Payment Gateway vs. Payment Processor: What Solution Should You Choose?

Even before the pandemic, the e-commerce industry was growing fast. However, the pandemic accelerated the growth of online businesses two folds. The surrounding ecosystem, such as payment sites, also grew, necessitating companies to find ways to accept electronic payments to remain competitive.

A company must have the right payment processing system to accept online payments. That’s when such terms as a payment gateway and payment processor gain relevance.

Read on to learn more about payment gateways and payment processors and determine which solution is best for your business.

What is a Payment Gateway?

A payment gateway is software that connects merchants and customers. The software is built into a card reader or a POS (Point-of-Sale) system and processes payments when customers use their cards to make purchases. When integrated into a website or POS, the payment gateway serves as a channel to receive and make payments.

For a business to receive payments, the payment gateway requires a customer to fill in details such as CVV, debit/credit card number, and expiry date before proceeding to make payments.

Most companies are integrating a white label payment gateway into their workflow to accelerate business and offer their customers a seamless payment solution. A white label payment gateway from Spell comes with all necessary payment tools for handling operations from refunds, chargebacks, and settlements, to invoicing, subscription management, and even marketing. Such a ready-to-use solution helps businesses reduce costs and scale expeditiously.

How does a payment gateway work?

Once a customer makes a transaction, the payment gateway sends the details to the payment processor. The processor then alerts the issuing bank, which checks if a customer has sufficient funds to facilitate the purchase. If the customer has adequate funds, the issuing bank approves the transaction; if not, it rejects it.

If accepted, the processor delivers the authorization to the payment gateway, and the funds are deducted from a client's account and sent to a merchant's account. The merchant can then process the payments in batches or one at a time.

If the request is rejected, the user will receive a notification from the merchant displaying an error with the transaction. Payment gateways typically use encryption to display credit card numbers; this guarantees that data is sent securely between the customer and the business.

How to set up a payment gateway?

There are various ways a company can integrate a payment gateway into its website. The first method is the hosted gateway, where the payment gateway is a third-party, and customers are redirected to a payment gateway where they're required to enter their card details. The integration is usually done using APIs.

The other method is the direct post method, wherein customers can make payments without leaving your website. The transaction gets to the processor and gateway without being stored on your server. In this method, a vendor links its payment gateway and your shopping cart to postcard details.

You can also opt to build your own payment gateway from scratch, giving you the greatest overall control over the whole payment process and eliminating the need to pay payment gateway charges. However, this can be very expensive, and it takes approximately one or two years to develop a functional product.

The last method is the integrated method, wherein a company uses a pre-built white-label payment gateway that they can customize and brand as their own. No third parties are involved, and companies are responsible for verifying, storing, and securing every transaction. Most startups with basic needs and small processing volumes opt for this approach as it saves on cost and time.

What is a Payment Processor?

A payment processor is an intermediary between companies and banks involved in merchant transactions. Payment processing companies are responsible for managing, handling, and processing debit and credit card payments, payments from crypto wallets and e-wallets, as well as open banking transactions.

Regardless of the payment method or currency or whether the payment is offline or online, payment processors facilitate payments between merchants and relevant banks.

Payment processing companies provide the hardware and software that enables consumers to pay for services and products. There are two types of payment processors:

• Front-end: connects with payment settlement services and card networks to manage and run merchant accounts.

• Back-end: manages the movement of cash among accounts.

How does a payment processor work?

When a customer makes a payment, a payment gateway submits the information to the payment processor, which initiates the payment by sending information to the credit card network like Visa or Mastercard for approval which either declines or approves a payment request.

Once a business accepts a card payment, the processor finalizes the payments and moves the funds from a customer's bank account to your business's bank account. Depending on the acquiring bank or payment processor, the merchant can access these funds immediately or in several days.

How to set up a payment processor

You can partner with a third-party payment processing service if you have a small website and few transactions. Customers will be redirected to another website when making purchases, disrupting their shopping experience.

Another alternative you can opt for is building your company’s payment software which can cost anything between $100000 to $250000 to develop an MVP (Minimum Viable Product). Releasing the MVP isn’t the end of the development process; you’ll also have to do maintenance and further development at an additional cost.

Development of payment processing isn’t an easy journey; it can take 1 or 2 years before you’re ready to launch the product. Besides the cost, you’ll also have to get various financial licenses and adhere to different laws.

The downside of taking this approach is that even if you invest lots of cash and time, you’ll most likely develop a technology that isn’t competitive in the current market. The benchmarks in this industry are already high, consumer expectations are high, and it’s challenging to change their choices to work in your product’s favor.

The best option is to integrate a payment solution into your website where customers enter their card details, and the transaction is processed on your website. This approach gives room for flexibility and offers customers a smooth payment experience.

Partnering with white label solutions from companies like Spell is more cost-effective as you can get top-notch tools to start receiving payments without dedicating a lot of funds to technology development. This way, your company will be ahead or in-line with the competition in days rather than years, and you’ll focus your funds on winning the market.

When you partner with a white label service provider, you trade another form’s software under your brand. However, your customers will only see your branding, and you set the terms and rates. Besides the processing fees charged by card networks and banks, you’ll also make a profit for every transaction.

Advantages of Integrating a White Label Payment Solution in your Website

1. Instant launch

Companies don’t have to invest in expensive software development, which can take one to two years. White label solutions allow you to accept electronic payments in no time through the embedded invoicing system.

2. Reduced Risk and Cost

Developing and launching a payment platform is only the beginning since you’ll have to develop updates and regularly maintain the platform, which can be very expensive. You don’t have to worry about maintenance costs or developing updates with white label solutions.

3. Scalability

Partnering with white label companies that have experience in serving high-volume payment flows on operational and infrastructural sides mitigates performance risks. This allows you to focus on marketing this new service to your customer instead of software development.

4. Uptime is Guaranteed

White label service providers come with proactive SLAs (Service Level Agreements), security features, safeguards, and redundancies to maintain uptime. This gives you peace of mind as your customers will never have challenges with the payment system, and payments will be processed round-the-clock.

5. Reduce Operating Costs

The cost of using white label solutions is 70% lower than any other method, like developing your own software. Reducing operating costs means increasing your company’s profitability and reserve capital.

6. Increased Productivity

White label software boost productivity since teams don’t spend time trying to debug the software or develop updates and thus have more time to focus on customers.

7. Increased Customer Loyalty

Integrating the necessary payment solutions into your website means customers can pay for goods and services conveniently, and this helps strengthen the relationship between your business and customers.

So, What Solution Should You Choose?

While the two terms, payment processors and payment gateways, may seem confusing, there's a straightforward distinction between the two. Payment processors oversee the entire process, while payment gateways solely decline or approve transactions.

Deciding on the best solution between a payment gateway or a payment processor depends on your business. Payment processors are an excellent choice for businesses that accept in-person sales.

Payment gateways have a digital framework that is best for companies that accept online payments. It's important to note that payment gateways can't work without payment processors. Therefore, if you opt for a payment gateway, you must have a payment processor.