Seeing how proliferating the gateway apps are in the modern industry, digital could be the only way for businesses. By making their stores online, they could survive the upcoming wave of huge sales from online purchasing. Online shopping is one thing that has become a trend, and the number isn't showing any slowing in movement.

Payment processors and gateways are often mentioned when we talk about the topic of online shopping. By combining the two, merchants can finally receive payments from customers online. This combination makes the transaction smoother and more seamless.

Although they have different meanings, some people think that they're the same thing! That's why we want to give you better understandings of the two and find the differences between them.

Understanding Payment Processors

Can you answer the question, "how do online payments work?" Although we often use it, not many people realize how it actually works. Let us first understand the meaning of payment processors.

See payment processors as bridges, the entities that move money from the buyer's account to the seller's account. Payment processor companies actually have been around for a while, and we're looking at the beginning of an era of remote payments.

Their original purpose was to be the middle-role for offline transactions, such as payments for credit cards, etc. When electronic payments have become a usual thing, they create a broad role by providing credit card terminals and point of sale devices to buy stores.

These equipment are the ones used for verifying the authenticity of credit card ownership. The authentication process heavily relies on the chip installed within the cards and the direct approval from a particular customer.

After the data is verified, the payment processors will send the payment information to the related issuing banks. After the bank checks and approves the transactions, the payment processors will send the details to the acquiring banks. In the end, they will send the transaction details to customers through the terminals or PoS devices.

Understanding Payment Gateways

If you buy something offline, for example, buying groceries at the nearest grocery stores, you'll have a PoS device as an authenticator. But what if you do the transactions online? Is there any other device that can serve the same purpose?

An online transaction authenticator or the payment gateway is another option most people often use today. Let us trace back to the '90s when people had debit and credit cards for the first time. As you might know, these gateways serve as PoS terminals, with the similar task to verify the requested digital payments.

Customers are required to insert their card into a physical terminal to use PoS terminals. The same thing won't happen in payment gateways. Instead of inserting their cards, they need to input credit card details, security codes, and billing addresses to use the virtual terminal. If this information is correct, the gateways will inform the payment of the processors.

One essential benefit merchants may gain from using payment gateways is the extra security against fraud. These gateways offer fraud screening tools in the form of IP based devices, and most importantly, address verifications tools. By having these tools around, merchants may review transactions even after approval by payment processors.

After the merchants approve the transactions, it flows just like offline transactions. The payment processors will send the data to two banks and share the details after it has been done.

Due to the exponential increase in cybersecurity risks, better authentication protocols have been the main focus of payment gateways. That's why newer regulations may guide the merchants to offer better authentication protocols through more robust mechanisms. An example of this is two-factor authentication that's often used nowadays.

What Are The Differences Between Payment Processors and Payment Gateways?

As you can see from the explanation above, the payment processors and gateways work in a different way. While the gateways act as the mediators for handling transactions between the merchant and processors, the payment processors are the ones who manage transactions between merchants and banks.

While there are standalone gateway platforms available, some others are adopting themselves with payment processor integration. So they may function as both platforms, able to process transactions more seamlessly. Some examples of this category are PayPal, Stripe, or Worldpay.

Individuals usually adopt one payment, processor, or combination. But, since most companies require a more comprehensive range of payment methods, they use multiple platforms to extend their currencies, terms of cards, and foreign markets options.