Most modern business owners and operators must deal with e-commerce transactions at some point in their careers.
You've probably heard the terms "payment processor" and "payment gateway" while setting up an online payment process. At first glance, the two phrases appear similar. They do not. In reality, the payment processor and the payment gateway are two different entities.
To improve your online payment process for security and client experience while decreasing expenses, you must first understand what these two separate services are and what they represent for your business's web presence.
This is a more in-depth look at their involvement in taking customer payments and transmitting transaction balances to your account.
The four major players
Before getting into the specific functions of a payment processor and a payment gateway, it's critical to understand the four parties involved in each transaction your business can operate.
- The shopkeeper (you)
- The client
- The issuing financial institution
- The purchasing bank
The payment processor is a service that connects the merchant, the issuing bank, and the acquiring bank.
When making a typical retail purchase and presenting a physical payment card to the merchant, the payment processor is all that is required to complete the transaction.
The payment processor service generally serves as a point of payment or point of sale (POS) interface for the merchant in a brick-and-mortar business. This interface is also known as a credit card processing terminal.
The terminal is in charge of verifying the legitimacy of the actual payment card given by the customer. Modern credit cards feature EMV chip technology, which utilizes cryptographic encoding to ensure the card's authenticity. Validating the payment card requires an authentic, bank issued EMV chip card and evidence of identity that matches the customer to the card.
A smart credit card processing terminal must be able to read EMV chips to serve as a point of authentication for the payment processor.
The payment terminal sends the transaction data to the issuing bank once the customer's payment card has been verified and the transaction has been accepted. The transaction will be approved or declined virtually instantly by the issuing bank. When the transaction is approved by the issuing bank, the payment processor transmits the information to both the acquiring bank and the payment terminal to notify all parties of the successful transaction.
If the transaction is declined by the originating bank, the payment processor communicates this information to the payment terminal, prompting the merchant to refuse the payment card.
A payment gateway, like a payment processor, is a technology that transfers funds between the customer's bank and yours. The key distinction is that it is mostly utilized for e-commerce or card-not-present purchases. In other words, it functions as a POS terminal for online transactions.
When selecting a payment gateway, use caution.
Because a customer does not show a physical card to the merchant while initiating a transaction via the internet, the transaction must be handled differently. This key distinction is what necessitates the use of a payment gateway.
The payment gateway authenticates a customer's digital credentials before transmitting information about the transaction to the payment processor in the same manner that the payment terminal authenticates a physical payment card.
Authenticating a transaction remotely is a more sensitive process when the consumer and card are not physically present. Customers expect to be able to make purchases over the internet and have them confirmed promptly; payment gateways, then, have a difficult task to do: validate the customer's credentials in a couple of seconds against the high probability of attempted bank card fraud.
SSL encryption's crucial role
Moreover, payment gateway technology has delivered a remarkable rate of success at the rate that customers demand.
To do this work safely—that is, without exposing the customer's personal information to potentially hostile third parties—a type of encryption known as secure socket layer (SSL) encryption is used. This implies that the payment gateway transmits the customer's sensitive data from the customer's computer to the issuing bank in an indecipherable format.
When the data reaches the issuing bank, the payment gateway decodes it and gives it to the bank in a usable manner. The information submitted by the customer is ultimately authenticated or declined by the issuing bank. Before authenticating the customer and payment card, the bank may evaluate other information such as the actual location of the requesting computer and the previous behavior of that particular client.
Once the issuing bank has validated the legitimacy of the customer's request, the payment gateway securely delivers the transaction information to the payment processor, who subsequently completes the transaction as detailed above.
The key point here is that the payment processor does not deal with authentication directly; it is the responsibility of the payment terminal (in a transaction where the client physically presents a card) or the payment gateway (when a buyer pays remotely on the internet).
Choosing the proper payment gateway, therefore, means locating a service that is dependable and secures the customer's identity and critical data. A good payment processor should be quick, accurate, and reasonably priced.