Payment processor vs. payment gateway: the ultimate guide to online payment processing

October 29, 2020

When you first start accepting payments as a small business or startup, it’s worth familiarising yourself with a few of the payment terms.

What is a payment processor? What’s a payment gateway? What about a payment service provider? All these terms can be a bit confusing at first, but they all play an important role in the purchase experience you offer your customers.

We’ve put together this short guide to help you understand what each of these terms means and which ones should be given priority:

  1. What is a payment processing system?
  2. How does payment processing work?
  3. What is the difference between a payment processor and payment gateway?
  4. What is a payment service provider?
  5. What are the types of payment systems?
  6. Using Pomelo Pay for payment processing
  7. Payment processing FAQ

What is a payment processing system?

A payment processing system is a piece of software that allows businesses to process payments online and offline at your point of sale (POS). It essentially acts as a third party that manages your payments.

A payment processor usually comes in two parts: a payment gateway and a payment processor - both of which are essential in order to process payments.

Payment systems have to work in accordance with local laws, and will therefore vary from country to country. These systems essentially enable electrical payments. There are various players involved whenever a payment gets processed:

  • The customer
  • The customer’s bank account
  • The merchant account
  • The merchant’s bank account
  • The merchant

Pomelo Pay, for example, is a payment processor and payment gateway. Do you have any specific questions about payment processing? Contact our support team who will be able to answer any questions.

How does online payment processing work?

Put simply, digital payments are electronic money transfers that take place on e-commerce platforms. You are essentially exchanging your goods and services for payment from your customer. This used to take place only in person, but with digital payments forecast to reach a total value of nearly $5B in 2020, online is now the norm rather than the exception.

How does an online payment work? The digital payment itself is made up of two stages: authorisation and settlement. Before a transaction goes through, the card payment first needs to be authorised. This authorisation is the communication that happens between the issuer and the credit card network (Visa, Mastercard, etc).

The authorisation makes sure there are enough funds in the issuing bank to send the amount. Once the payment is authorised, the funds are sent from the customer bank account to the credit card provider - this process usually only takes a couple of seconds.

Once the credit card provider holds the funds, it kickstarts the next part of the process called settlement. Visa or Mastercard sends the payment to your merchant account, which is a process that can take a few days depending on the network and currency used.

payment processing payment gateway
Source: Getsocio

What’s the difference between a payment processor and payment gateway?

An online payment processor works just like a physical payment processor, but instead operates online. The payment processor acts as a third party to process your online payment - think of it as the middle man between your business account and your customer’s account.

Payment processing companies authorise the payment with the credit card network and then process the transfer. They also make sure that the payment is secure, encrypted and meets regulatory and compliance requirements. The processor will also take care of accidental transactions or any issues such as chargebacks.

The payment gateway is the software used to communicate card information between the merchant account and the transaction. While the processor focuses on moving funds from the buyer account to the merchant account, the payment gateway provider moves the actual transactions from one API server to another.

Many platforms like Shopify and Magento offer integrated payment processors: this means they offer a platform to sell items online that already has a processor and gateway integrated into the checkout and shop.

Unfortunately, the main issue with these types of platforms is that they charge high fees and can cause confusion. Many established companies such as Stripe, Worldpay maintain high fees even without an integrated shop platform.

At Pomelo Pay we offer a free customisable online shop that is incredibly straightforward to use and only charges a 1.49% card transaction fee!

What is a payment service provider?

Payment service providers offer a full third party payment service (gateway and processor) that allows merchants to accept payments online. Sometimes those are integrated as both a merchant account and payment gateway, which makes it easy to collect and manage payments.

Pomelo Pay is a merchant service/payment service provider, which means we manage the entire payment transaction from end to end. This process starts with the customer initiating payment, and then we take care of the rest so the payment is authorised and then settled to your merchant bank account.

Have a question about payment processing? We can help!

What are the types of payment systems?

When taking a payment, you’ll see that there are several payment methods that customers might use:

  • Credit and debit cards (such as Visa, Mastercard or American Express)
  • Mobile payments (such as Apple Pay, Google Pay or PayPal)
  • E-wallets
  • Prepaid cards
  • QR code payments
  • Payment links
  • Direct debit
  • Bank transfer
  • Cash

As you can imagine, the more payment methods you accept, the wider range of customers you can cater to. That’s why we focus on enabling as many payment methods as possible.

Want to find out more about payment methods? Read our detailed guide on understanding payment methods.

Using Pomelo Pay for payment processing

As a payment solutions provider, we connect your merchant account with your customers through an interface that allows you to accept all types of payments quickly and smoothly.

But that’s not all. We take things one step further by offering unified payments: this means you can accept payments across various channels and use cases - all from one place.

For example, with Pomelo Pay you can decide to take in-person payments through QR codes, or take a deposit through payment links or even integrate payments into your website with our APIs.

Having several payment options means you have a payment method for every situation, and can therefore sell your products and services to a wider range of customers.

With Pomelo Pay, you can accept Apple Pay, Google Pay, Visa and Mastercard credit card payments. We take care of the entire payment process so you can focus on doing what you do best: managing your business.

A few other benefits of using Pomelo Pay are:

Price: with Pomelo Pay, you just need our app to get started. We offer a free online ordering system and online store, and only charge 1.49% transaction fee. This is different to other payment processors and service providers that ask for a monthly fee, set-up fee, processing fee, gateway fee or chargeback fee!

Convenience: with QR codes, your customers just need their phone to pay. No more hassle searching for cash, credit cards or wallet!

Functionality: You can begin accepting payments on your phone in no time at all. Whatever your business, a mobile POS will add real versatility to your business operations.

Safety and security: by funnelling all your payments through a PCI-certified PSP like Pomelo Pay, you and your customers enjoy an extra layer of security. Not only that, but QR code transactions are also encrypted and tokenised (meaning card details are safely stored in a licensed third party).

Payment processors, online payment gateways and payment providers are essential pieces of the payment experience. By choosing an affordable service provider that streamlines the process you’ll have the mental space to focus on what matters most: working on your business.

Want to learn more about partnering with a payments platform? Join Pomelo Pay for free!

Payment processing FAQ

What is a payment processing fee?

Payment processing fees are the fees merchants incur when card processing for customers. These fees vary depending on the type of card, transaction risks and pricing model. For example, credit cards usually charge a 3% fee, while others charge under 2%.

Do online payments go through immediately?

The time it takes for a payment to go through depends on your payment processor. With Pomelo Pay, your payments are deposited the next working day.