The terms “payment gateway” and “payment processor” are often used interchangeably. While they sound similar and are both essential for processing payments, each serves a distinct purpose in ensuring transactions run smoothly.
Think of a payment gateway as the secure front door to your transactions, collecting and verifying payment information, such as credit card details. Meanwhile, a payment processor handles the behind-the-scenes work, moving funds between your business and the customer’s account. Understanding these differences is key to optimizing your payment system and minimizing unnecessary costs.
In this article, we’ll cover the main differences between payment gateways and payment processors, explain their individual functions, and show how they work together to streamline transactions.
A payment gateway is a service that securely collects and verifies a customer’s payment information — similar to a point-of-sale (POS) terminal but for online transactions. It plays a crucial role in facilitating the authorization of electronic payments, including credit card payments and crypto transactions. For businesses exploring how to accept crypto payments, implementing a gateway is often the first step.
Payment gateways are typically integrated directly into a merchant’s website (known as a white-label payment gateway). However, some redirect customers to a different website to complete card-not-present transactions before returning them to the vendor’s site — this is called a third-party payment gateway.
Well-known gateways include Stripe, Stax, PayPal, Skrill, and B2BinPay.
Before diving into how payment gateways work, let’s identify the key players involved in payment processing:
Payment gateways play a vital role in accepting payments by securely transmitting customer payment information and ensuring it reaches the processor for further verification.
Now, here’s how the payment gateway process works:
In summary, payment gateways securely process payment details and facilitate authorization, ensuring that online retailers can accept payments seamlessly.
Whether you’re running a cryptocurrency exchange or any other business that handles online payments, you’ll need both a payment gateway and a payment processor.
A payment processor acts as the intermediary between the issuing and acquiring banks, ensuring that funds are securely transferred to the merchant’s account. It’s a key component of merchant services, managing everything from encrypting payment information to verifying transactions with the customer’s bank.
Businesses typically pay a fee for payment processing, which may be a percentage of the transaction amount or a fixed per-transaction fee. Pricing for payment processing services can vary based on the provider, transaction volume, and specific features required.
Payment processors do the heavy lifting behind the scenes, facilitating efficient in-store and online transactions. Here’s how the process unfolds in three key stages:
Throughout these stages, payment processors ensure compliance with relevant regulations and monitor transactions for signs of fraud.
While payment gateways and payment processors are essential for handling transactions, they play different roles and offer unique functionalities. Let’s break down the key differences, from their roles in the transaction process to how they handle security and compliance.
Think of a payment gateway as the green light that signals the start of a transaction — it collects and securely transmits payment details to request authorization. The payment processor acts as the engine that powers the transaction, communicating with the bank to authorize the payment and moving funds from the customer’s account to the merchant’s.
Essentially, payment gateways facilitate the secure transfer of data while the processor handles the authorization and ensures the transaction is completed.
Payment gateways serve as customer-facing touch points during checkout, providing a secure, user-friendly interface while supporting a variety of payment methods.
Conversely, payment processors manage the technical aspects of verification, processing, and settlement.
Payment gateways offer a range of customizable checkout options, allowing you to tailor your payment setup to suit your business needs. There are different payment gateway integrations for exchanges and small businesses — server-to-server integration, a hosted payment page, or local bank integration. These options facilitate digital payments across multiple platforms.
Payment processors provide more specialized services, including:
Payment gateways prioritize data security by encrypting payment information using tools like tokenization and adhering to standards such as PCI DSS. They also feature built-in fraud detection systems, offering real-time alerts and reports to keep transactions secure.
Payment processors focus on ensuring compliance with banking regulations and maintaining the integrity of transactions. They handle chargebacks (bank-initiated fund reversals) and ensure that payments meet industry standards.
One of the most noticeable differences lies in how customers interact with these systems. Payment gateways are customer-facing, providing the checkout experience, while payment processors operate behind the scenes, handling tasks without direct customer interaction.
Payment gateways and processors play complementary roles in enabling secure and efficient transactions. Together, they facilitate the transfer of payment data and ensure communication between all parties involved.
The payment gateway encrypts the cardholder’s information and transmits it to the processor. The payment processor then forwards the data to the issuing bank for verification. Once the issuing bank approves or declines the transaction, the processor relays the response to the gateway, which notifies the customer of the transaction’s status.
Payment gateways and processors work hand-in-hand to support efficient payment processing. While their roles differ, they share the same goal: to ensure seamless and secure transactions.
Here’s why crypto exchanges benefit from using both systems:
Payment gateways and processors are integral to delivering a fast and streamlined payment process. As touched on earlier, the gateway acts as the customer-facing component, capturing and encrypting payment data before sending it to the processor. The processor then works in the background as an intermediary, ensuring the secure transfer of funds between banks.
By using both systems, exchanges can provide fast and dependable payment solutions, which is crucial for maintaining user satisfaction.
Crypto exchanges rely on both systems to manage cryptocurrency purchases and withdrawals in fiat currencies.
For fiat-to-crypto purchases, the gateway accepts the user’s payment and verifies their identity before passing the information to the processor. The processor then facilitates the conversion and credits the users’ wallets with crypto assets.
Withdrawals (crypto-to-fiat) follow a similar process. The payment gateway collects the user’s information and initiates the transaction, then forwards the details to the processor, which facilitates the transfer of funds to the user’s bank account or preferred withdrawal method.
With crypto crime on the rise, exchanges must prioritize protecting user data and funds. While they implement security measures like multi-factor authentication, payment gateways and processors add an extra layer of protection.
The gateway serves as the first line of defense, encrypting sensitive details such as debit or credit card information to reduce the risk of theft. The payment processor enhances security by monitoring transactions for fraudulent activities, like chargebacks, in real time, safeguarding both crypto assets and fiat currencies.
Exchanges attract users by offering various payment options, including bank transfers, credit or debit cards, and cryptocurrencies. Payment gateways and processors help accommodate each method, ensuring smooth transactions. But what does it mean to be unbanked, and why does it matter here? Unbanked individuals lack access to traditional banking services, making it challenging for them to participate in the financial system.
A payment gateway provides a unified interface for users to select their preferred payment methods, while the processor manages the routing and processing to ensure funds are transferred successfully, regardless of the method chosen.
By supporting multiple payment options, these systems make it possible for even unbanked users to participate in the crypto market, expanding financial inclusion.
Payment gateways and processors work together to create a fast, secure, and accessible payment system. Gateways handle the initial collection and transmission of payment data, while processors ensure transactions are authorized and that funds and digital assets are transferred without a hitch.
AlphaPoint’s integrated payment processing solutions empower crypto exchanges to optimize payment flows, providing reliable and efficient transactions. With secure APIs at the heart of our infrastructure, we simplify the management of both crypto and fiat payments, delivering a flawless user experience.
Ready to transform your exchange’s payment capabilities? Request a demo today to see how AlphaPoint can elevate your business.
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