9 Min. Read

Payment Gateway vs Merchant Account: What’s the Difference?

March 29, 2023

Let’s break down the difference between a payment gateway vs a merchant account.

Payment gateways and merchant accounts are terms you’ll have come across if you take credit card payments from customers.

If you’re confused about the differences, you’re not alone. The world of online payments is a vast and often flustering one.

Don’t they do the same thing? Can’t I have one or the other?

If only things were that simple! You need both of the above to receive payments from customers as they each serve a different purpose.

A merchant account is an account used by merchants for processing customer payments.

A payment gateway takes funds from a customer’s account and places them in the merchant account.

Once funds reach the merchant account, they usually transfer to the business account.

Here’s What We’ll Cover:

What Is a Merchant Account?

How Does a Merchant Account Work & What Does It Do?

What Are the Benefits of a Merchant Account?

What Is a Payment Gateway?

Why Do You Need a Payment Gateway?

Payment Gateway vs Payment Processor

Choosing a Merchant Account

How Do You Choose a Payment Gateway Provider?

Wrapping Things Up

What Is a Merchant Account?

Isn’t a merchant account the same as a business account?

Surprisingly, no. A merchant account is not a business bank account.

A merchant account holds customer deposits when they have bought something from you.

You can think of it as a “money pot” for online businesses that holds onto customer money for a short period.

How Does a Merchant Account Work & What Does It Do?

Credit card payments are among the most common forms of payment these days.

When a customer makes an online payment, those funds are briefly held in a merchant account.

This allows time for credit card processing. It also provides time for collecting and verifying information about the transaction.

Once the process is complete, the funds will generally be released to a business bank account.

An amount may be kept in the merchant account. This can be used for different reasons including payment of refunds.

You might be thinking, why do I need a merchant account? Can’t the money come to me directly?

Unfortunately for online merchants, no. You do need to have a merchant account. There are, however, many advantages of merchant accounts as discussed below.

What Are the Benefits of a Merchant Account?

The real benefits to a merchant account are:

It groups transactions made and sends them to your account in one deposit. When processing many transactions a day, this will make your accounting process easier.
Monies held in the merchant account can help mitigate uncertainty around transactions. An example of this would be customer returns. This pot of money helps deal with this.
It allows for fraud checks to be carried out where appropriate. Suspicious or questionable payments can be flagged before reaching the business bank account. This can potentially save money on large transaction fees.

What Is a Payment Gateway?

A payment gateway is like a bridge. It connects your customer’s bank, or another payment method, to your merchant account.

The gateway allows funds to move into the merchant account. This will happen once a customer’s details are verified, and the transaction cleared.

It might help to think of this as putting your card into a card machine in a store.

It’s the first point at which you are giving your account information over to a third party.

Some examples of payment gateway providers are PayPal, Stripe, and WorldPay.

Why Do You Need a Payment Gateway?

Why can’t the money move from the customer’s account straight to the merchant account?

A payment gateway serves many purposes, including:

Security. A customer enters their card/account information at checkout. It then goes into the payment gateway, where it is captured and encrypted by the system. This helps to keep customer’s payment details safe from fraudulent transactions.
It routes the information gathered to a payment processor or a merchant account. Any further checks can be carried out here before sending the money to a business bank account.
Asking the merchant to accept or decline payment. There might be an issue with the payment information provided by the customer. The payment gateway will then ask the merchant how they want to proceed. The transaction will either continue or an alternative payment type will be needed.

Payment Gateway vs Payment Processor

Hopefully, you’ve now got your head around what a payment gateway is.

Let’s briefly talk about the difference between payment gateways and payment processors.

Payment processor is probably another term you’ll have heard of but might not know what it means.

To put things simply, a payment gateway is a service that will allow (or not) a transaction to go through. When it is approved, a payment processor will then execute a credit card transaction.

Payment Gateway

As mentioned above, a payment gateway is just that. An online transaction needs to pass it through before it’s finalized.

The service allows for credit card and debit card payments to be made.

A customer interacts with an online payment gateway when they enter payment information at online checkout. This data is then encrypted by the system to protect it from fraud.

Payment Processor

A payment gateway does not process the payment itself. This is the job of a payment processor.

It works as a middle man between all parties. The payment gateway “talks” to the merchant, cardholder, and both sending and receiving bank to process the transaction.

Merchants will need to choose a payment processor to process their online payments.

You need a processor that takes credit and debit card payments, as well as other payment methods.

In physical stores, a payment processing service gives the merchant everything it needs. This will include supplying a credit card terminal for taking in-person payments.

For an online business, it will instead provide the software to use. It will set up a virtual terminal on the website for payment processing in online sales.

Of course, some businesses might need both!

Choosing a Merchant Account

How do you choose the right merchant bank account provider for you?

First of all, there are a few different types of merchant account that it helps to be aware of:

Payment Service Providers (PSPs). These are particularly useful for smaller businesses. The cost of having your own individual merchant account might outweigh the benefit. With a PSP, your business account is aggregated with those of other merchants. The benefit of aggregate merchant accounts is the option of paying monthly. For many, this makes it much more affordable. There is a risk of vulnerability with this type of account. Research is necessary if you are considering this route.
A traditional, dedicated merchant account. You’ll have your own dedicated merchant account. It is also recognized as its own entity instead of grouped with others. The downside of an individual merchant account is higher costs. The costs might not be manageable or justifiable for some businesses.

When looking for a merchant account provider, you’ll need to consider the price and any payment plans.

If you are a new and small business, try researching aggregate merchant accounts. You do have the option to move to an individual merchant account when you see more customers.

You also need to research the processing fees and chargeback fees of each provider.

There may be extra fees such as conversion rates that you need to be aware of.

It is important to ask a merchant account provider about their anti-fraud tools. You want to make sure you and your customers are protected.

You may also consider asking some of the questions listed here when choosing a provider.

How Do You Choose a Payment Gateway Provider?

As with a merchant account, it will depend on the type of business you run. You’ll also need to consider your needs as a company, and how to find something to fit this.

Payment gateways may only work with some merchant accounts and types of banks. This might not work for all customers, and as such, you might want to account for another form of payment.

When researching payment gateway providers, there are some questions to ask. These will help you decide if it is the right one for your needs.

Do they offer many payment methods? Many shoppers do still pay with a credit or debit card. There are other forms of payment that you need to consider. For example, customers may use an eWallet, mobile payment, or direct debit. Your payment gateway provider should account for this.
What fraud protection do they offer? In the online world, fraud is always a worry. It will be a constant consideration for both customers and businesses. A payment gateway dedicated to fraud protection is important to your business. A good example of this is Stripe’s world-class Radar service. A failure to manage fraud can be devastating to your reputation.

Wrapping Things Up

Recognizing key differences between a payment gateway and a merchant account is difficult.

Hopefully, this article helps to make things a little clearer.

The biggest takeaway is that they’re not the same thing. Your business will need both to process payments from customers safely.

If you are looking for a new provider for either service, speaking to them can help.

They can help you to get the information you need.

As a business owner, you and your customers are vulnerable to fraud. This is true whether you are based either partially, or wholly, online. Making sure you have the proper payment infrastructure in place can help give you peace of mind.