Merchant Account vs. Payment Gateway – What Are the Differences?

A payment gateway and merchant account are both necessary for accepting credit or debit card payments, but they’re not the same thing. The main difference between a payment gateway vs merchant account is that a payment gateway accepts customers’ payment information and routes this information through the payment network while the merchant account is where the funds from card payments are held until they are released into the merchant’s business bank account.

If you currently run or are thinking of starting an online business, understanding the roles of the payment gateway vs. merchant account in the payment process will help you select the right processing partner to help you accept payments securely and cost-effectively.

What Is a Payment Gateway?

Whether you accept debit or credit card payments online or in a brick-and-mortar store, the payment gateway is the interface used by the consumer to enter their card details. On a website, this is facilitated via the checkout page. In a store, this is achieved via the point of sale (POS) terminal.

1. To initiate the payment process, the customer enters their payment information into the payment gateway (the checkout page or POS terminal) and presses or clicks “OK.”

1. The payment gateway encrypts the customer’s account information and sends it to the merchant account provider, from where it passes to the card network and finally to the customer’s bank (the issuing bank).

1. After fraud checks, authorisation and authentication are complete at each stage, the issuing bank sends back a response (either approved or declined) to the payment gateway which is displayed to the customer.

1. If the transaction is approved, the funds are received in the merchant account and held for a specified period (usually 48 hours).

1. At the end of the holding period, the funds are deposited into the merchant’s business bank account.

What Is a Merchant Account?

As explained above, the merchant account is the place where funds from in-store or online transactions are received and held until they are released into the merchant’s business account. Merchants have no control over the funds in their merchant accounts.

There are several reasons why a merchant account—separate from a business owner’s business bank account—is necessary:

• Card payments are typically processed in batches, not in real time, which means that card transactions can’t be settled straight away.
• If there is a chargeback, the funds are paid out of the merchant account to ensure the customer gets their money back.
• Fraudulent transactions that are intercepted before the funds are released to the merchant can be reversed.

After any chargebacks are subtracted and the holding period is up, the funds are transferred into the merchant’s business account as a lump sum. From there, the merchant can access the funds and use them to make purchases, pay bills and wages, pay out shareholders, invest in stocks, make donations or transfer money to other accounts.

The Role of the Payment Processor

While it’s possible in theory, merchants don’t usually work directly with the merchant acquirer (acquiring bank) where their merchant account is held or build their own payment gateway from scratch. Instead, they outsource their payment processing to a payment service provider that provides both a payment gateway and a merchant account.

Depending on the size of the business, a business owner has two main options when it comes to payment gateway providers:

1. An aggregate merchant account
2. A dedicated merchant account

Aggregate Merchant Account

Payment service providers that follow an aggregate merchant account model combine dozens, hundreds or even thousands of merchants together under a single umbrella. They process these sub-merchants’ payments through a single merchant account with an acquiring bank. Examples of merchant aggregators are PayPal and Square.

Dedicated Merchant Account

In contrast, a merchant account provider works with a network of acquiring banks and assigns a single merchant account to each of their clients. After a rigorous underwriting process, merchants who are approved are given a merchant identification number and their own dedicated merchant account.

Dedicated Merchant Account vs. Aggregated Merchant Account

For hobbyists and very small businesses, aggregated merchant accounts provide a quick and easy way to begin accepting payments with a minimum of documentation and no contracts or monthly fees. However, as the payment processor needs to buffer itself against the combined risk of its sub-merchants, processing fees tend to be higher.

In contrast, dedicated merchant accounts can offer more customised fee structures for registered businesses with a regular turnover. This can reduce the cost of accepting credit card payments significantly. Merchant account providers also offer a vast array of merchant services that aren’t available with most aggregate payment accounts, such as monthly merchant statements, adjustable fraud scrub, chargeback mitigation, reports and analytics, recurring billing and more.

Features to Look for in Payment Gateways

When looking for a payment gateway, look for one that:

• Is PCI-DSS compliant
• Allows you to accept multiple currencies
• Allows you to accept multiple payment methods, including credit and debit card payments, e-wallet payments, MOTO (mail order, telephone order) payments and bank transfers
• Offers quick and seamless API integration

Features to Look for in Merchant Accounts

When looking for a merchant account, look for one that offers:

• A customised underwriting process when you open a merchant account
• Customised processing limits and a customised payment processing fee structure
• The ability to scale with you as you grow
• Offers support in all of the countries where your business operates
• A full suite of merchant services, including:
  • Detailed reports and analytics
  • A monthly merchant statement
  • An adjustable fraud scrub
  • Advanced chargeback mitigation
  • Recurring billing
  • Customer database
  • 24/7 customer support

The Right Payment Gateway and Merchant Account Can Propel Your Business to Success

Now that you understand the difference between a payment gateway vs. merchant account, you’re ready to start shopping around for a payment processor that offers the best of both in a package that suits your business model and processing needs.

Once you find your ideal processing partner, you can accept payments with full peace of mind, knowing that your money and your customers’ money are in the best of hands.