Payment Gateway vs Merchant Account Functions: At a Glance
Yes, typically, you need both a payment gateway and a merchant account to handle electronic transactions effectively. The merchant account serves as the holding account while a payment gateway is responsible for gathering and securely transmitting the payment data from the customer to the payment processor.
However, many modern payment processors like PayPal, Square, etc., offer an integrated solution that combines the functionalities of both a payment gateway and a merchant account. These providers handle transactions without requiring you to have a separate merchant account.
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FAQs
The main difference between a payment gateway and a merchant account is the data of the payment vs the actual money. For example, when you pay with a card, you have to provide your account details (account holder’s name, account number and PIN). A payment gateway secures this data so it’s kept safe without any breaches. On the other hand, when the money is deducted from your account, it is transferred to the merchant account so the business can receive it. A merchant account also allows you to claim a refund or ask for a chargeback.
A payment gateway and a merchant account both work together to process payments efficiently for a business. The customer data is securely sent by the payment gateway for approval. Once the money is deducted from the customer’s account, it is temporarily held in the merchant account. So, both act as a team to make sure your business gets paid safely.
A merchant account acts as a subset of a business’s main account. It is more for a business’s benefit than a consumer’s. When a customer makes a payment, the money is kept in this account for a specific time to account for any potential refunds, deductions, and chargebacks. In this way, only the confirmed transactions are transferred to the business account.
