A web or mobile application is the most fundamental requirement of any business. It is the major channel of communication with users. And since it is equipped with all important features, customers are actually looping themselves in the sales cycle of the business via it.
Major factor attracting customers to interact with the service/product provider using mobile or web application is convenience. The app lets customers view product, purchase the product and even pay for the product in a very hassle-free way.
Talking about the payment, a precisely developed payment module makes payment happen securely and it is the most common module available in all current web or mobile applications.
Though it is common, business owners have a lot of queries related to it. They cannot easily draw a line between the payment processor and payment gateway. And so, they cannot decide which one should they choose and how much does it cost.
In fact, they cannot even decide whether they need payment gateway/processor or they can accept online payment without it!
By a lucky chance, I have covered all these doubts with comprehensive answers in this blog. So, let’s first understand the difference between a payment gateway and payment processor.
But to understand it more rationally, we first need to understand the working of the online transaction.
- How does online payment transaction work?
- Scenario 1: Payment made via point of sale system
- Scenario 2: Payment made via online payment window
- Difference between a payment gateway and payment processor
- Which one do you need? The payment processor or payment gateway?
- How much does it cost to acquire payment processor/gateway?
- How significant the right payment processor/gateway is?
- In the nutshell
How does online payment transaction work?
Generally, an online transaction happens in 5 easy steps and throughout these steps, there are many actors involved. These actors include:
- Customer: Who owns the credit/debit card and pays via card
- Issuing Bank: Customer’s bank which offers the card to the customer
- Card network: Independent companies which provide cards to banks. I.e MasterCard, Visa etc.
- Merchant: One who accepts the payment via card using either his point of sale system or online payment module.
- Payment aggregator: Payment aggregator is generally considered as payment gateway/processor which lets merchant accept payment online or even through the point of sale system.
- Merchant bank: Merchant has an account in merchant bank and money gets transferred to customer bank to merchant bank upon a successful transaction.
Here it is worth mentioning that a customer can make payment in two ways. He can either pay by swiping the card at the merchant’s point of sale system or he can add information of his card digitally in the payment window of the web or mobile application.
In both of these ways, the transaction reaches to successful state using almost the same path. But the difference between the payment processor and payment gateway is hidden in that ‘almost’! So, it is better to learn the working of online payment in two scenarios.
Scenario 1: Payment made via point of sale system
- A user swipes the credit/debit card at the point of sale system and the reader of a point of sale system reads the information of the card.
- The point of sale system is equipped with a program which validates the card information and then shares card information with the relevant merchant bank. This program is nothing but the payment processor. (NOT payment gateway)
- The merchant bank sends information to the card-issuing company.
- The card issuing company performs the check and if everything looks good, it sends confirmation to customer bank which debited the money.
- And the card network shares payment status with a payment processor which then delivers the message to the merchant.
Scenario 2: Payment made via online payment window
- A user adds card details in the text boxes of the payment window.
- Digitally added details is now validated by a program which is nothing but the payment gateway.
- Once payment gateway validates the information, it shares the information with payment processor and from here, transaction evolves same as scenario 1.
So, now you are probably aware of the difference between a payment gateway and payment processor. If you are still living with doubt, here is the proper definition.
Difference between a payment gateway and payment processor
Most of the business owners are thinking payment gateway and payment processor the same thing as they grow up in a startup environment hearing payment gateway and processor together. So, finally, it is time to shatter the illusion.
Payment processor: A payment processor validates the credit and debit card data and shares information between merchant bank, customer, customer bank and card issuing company.
Payment gateway: A payment processor is integrated into the online payment window, especially in e-commerce apps and sites. Payment gateway validates the data and transmits the online payment data to the processor.
The reason why our world is experiencing both payment processor and payment gateway is because of the fact that the physically inserted data requires different validation process and digitally inserted data requires different validation process.
Payment processor validates the physically inserted data, whereas payment gateway validates the digitally inserted data.
Compared to the payment processor, the payment gateway has to work aggressively as validating digitally inserted data is harder than physically inserted data.
Which one do you need? The payment processor or payment gateway?
Based on the previous learning, we can firmly say that a payment processor is needed when you are running a brick mortar store and accepting payment via credit/debit card.
And a payment gateway is needed when you are running an online business and allowing people to pay online. However, in such a case, you also need payment processor as payment gateway only validates the data; it does not send data to the merchant bank.
How much does it cost to acquire payment processor/gateway?
Several independent companies are providing payment processor/gateway and they do charge per transaction. Following are the top 2 popular payment processor/gateway providing companies and their pricing model.
Using Stripe, you can accept payment via Visa, MasterCard, American Express and Discover credit/debit card. It also supports Apple Pay and Google Pay and 100 different foreign currencies.
For online checkout window (Payment processor + Payment gateway), Stripe is charging 2.9% + $0.30 for every credit/debit card transaction.
For every in-person transaction through a point of sale system, Stripe is charging 2.7% + $0.30 per transaction. If payment made using an international credit card, Stripe is charging 1% extra.
Paypal is yet another major payment processor/gateway providing company. However, it is more expensive than any other options.
It charges 2.7% per US card swipe, 3.5%+ $0.15 for keyed-in transaction and 2.9%+ $0.30 per online transaction. And if the payment made via international card, PayPal can charge up to 4.4% + some fixed rate depending on the currency.
How significant the right payment processor/gateway is?
If your purpose behind developing mobile or web application is generating one more revenue stream, your online application must be armed with the payment module. And to give life to the payment module, you should integrate the payment gateway/processor.
Because without it, it is impossible to establish a connection between the merchant bank, customer bank, and card issuing company.
Not only for online payment but even for in-person payment via point of sale system, you always need a payment processor to validate the card details and send it to other entities.
However, having a payment processor/gateway doesn’t make you reach on cloud 9. You also need to have the right payment processor/gateway.
There was a time when the payment gateway/processor Uber was using was not able to convert currencies in real-time. Due to this, riders of European countries had to pay the fare in US dollar.
But soon, Uber adopted Braintree payment processor/gateway, and Uber had seen exceptional growth in the number of customers.
Following graph clearly depicts how after adopting Braintree payment processor/gateway, the number of Uber users skyrocketed.
In the nutshell
As businesses are relying more and more on their web or mobile applications, payment module is becoming a fundamental module of the mobile or web application.
But without the payment processor/gateway, payment module cannot accept the payment. For a brick mortar store owner, it is totally safe bet to only opt for a payment processor.
But for an e-commerce store owner, payment processor, as well as payment gateway both, are needed. The market is flooded with the choices of payment processor/gateway.
However, according to your business requirements, you have to select the best suitable payment processor/gateway.
Because if you end up choosing the wrong payment processor/gateway, the user experience is affected very badly and your business will soon start rolling toward a dead-end!