If you’ve ever wondered what the difference is between a merchant account and a payment gateway, you’re in luck. In this post, we’ll explain everything about the two so that you can decide which one will work best for your business.
The Difference Between Merchant Accounts and Payment Gateways
It can be confusing to figure out the difference between a merchant account and payment gateway, but it’s important to understand the differences between these two essential pieces of your eCommerce business before choosing one or the other.
Merchant accounts are what you set up with your bank. They allow you to accept credit card payments for your products or services in exchange for a small transaction fee per sale. Payment gateways are companies that process payments on behalf of merchants, taking care of everything from receiving customer information to managing customer data and issuing refunds as well as chargebacks should they be necessary.
In general, merchant accounts are more expensive than payment gateways because they require more overhead costs like website design and maintenance fees; however, they also offer more flexibility than payment gateways when it comes down to customizing your online store experience according to your brand’s specific needs (ease-of-use features like shopping carts).
What is a Merchant Account?
A merchant account is a financial service that allows businesses to process credit and debit card payments. Merchant accounts are provided by banks and other financial institutions, like PayPal.
Merchant accounts are used by e-commerce websites, brick-and-mortar retail stores, and other businesses that accept payments for goods or services.
What is a Payment Gateway?
Payment gateways are software applications that sit between a merchant and a payment processor. They act as a bridge between the two, allowing you to accept credit card payments from customers.
The reason payment gateways exist is that there was no way for merchants to accept online payments before they were invented. The first online transaction ever recorded occurred in 1994 when a university professor named Andrew Odlyzko paid his coffee shop bill using an electronic form of cash called “e-cash.”
This proved that it was possible to send money from one person’s account to another without having physical possession of any actual bills or coins. However, e-commerce wouldn’t become widespread until several years later when companies started developing gateways that would allow businesses like yours to access them.
Choosing a Merchant Account or Payment Gateway
If you’re wondering whether to get a merchant account or payment gateway, here are some points to help you make your decision:
- Merchant accounts are more expensive than payment gateways. Payment gateways cost less because they have fewer features and can’t process payments as quickly as merchant accounts. They also don’t require PCI compliance or the integration of expensive POS systems like the ones used in restaurants and retail stores.
- Payment gateways are easier to set up than merchant accounts, which require a lot of work upfront before you make any money at all (you’ll have to integrate your POS system with theirs). If you’re just starting out and aren’t sure how many sales will come through each month, this could be an important factor in deciding between these two options.
- Payment gateways offer more flexibility than merchant accounts—they allow businesses with multiple locations or online stores to access their funds from anywhere at any time without having an actual brick-and-mortar location where there might be security risks involved! The best part about both payment processing methods is that once installed correctly (which involves getting approval from law enforcement officials), neither one has ever been known for being hacked!
Merchant and Payment Gateway Charges
Merchant Account Fees
- Monthly fee: A merchant account may have a monthly fee, usually ranging from $25 to $75. In some cases, this fee is waived if your average daily sales volume exceeds a certain threshold.
- Transaction fees: A transaction fee is charged by the bank for every transaction conducted through their network. For example, Chase charges 2% of each sale plus $0.15 per transaction; it also charges an additional rate of 1% for card-not-present transactions (like those made online). Other banks may have different rates that are calculated differently but still fall under the same category of “transaction fees” or “merchant rates” because they all involve making money off your business’s transactions with customers and clients. Payment Gateways
Using A Virtual Terminal Service Provider
A virtual terminal is a service that allows you to process credit card transactions online, without the need for a physical terminal. It’s a great option for businesses with fewer than 100 transactions each month, or who want to test out e-commerce before committing.
Virtual terminals are also ideal for situations where you need flexibility and control over how your data is managed, such as when you’re working with an international client base or selling items from multiple locations in different countries.
However, it’s important to note that using a virtual terminal service provider could result in higher processing fees compared to using an integrated gateway solution or merchant account.
Whichever type of service you use, it’s important to know the terms and conditions and additional hidden costs you may be charged.
You should be aware of the terms and conditions, as well as any hidden costs. While these may seem like unnecessary details to pay attention to, they can actually have a significant impact on your business’s bottom line.
You might not be aware that the payment gateway company charges you for each transaction made through their service. How much does it cost? That depends on the company and how many transactions you make per month, which is why it’s important to read over their agreement before signing up with them.
Whether you’re building your own eCommerce site or selling on a marketplace like Etsy, choosing the right payment gateway or merchant account can make all the difference. If you’re just getting started with accepting credit cards online, it’s important to know what these services offer before signing up for one over another. Payment gateways are often used by smaller merchants who want the flexibility and features of an enterprise-grade solution without having to invest in software or hardware upgrades upfront. On the other hand, merchant accounts are designed specifically for businesses that need advanced features like recurring billing capabilities or multiple currencies supported at once—but also have higher fees due
During a regular day—whether you’re a new business or well-established—you’re likely to hear terminology that you:
- Don’t entirely understand
- Think is interchangeable
- Don’t know the meaning of it at all
So, you might feel a little intimidated at first. But that’s okay—learning the lingo that affects your business daily is just part of the territory that comes with operating in today’s technologically advancing world. It might take time, but learning the meaning of business terminology saves you precious resources and keeps you from making embarrassing mistakes. A couple of terms like this are merchant account and payment gateway.
Some business owners believe only one of these items is required for credit card processing. The reality is that a merchant account and a payment gateway serve two entirely different purposes:
- The payment gateway enables and allows you to process online transactions.
- The merchant account holds the funds from these transactions before depositing them into your business’s bank account.
As these short definitions prove, a business needs both to accept and process transactions.
Do you need a merchant account? Is your business considered high-risk because of your industry? Reach out to Bankcard to learn how we can help.
What is a Merchant Account?
Merchant accounts are special bank accounts that facilitate the acceptance of various payment methods, such as credit or debit cards, automated clearing house (ACH) payments, and more. It’s not the type of bank account you can physically access—instead, it’s more like a bridge between your physical and eCommerce storefronts and card issuers. This bridge helps you obtain the funds your customers pay for goods or services and transfer these funds into your actual bank account.
You can get a merchant account through:
- Merchant acquirers
- Acquiring banks
- Credit card processors
Here’s how it works:
- The business—also known as the merchant—signs a contract with one of the above. This entity then creates and controls the business’s merchant account.
- Whenever the business processes a credit card payment, funds get deposited into that merchant account.
- The business then transfers the accumulated funds in the merchant account into its business’s bank account.
Merchant Accounts and Business Bank Accounts
The steps above highlight a crucial difference: merchant and business bank accounts are different.
- Merchant accounts are only for accepting credit and debit card payments.
- A business that doesn’t have a merchant account can only accept cash, check, or bank transfer payments—this isn’t a practical solution in today’s world of online shopping.
- Merchant accounts cannot be withdrawn from or deposited into.
Business bank accounts
- Business bank accounts allow a business to run its day-to-day operations.
- Employers pay staff, contractors, and suppliers with funds in the business’s bank account.
- All sales funds from the business are stored in this account.
Why is a Merchant Account Important?
Today’s consumers shop wherever they are—that might be in-store, at home or at work, and using a laptop or other mobile device. Even if you have a physical storefront, meeting your customers where they are and where they feel most comfortable shopping is one of the most crucial aspects of today’s business world. In other words, if you can’t accept credit or debit card payments, you’re losing out on a lot of sales.
Credit card processing ability can increase both sales and overall revenue. Plus, if you operate internationally, international merchant accounts allow you to accept currencies from other countries.
Finally, if you’re in an industry that traditional merchant account providers consider high-risk, these providers won’t work with you. You need a high-risk merchant account, so you can process payments.
What is a Payment Gateway?
Payment gateways are just as important as merchant accounts—if not more so. With a merchant account, you can accept credit and debit card payments. But without a payment gateway, you have no means of actually processing the payment. Online payment gateways function much like your in-store credit card reader, reading your customers’ payment information during online checkout.
Almost all businesses need to accept credit card and debit card payments to grow their customer base and remain relevant in the ever-changing world of commerce.
In-store, your POS, or point-of-sale, the machine acts as your payment gateway. In an online eCommerce store, your checkout page is the payment gateway. Both examples share something in common:
- The payment gateway is where customers enter their credit or debit card information to complete the purchase.
Here’s how it works:
- The customer enters their payment details on the checkout page OR swipes, inserts, or taps their credit or debit card in-store.
- Payment details are sent to the payment gateway.
- The payment gateway converts the cardholder’s information and then sends the encrypted data to the payment processor.
- The still-encrypted data then gets routed from the payment processor*, through the network, and to the card issuer’s bank to get authorized.
- The processor returns information to the payment gateway, either approving or declining the purchase.
- The payment gateway then sends this decision to the merchant and the customer.
*Processing payments costs money, right? Not with Bankcard’s zero-fee credit card processing!
Payment Gateways and Payment Processors
The steps outlined above highlight another difference in the payment cycle. These two terms are sometimes considered interchangeable as well, but they, too, are two totally separate aspects of payments.
- Collects customer credit and debit card information
- Routes the information to the correct payment processor
- Routes credit and debit card information received from the gateway to a customer’s bank or credit card issuer and the business’s merchant account
- Facilitates moving funds from the customer’s account to the business’s account for approved transactions
For instance, our Shopify payment gateway and WooCommerce payment gateway integrations provide the online payments services you need to keep your online store ringing up sales. Check out all Bankcard’s integrations and reach out via the form if you need an integration you don’t see here.
Why is a Payment Gateway Important?
If you have a merchant account for your business, but you don’t have a payment gateway, it’s like having more customers in your store than you ever have with no way to accept their payments. Think of a payment gateway as the “gatekeeper” at the toll bridge—it’s the toll bridge operator between you and the other side of the bridge, i.e., the bridge between you and your customers’ payments.
A business merchant account and a payment gateway are critical to your sales. When you offer a broad range of payment acceptance, you attract more customers, earn more sales, and widen your market share.
How to Spot the Best Payment Gateways
Payment gateways are not all the same. All payment gateways perform the above functions—but those are merely the essentials. A lot of payment gateway providers add additional functionality and services to enhance your entire payment facilitation process, such as:
- Numerous payment methods. While credit cards and debit cards lead the pack in ways to pay, today’s payment methods are many and include things like eWallets from Google Pay and Apple Pay, as well as direct debits and bank transfers. A general payment gateway can’t do all that. The best payment gateways offer multiple payment options, whether your retail store is brick-and-mortar or online.
- Fraud and other risk protection. Businesses with online operations risk hacking or another type of attack each time a payment is processed. If this happens a lot, it can negatively impact your business. Chargebacks occur for many reasons, one of which happens when a customer’s payment information is stolen during checkout. When customers see fraudulent charges on their statements, you face chargebacks and the associated fines and penalties. It can also negatively affect your business’s reputation, leading you to seek out high-risk merchant services if your current merchant account provider drops you as a customer.
- Subscription billing and other tools. Many businesses, both goods- and service-based, use subscriptions and recurring billing to maintain customer accounts, maintain inventory and facilitate ongoing payments. Payment gateways that take care of your automated subscriptions, remind customers of upcoming payments, and allow for customizing plans according to the customer are helpful.
- Payment data and analysis. Detailed payment information at your fingertips helps you make informed decisions regarding business improvements and overall business health. Run reports that showcase where you’re doing well and what aspects of your payments process could use some work.
When you have a basic payment gateway that doesn’t offer these added qualities, you must fill the gaps with other services that can eat into your bottom line. The best payment gateways come with a merchant account as an all-in-one service. Bankcard merchant accounts come with our payment gateway. Contact us to learn more.
Getting to Know the Differences Between Merchant Accounts and Payment Gateways
If you’re still unsure about the differences between these payment industry terms, consider the following.
Merchant accounts and payment gateways serve distinctly different purposes:
- Merchant accounts receive and house the proceeds from credit and debit card payments.
- Payment gateways collect and encrypt customer card information and send it to a payment processor to facilitate and complete a transaction.
For instance, imagine the payment gateway is your cashier, waiting for a customer to hand them cash for the purchase. Once the customer gives the cashier the money, the cashier puts the money in your cash register. The cash register is your merchant account.
Now, while these are two distinctly different items, they are inextricably linked. You can’t reach the “money goes in the register drawer” phase of a transaction without both.
The Benefits of a Merchant Account and a Payment Gateway
The main reason you obtain a merchant account for your business is so you can accept credit and debit card payments either in-store or online. But there are several other reasons why a merchant account is beneficial for your business:
- You’ll see increased sales in line with more accepted payment methods.
- The increased sales lead to better revenue and improved cash flow immediately.
- The increased revenue and cash flow can allow you to better market your business and get in front of even more customers.
- Increasing your business’s visibility leads to better market share and maintaining an edge over your competition.
A traditional payment gateway is perfect for online businesses, but any business can use it to adopt frictionless payments technology in all their sales channels. For instance, Bankcard offers numerous API integrations so you can connect all the software you currently use with your Bankcard account.
Merchant Account or Payment Gateway: Which Do You Need?
Accepting card payments means you need both a merchant account and a payment gateway. These two technologies work together to facilitate customer purchases and house the funds from customer payments. If yours is a business that accepts cash or checks only, you don’t require a merchant account or a payment gateway—but in today’s ever-evolving business world, it’s smart to accept as many forms of payment as your customers wish to use.
When you’re ready to make a move to a merchant account and payment gateway, remember to score potential providers based on the following criteria:
- You should be able to accept all forms of currency for your specific state, province, region, or country.
- If you’re used to accepting checks and cash-only payments, you should review merchant accounts that have no cap on processing volume. Once you open your business to consumers who want to pay with credit or debit, expect your sales to increase almost overnight!
- Payment gateways are offered at varying prices, so compare the included services with your business’s budget and choose the option that makes the most sense for your store.
- Consider the features you need and which features are unnecessary—if you can benefit from chargeback management, customer reminders, or inventory information, choose a provider that offers what you need but won’t try to sell you anything you don’t.
- Most importantly, a payment gateway needs to easily integrate with the equipment and services you already use and come with superior security.
Partner with Bankcard
- Own a small, physical store, and you’re finally taking your business online.
- Offer mobile services for your clients, and you need a solution you can take with you.
- Operate a large business that needs to streamline its overall payment processing
Bankcard’s merchant accounts and payment gateways can put you in a position to meet your customers wherever they are and accept any form of payment they choose. Reach out to speak with one of our high-risk payment solution specialists and learn how you can boost your business to the next level with Bankcard.