PAYMENT PROCESSOR VS. MERCHANT ACCOUNT VS. PAYMENT GATEWAY
If you are reading this article then probably you have already read multiple articles about the differences between payment gateway, merchant account, and payment processor. There may be a possibility that you are still a bit confused about them. That is ok you do not have to be confused anymore. This article is fully loaded with precious information in the form of Text, Video, and audio. I am sure by the time you complete reading this blog post you will know the valuable role of all the three entities. In case if you still have questions feel free to ask them in the comments section.
In this super loaded article, I will be sharing maximum information about the differences between a Merchant account, and Payment gateway. Along with that, I will also explain to you what is the role of a payment processor or a merchant account acquirer. This article will also give you an in-depth analysis of the various features and benefits of three primary entities involved in the payment processing ecosystem. You will also get answers to top questions like
- What is a Payment Processor?
- What is a Merchant Account?
- What is an Aggregated Merchant Account?
- What is a Dedicated Merchant Account?
- What is a Payment Gateway?
- What is a Hosted Payment Page?
- What is API integration?
- What is Plugin based Integration?
- What is Virtual Terminal or Moto(Mail Order Telephone Order)?
- What is IVR Payment Gateway?
- What is a Full Stack Payment Gateway?
Without wasting a lot of your time let’s quickly go ahead and understand the differences between Payment processor, Merchant Account and Payment Gateway.
Let’s go step by step that means lets first discuss the entity which handles the maximum amount of risk. Yes, I am talking about the payment processor also known as a Merchant Account Acquirer.
WHAT IS A PAYMENT PROCESSOR
A Merchant Account Acquirer is a financial institution that eventually takes the risk of onboarding Merchants. Onboarding is an extensive process, and the merchant is required to submit multiple documents to get approved. A Payment processor can be an acquiring bank, and it can also be an ISO or MSP. It is because Financial Institutions utilize the services of multiple other organizations to acquire merchants. Most of the times these third-party companies only send the applications to the Acquiring Bank. They hardly cover any risk but in some cases as per the agreement between acquirer and ISO or MSP the risk liability can be shifted to a small extent.
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TYPES OF PAYMENT PROCESSORS OR MERCHANT ACCOUNT ACQUIRERS
Depending upon the type of industries the Payment processors work with they can be termed as.
➣ General Purpose Acquirers
General purpose acquiring bank would primarily be interested in only working with merchants with good credit score. They prefer to work with merchants from Low Risk Industries. They prefer to work with merchants with good processing history that shows meager chargeback percentage. These Banks are highly conscious about there reputation, and that is why they stay away from onboarding merchants from most of the high-risk industries.
➣ High Risk Acquirers
High Risk Acquiring Banks are the financial institutions with slightly bigger risk appetite. They onboard merchants with bad credit and also onboard merchants from few high risk industries. These high risk acquiring banks have to spend more money to various card brands to be able to do high risk acquiring. Even though they onboard merchants from few high risk industries they do not onboard merchants from prohibited industries. These acquiring banks reduce the risk by charging a higher transaction fee and also by putting a rolling reserve or a fixed reserve on the merchant account.
They also reduce the risk by offering an extended settlement time frame to the merchant. Merchants usually have to agree to an arrear of 7, 15 or 21 days. To reduce the number of chargebacks most of the times, the acquirers also use various chargeback alert services offered by different service providers.
WHAT IS A MERCHANT ACCOUNT?
If you are running a business, I am pretty sure you have a business bank account. The purpose of this business bank account is to credit and debit financial transactions. In case of a merchant account, the objective of this account is to hold the funds that are received after transaction approval. We can also say that a Merchant account is pretty much like a bank account that you open with and acquiring Bank. After the successful transaction, the money stays in the motion account for few days. Mostly this time frame can range from 2 days to 7 days. Depending upon the Merchant account agreement this period can be longer as well. After deducting the transaction fee and other charges as per the agreement, funds go to the merchants business bank account. The merchant account is also used to issue refunds and accumulate reserves. If there is any refund request, then the amount is deducted from the merchant account.
Now that we understand what exactly is a merchant account let’s discuss the types of Merchant Accounts.
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➣ What is a Dedicated merchant account
A dedicated merchant account gives more control of the solution to the merchant. It means the merchant can negotiate for better pricing. Most of the times merchants pay a low transaction fee if the monthly sales volume is low. The transaction fee increase if the monthly sales volume increases. It gives a direct benefit to budding entrepreneurs or startups. They pay less transaction fee at the start of the business, and as they gain more sales volume, they pay more transaction fee.
Getting a dedicated merchant account requires the merchant to be dedicated as well. It means the merchant has to go through a strict onboarding and risk review process. The underwriting team looks at all the KYC documents and identifies the risk profile of the merchant and the shareholders. The approval time frame of a dedicated merchant account can be anywhere between 5 working days to 2 weeks. It depends upon the level of Investigation the risk analysis the onboarding team performs. Sometimes the team may ask for additional documents apart from the regular KYC documents. They may ask for one-year business bank statement, Profit and loss statement prepared by a third party auditor, Industry References, and Bank references. They may also ask for suppliers agreement is the merchant is selling tangible products.
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➣ What is an Aggregated Merchant Account
As the name suggests, aggregated merchant account works on the concept of aggregation. It means that the funds collected for multiple merchants are kept in a common pool. Here merchant will have less control and less capability of negotiating rates.
If you compare the aggregated merchant account with the dedicated merchant account, then you will realize that it is easier to get an aggregated merchant account. Most of the time the merchants are requested to submit limited information, and the account approval happens in a short time frame. Merchants may start processing within 24 hours. The crucial challenge with an aggregated merchant account is the lesser control. That means if few fraudulent merchants do some wrong activities then it may eventually effect genuine merchants. If you are interested in getting a merchant account, I will strongly recommend you to get a dedicated merchant account.
We are going good because now we have a proper understanding of what is a payment processor and a merchant account. Now let’s discuss in details about payment gateways. It is one of the most confusing terminologies for a first time merchant.
A better way to understand the confusion would be to take an example of DVD. Some of us refer it as a digital versatile disc, and some call it as a digital video disk. Technically it is a Digital Versatile Disk. DVD can record data that may be in any form including image, text, audio, video or any file that is computer generated.
The reason why I gave the example of DVD is that different people get confused the same way for the term Payment Gateway.
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LET’S GO AHEAD AND CONCENTRATE ON PAYMENT GATEWAY
A Payment Gateway is an essential part of payment processing ecosystem. Payment gateway companies have to comply with the PCI DSS compliance and guidelines. They ensure the data security of the cardholder as well as the encryption of the card transaction information while it travels from one point to another in the ecosystem.
After getting the Merchant account then a payment gateway is needed because the cardholder’s information needs to be securely transferred to the acquirer. This activity can only be done by using a payment gateway. The card issuer sends the approval or decline signal to the acquirer and the payment gateway sends this information to the merchant and the cardholder.
At the end of this article, I will also explain how the payment processing ecosystem works by using all vital elements. As of now let’s understand different modes by which payment gateways helps merchants in accepting transactions
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➣ Hosted Payment Page
With this kind of platform, the customer is forwarded to a payment page hosted on the secure server of the payment gateway company. On this page, the customer types the credit card information. This information is further verified. The payment gateway performs multiple checks like velocity check to detect fraud. After fraud scrubbing the transaction and card information is sent to the merchant account acquirer.
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➣ API Payment
Most payment gateway companies offer API documentation to the registered merchants. By utilizing the API documentation, merchants can integrate the payment gateway directly on the sales website. It allows the customers to type the credit card information directly on merchants website.
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➣ Plugin Supported Integration
There are so many CMS (Content Management Systems) available now. The most popular CMSs are WordPress, Magento, Prestashop, and Joomla. To be competitive in the payment processing industry most of the payment gateway companies Offer readymade plugins to their Merchants. These plugins can be downloaded from the website of the payment gateway company. Integration hardly takes few minutes. Customers can submit card information directly to merchants website.
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➣ Virtual Terminal or MOTO
Some merchants may be interested in accepting orders over the phone. Although this kind of solution is extremely difficult to find in today’s world still some options may be available. Inbound Call centers that get a significant amount of calls every day use virtual terminals. If a Sales representative is responsible for accepting orders then, In that case, the customer can give the credit card information to the representative over the phone. The representative keys in the card information into the virtual terminal. Multiple payment gateway companies do offer Virtual terminal or Moto feature.
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➣ IVR Payments
IVR Payments are used in scenarios where the customer is not interested in giving the card information to the representative, and he is also unable to type the information on the website. IVR payment processing solution works like a charm, and many companies use this mode of payment. Customers key in the credit card information directly on any touchtone phone without revealing the credit card number to anyone. Most large organizations utilize the IVR payment gateway.
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LET’S UNDERSTAND WHAT TYPE OF PAYMENTS CAN A PAYMENT GATEWAY HELP A MERCHANT TO ACCEPT.
➥ Credit Debit Card Payments
The most common mode transaction that a payment gateway offers is online credit and debit card transaction. It is one of the most popular modes of payment processing in the age of eCommerce.
➥ ACH/Echeck Payments
Echeck/ ACH. Many payment gateway companies do offer the ability to accepting echeck payment. If the merchant is utilizing a service from a third party ACH payment processing company, then this solution can be easily integrated into the payment gateway.
➥ NEFT – National Electronics Funds Transfer System.
Most of the India based payment gateway companies allow merchants to offer NEFT facility to customers. Customers can quickly initiate NEFT transfers on merchants website.
After reading the above information don’t you think that it’s too complicated to procure all these solutions from different organizations. Yes, it may be correct, but you do not have to worry there are a lot of full-stack payment platforms available.
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WHAT IS A FULL STACK PAYMENT GATEWAY?
A full stack payment gateway offers a payment gateway along with a merchant account. They can quickly do this because they have their agreement with different financial Institutions. Their payment gateway complies with the PCI DSS guidelines and recommendations. Sometimes these Full Stack Payment Gateway companies are also referred as 3rd party credit card processing companies. The Solution that is offered by these companies is usually termed as a 3rd party merchant account.
In case if you want to accept card payments online without a merchant account, then we recommend you to look at some options like Paypal and Stripe.
Now that we understand the difference between a payment processor merchant account and a payment gateway let’s quickly understand how does the transaction flow typically work in a Credit Card payment processing scenario.
➛ The customer visits merchants website. On the merchant’s site, the customer checks different products and services being sold. After making a choice the customer adds the products to the shopping cart and eventually lands on the checkout page by clicking on the checkout button.
➛ On the checkout page, the customer fills the necessary information that includes the billing address, name, email and phone number. If the merchant has integrated the payment gateway by utilizing API or Plugin, then the customer may be asked to put the credit card information directly on the customer’s website. In case if the site is not directly integrated to the payment gateway, then the customer clicks on the submit button. The customer sees a hosted payment page that is located on the secure server of the payment gateway company. On this hosted payment page the customer types in the credit card information. If 3D secure filtering is enabled, then the customer will be forwarded to a 3D secure page where he will be asked to type in the PIN number or a one-time password.
➛ The information submitted by the customer is encrypted and is validated to be genuine by performing different checks. If it is a fraudulent transaction than most of the times, the operation will not go through beyond this point.
➛ After analyzing the genuineness of the transaction the payment gateway company forwards the encrypted information to the merchant account acquirer.
➛ The Merchant account acquirer identifies the card brand information and then forwards the transaction information to the card brand.
➛ Some Card brands are also card issuers. If that is the case then the card brand will identify the possibility of approving or disapproving the transaction. if the card brand utilizes the services of a card issuer then this information is forwarded to the card issuing Bank.
➛ The card issuing Bank identifies the line of credit that is available on the card account. Based on its analysis it sends a response that may be Approved or Declined.
➛ The information follows the same track backward and eventually reaches the merchant.
➛ In case if the transaction is successful, the merchant delivers the product to the customer. In case if the operation is declined, then the customer is requested to use a different card.
➛ When the transaction is approved the card issuer sends the money to the merchant account acquirer for settlement to the merchant.
➛ Payment processor keeps the fund into the merchant account that has been allocated for the merchant. After deducting the fees, charges, interchange fee, and other charges the amount is further sent to the business bank account of the merchant. The settlement time frame depends upon the terms mentioned in the merchant account agreement. Most of the time this time frame may be in between 2 days to 7 days. In case if it is an account of a High Risk Merchant, then the settlement period can be a little bit longer and can be as high as 15 days to 21 days.
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Acquirer vs. Issuer
As mentioned above Acquirer is a financial institution responsible for offering a merchant account to a business. An issuer is a financial institution or Card Brand that issues the credit or debit card to the cardholder.
