Whether you’re a brand new business or a well-established brand, it’s likely you’ve had to deal with things like accepting payments online. Luckily, there’s loads of tech out there that makes it simple for businesses to trade online. What’s less simple, though, is the terminology.
When you dive into the world of online payments, you’ll start coming across a host of different – but confusingly similar – terms, such as payment service providers, merchant banks, merchant accounts, acquiring banks, issuing banks, etc. Another term you’ll probably see thrown around is payment gateways – and that’s what we’re talking about today.
From what they are, how they work and how they relate to things like merchant accounts and payment service providers, here’s everything you need to know about payment gateways.
Spoiler alert! You don’t actually need to worry about finding a separate payment gateway. All you need is a payment service provider (PSP) – they take care of it all for you.
What is a payment gateway?
A payment gateway is the technology that authorises credit and debit card payments for businesses. It works by securely capturing your customer’s payment data and transferring it to the merchant (in this case, that’s you) and then on to the relevant bank. Basically, it’s like the digital equivalent of a point-of-sale (POS) terminal in a shop. Payment gateways also work to validate your customer’s card details, making sure they have the funds available to complete the transaction. Your payment gateway will then let you know whether or not the charges have been approved by the customer’s bank.
It’s worth noting that the term ‘payment gateway’ is often confused with other related payment related terms, such as ‘merchant account’ and ‘payment service provider’ – but these are actually different thing
How does a payment gateway work?
A digital payment gateway works exactly like a physical point-of-sale system. The only difference is that the online gateway uses digital capture files to package the card information, rather than the output from a physical card reader.
Here’s what that transaction flow looks like:
- The customer enters their card details on your website checkout page.
- The payment gateway then securely transfers your customer’s details to your payment processor (also known as the acquirer, acquiring bank or merchant bank).
- The data is then pushed to the bank that issued your customer’s card (known as the issuing bank), so they can verify the transaction and confirm whether the customer has sufficient funds available.
- The issuing bank then approves or rejects the transaction, sending that data back to the merchant bank and the payment gateway, where both you and your customer are told whether the transaction was successful.
And that’s it! Well, sort of.
To take payments online through a payment gateway, you also need what’s known as a merchant account. Here’s a bit more about what that means.
What is a merchant account?
A merchant account is a specific type of bank account businesses need to accept credit or debit card payments from customers. Once your customer submits their card details, your payment gateway deposits the funds from your customer into your merchant account, where it’s held temporarily before being deposited into your bank account.
It’s important to remember that a merchant account is different from your business account. A merchant account is simply where your customer’s money is held while it goes through the necessary chain of approval. Once the payment is authorised and any returns are accounted for, the funds are transferred to your business account.
Payment gateways vs merchant accounts
Payment gateways are often confused with merchant accounts, but you actually need both to be able to take payments online. Merchant accounts also work to simplify how your business gets paid. While your payment gateway will (hopefully!) be accepting multiple payments a day – from multiple sources – your merchant account combines these gateway payments into a single deposit for your bank account. Which makes things like reconciliation much easier.
As mentioned above, you don’t actually need to worry about arranging a separate payment gateway and merchant account for your business. All you need is a payment service provider (PSP) – they take care of it all for you. Let’s look at what PSPs are, how they work and how they differ from payment gateways.
What is a payment service provider (PSP)?
Payment service providers (PSPs) – also known as merchant service providers – are companies that offer services to help businesses get paid. With a PSP, you get both a payment gateway and a merchant account, making it easy to start collecting payments online. As well as allowing you to accept credit and debit card payments, payment service providers also enable you to accept a whole range of payments – such as direct debits and bank transfers.
Payment gateways vs payment service providers (PSP)
Payment gateways and payment service providers (PSP) get mixed up all the time, which is understandable – they both allow your business to take payments online.
But there’s a key difference: payment service providers take care of the entire payment process for you. Rather than managing your payment gateway and merchant account separately, payment service providers offer a full-service solution, taking care of both the payment processing and collecting the funds. They also take responsibility for things like contracts with banks and settlement of the collected funds.
PSPs are the ultimate tool for offering your customers flexible ways to pay. By allowing you to integrate all the major payment methods – including credit and debit cards, e-wallets and pay-later apps – your customer can choose their favourite way to pay. Which means fewer abandoned checkouts for you, and a better shopping experience for them. Everybody wins!
Grow your way with Mollie
Did you know that Mollie is one of Europe’s leading payment service providers?
We’ve made taking payments online easy. With branded checkouts, localised payment methods and a quick and easy integration for your websitestore, Mollie guarantees a frictionless experience for you and your customers.