- What is a payment processor?
- What is a payment gateway?
- How to set up your online store so you can successfully accept payments
Q: What is the difference between a payment gateway and a payment processor?
A: Payment gateways and payment processors are both vital to running a successful online store. That said, the two are frequently confused for one another, leaving small business owners unsure of how to open their online stores. This article explains the differences in detail so you can find the right tool for your e-commerce operations.
E-commerce has become a critical component of our modern marketplace.
The internet-enabled many retailers to move to the online space, allowing shoppers the freedom to browse from the comfort of their own homes.
That convenience alone would have been enough to make e-commerce a major part of the economy, but the pandemic further accelerated things.
With small business formation booming during the pandemic, many business owners find themselves curious about payment gateways vs payment processors.
These two tools play a major role in online transactions. Without the proper gateway and processor in place, your small business won’t be able to accept online payments.
But figuring out which one you need to purchase to ensure smooth transactions can be tricky, especially when you’re busy running a small business on your own.
This article is here to help. Today we’ll be looking at the payment gateways vs payment processors, laying out everything you need to successfully launch your online store.
- What is a payment processor?
- What is a payment gateway?
- Do payment processors need separate payment gateways?
- Everything you need to accept online payments
E-Commerce Takes the Stage
The online space has opened endless possibilities for the entrepreneur.
The majority of products can sell entirely online, meaning small businesses can launch easier and connect with much larger audiences.
In fact, online businesses are so viable that even foreigners can launch a business in America using a US mailing address and e-commerce site. You don’t even need a physical headquarters to succeed.
Not only does this incentivize more people to launch small businesses because of the convenience, but it also allows them to kickstart their company without much overhead.
Naturally, the market has shifted towards online spaces in recent years. But when the pandemic hit, online operations became crucial for both businesses and consumers.
Small business owners no longer had the option to sell out of storefronts. E-commerce was the sole method of maintaining social distancing protocols while continuing to operate.
Once they realized and pivoted, businesses came roaring back.
Pew Research Center reports that self-employment faced similar losses compared to traditional employment at the start of the pandemic, but bounced back much quicker. Much of this can be explained by their quick and nimble pivot to the online space.
However, with this pivot comes a host of new challenges. Small business owners have to learn new tools and procedures to successfully run their online stores.
Two of the most important elements in doing so are payment gateways and payment processors.
What is a Payment Processor?
A payment processor is a tool that transmits information between you, the purchaser, your bank, and the purchaser’s bank.
Payment processors aren’t exclusive to the online space. Every transaction that uses a credit or debit card requires a payment processor in order to be completed.
PayPal is an example of a payment processor. The platform takes in information from the card issuer and transmits it to your bank.
What is a Payment Gateway?
A payment gateway is a tool that transmits transaction data from the point of sale to the payment processor.
Unlike payment processors, payment gateways don’t communicate with banks. Rather, payment gateways serve as a link between the processor, the merchant, and the customer.
Payment gateways inform the two parties of the success or failure of a transaction by communicating with the processor. Essentially, a payment gateway serves as a cash register for online transactions.
A good way to differentiate between gateways and processors is to consider who the information is aimed at.
A payment gateway is primarily there to inform the customer and merchant about the transaction.
By contrast, a payment processor exists to inform the financial institutions of the transaction.
Do Payment Processors Need Separate Gateways?
Many payment processors come equipped with their own gateways. That said, this isn’t always the case, and even when it is, bringing in an outside gateway may still be necessary.
There are a few key features to consider when determining your gateway needs.
- Transaction volume: Some service providers like PayPal offer built-in gateways, but they only work for a low volume of transactions.
- In instances like this, you may need to bring on an outside gateway that can handle a higher transaction volume.
- Integrations: Some payment processor gateways may work smoothly with your online store.
- When this happens, it delays the buying process and can ultimately cost you sales.
Bringing in a separate payment gateway makes the process smoother while allowing you to stick with the existing payment processor.
However, if you find a payment processor that includes a payment gateway, you may not need to change anything. So long as the included gateway supports your transaction volume and integrates well with your site, there’s no need to bring in an outside gateway.
With all this laid out, here’s how to set up your online store.
What You Need to Accept Online Payments
The first thing you’ll need is a website. Most businesses will already have a site set up, but you may need to build an online shop into your existing site if you haven’t already.
Once you have your shop set up, your next task is to find a payment processor. Select a processor that is trustworthy, works with various card issuers and can support your business’s sales volume.
Most of the time, setting up a payment processor is as simple as creating a merchant account with the processor. From there, they’ll likely also provide you with a gateway you can integrate with your store.
Once you have the gateway set up, you should test it and see how it works with your site. If everything runs smoothly, you’ve effectively set up your online store.
If the gateway is glitchy or slow, you’ll want to look into outside gateways. Finding a gateway that runs smoothly might cost a bit more, but it will almost certainly pay for itself by preventing lost sales.
The gateway is the last critical component. Once that’s in place, your online store is ready to go.
You may also want to consider bringing in additional services or features. For instance, many online stores offer to buy now pay later options through consumer loan providers like Klarna.
If you’re worried about accounting, you may also look into a payment aggregator. Payment aggregators combine all transactions, both online and offline, and bring them together so you can easier manage your business’s financial information.
If you operate solely online, you probably don’t need an aggregator. For mixed businesses, they can be helpful.
Understanding the differences between a payment gateway vs payment processor can be confusing.
The two both transmit financial information between parties, and many payment processors also include payment gateways.
The simple way to differentiate between the two is to look at who the information is geared towards.
A payment processor communicates between financial institutions so the transaction is properly completed.
A payment gateway communicates information between the seller and the buyer so they know how much they’re paying or being paid.
Finding the right payment processor and gateway will allow you to successfully launch and grow your business remotely.
If you’re looking to launch a business entirely online, one of the best ways to register is to use a virtual office address. Alliance Virtual Offices is here to help.
With a virtual office plan from Alliance Virtual Offices, you’ll gain access to a business address that can be used to launch and register your online business — without an expensive office or storefront rental.
Save money and get growing with Alliance Virtual Offices.