Payment Gateways vs. Merchant Accounts
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Two of the most important aspects of collecting payments as an online business are payment gateways and merchant accounts. Despite their importance, finding easy-to-understand information on the differences in payment gateways vs. merchant accounts can be difficult.
Here, we’ll explain the basics of these two important components of eCommerce and help you understand which solutions make sense for your business.
What is a payment gateway?
A payment gateway is like an online point-of-sale (POS) system that securely processes credit card payments.
In many cases, brick-and-mortar retailers may not need payment gateways. However, for eCommerce businesses that want to process payments on their website, payment gateways are a must.
There is a lot of technical complexity in what payment gateways do. However, the basic concept is simple: they act as a secure “middleman” between an online business and payment networks.
Payment gateways make it possible for merchants to process different forms of online payments, with credit cards being the most common payment method. By using payment gateways, merchants simplify the process of providing customers an easy and secure way to make a purchase. Additionally, most payment gateways can help enable compliance to PCI DSS (Payment Card Industry Data Security Standard).
How do payment gateways work?
Payment gateways integrate with eCommerce sites and provide a secure way for customers to input payment information. But, what exactly happens after the customer puts in their payment information? How does a payment go from your site to the appropriate card networks and banks?
To answer that question, let’s first take a look at the key players in online payment processing.
- Customers– The people making the purchases.
- Merchants– The online businesses selling goods and services.
- Payment gateways– The “middleman” that enables merchants to securely capture customer payment information, and send it on to the appropriate payment network.
- Acquiring banks– The financial institutions that send transactions to/from a merchant account. Sometimes, an acquiring bank is called the acquirer.
- Credit card networks– These are the networks for credit card brands like Visa, American Express, Discover, and Mastercard.
- Issuing banks– The banks that provide customers with credit cards are known as issuing banks. They approve, reject, and process transactions for customer cards.
Now that we understand all the players, let’s walk through the process end-to-end. Remember all this happens in seconds!
- A customer is on the merchant’s checkout / payment page
- The customer inputs payment information using the secure payment gateway integration on the site
- Payment information is sent to the merchant’s acquiring bank
- The acquiring bank sends the payment information to the appropriate credit card network (Visa, Mastercard, Discover, etc)
- The card network routes the transaction to the issuing bank
- A transaction approval or rejection makes its way back to the merchant and customer
That’s it! At this point the customer would see either an approval/confirmation page or a rejection/enter another form of payment message.
It is important to note that the transaction could be rejected at various points in the process, not just at the issuing bank. For example, a fraud check on the credit card network could lead to a transaction being rejected before making it to the issuing bank.
What is a merchant account?
A merchant account is a special type of bank account where funds from card sales are deposited and withdrawn.
When an eCommerce businesses collects payments online, the funds are sent to a merchant account. The funds generally sit in the merchant account for a predetermined number of days before being transferred to the merchant’s business account.
You may wonder: why do I need a merchant account if I already have a business bank account? There are a few reasons, the most important is: merchant accounts can collect payments from the major credit card networks, but regular business bank accounts cannot. Additionally, merchant accounts enable refunds and chargebacks to be processed before funds are transferred to your business bank account and can streamline the process of collecting funds from multiple payment networks.
Do merchant accounts include payment gateways?
Some payment solutions providers offer merchant accounts and payment gateways together. In other cases, providers offer one or the other, but not both. TailoredPay — the premier payment solutions platform for high-risk businesses — is an example of a payment solutions provider that offers both services.
Understanding aggregate merchant accounts
If you’re familiar with the world of eCommerce, you may know that it is possible to accept payments online without a dedicated merchant account of your own. For example, many small businesses do just that with platforms like Stripe, Square, and PayPal. These services are known as aggregate merchant accounts.
With an aggregate merchant account, a single merchant ID (MID) is shared between multiple merchants. With these aggregate merchant accounts, the funds from multiple different businesses are put in a single larger fund.
If you have low monthly sales volume (under $20,000/month) and aren’t in a high-risk industry, using an aggregate merchant account might make business sense. However, be sure to do your homework and compare rates and terms!
Payment gateways vs. merchant accounts: The basics
Now that you understand what payment gateways and merchant accounts are, we can see they are fundamentally different. Specifically, the key difference between payment gateways and merchant accounts is:
Payment gateways allow you to process online transactions, while merchant accounts allow you to store and transfer the funds from those transactions.
They are two solutions to slightly different business challenges. A payment gateway allows you to securely process your customers’ payment information on your website. A merchant account allows you to store and transfer the funds from those transactions.
Payment gateways vs. merchant accounts: For high-risk businesses
High-risk businesses — which include businesses with bad credit, subscription sales models, or in high-risk industries — have a unique set of needs when it comes to payment gateways and merchant accounts. For high-risk businesses, many traditional payment solutions providers, banks, and aggregate merchant accounts simply aren’t an option. This is because those solutions either won’t accept high-risk businesses or the fees are simply too high.
Additionally, high-risk businesses also often tend to have higher chargeback ratios. Not only do chargebacks cost money, they could lead to payment solution providers dropping the business altogether.
Because of these challenges, we recommend high-risk businesses to partner with a provider that:
- Specializes in high-risk industries
- Offers both high-risk merchant accounts and payment gateways
- Has strong chargeback mitigation features to protect your business
Payment gateways vs. merchant accounts: Finding the right solution
When it comes to finding the right payment gateways and merchant accounts, there is no one-size-fits-all answer. If your small business only does a few thousand dollars a month in sales, an aggregate merchant account is probably the simplest solution. If you do $20,000 or more in sales, a dedicated merchant account and robust payment gateway begin to make sense.
If you’re a high-risk business, partnering with an expert in the high-risk payment processing industry is usually the right choice. Here at TailoredPay we focus exclusively on solutions for high-risk businesses and offer industry-leading rates and services. To apply for an account, fill out our simple online form (it only takes a few minutes and it’s free!) and one of our payment processing experts will be in contact within 24 hours. If you still have questions about payment gateways or merchant accounts, check out our merchant account FAQ page or contact us directly at (888) 599-6482.