Payment Gateways vs Processors: A Detailed Breakdown

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The most common fintech-related terms being used interchangeably are PaymentGateway and PaymentProcessor. Not many know the exact difference between these two. I was also confused initially when I started working in the payments team as a software engineer. First of all, no, they are not the same. In this article, let’s see what each of those means and their responsibilities.

PaymentGateway and PaymentProcessor are external parties used to build payment capabilities in an application to enable monetary transactions for users.

Let’s see them in detail...

PaymentGateway

Integration with Payment Gateway

1. Let’s say you are building a mobile or web application where you want to sell something, take payments, and give refunds to customers, but you do not have the resources or expertise to build end-to-end payment solutions on your own. Then you can consider integrating with PaymentGateway. This integration can be done very quickly. Stripe, BillDesk, Paytm, PhonePe, and RazorPay are some common and well-known payment gateways.
2. By using PaymentGateway, your application does not need to store any of the user's payment instrument data. They handle the storage of customer payment information, payment instrument additions, deletions, and updates done by users in a secure manner, following industry standards and compliance requirements.
3. So, by offloading these responsibilities to specialized third parties, your application can reduce compliance complexities and focus on providing product-related services without the burden of handling sensitive financial data. PaymentGateway offers customizable elements, such as hosted payment pages or widgets, that can be integrated seamlessly into the application’s user interface. Payment Gateway costs you more for providing these responsibilities, which is higher than PaymentProcessor charges.
4. A payment gateway is a technology that makes the online transfer of money between a buyer and a seller possible and acts as a secure bridge between your application and the banks/financial parties involved in processing the payment. Its primary responsibilities are

• Transaction Authorization: The payment gateway verifies the user’s payment details and ensures that the funds are available.
• Encryption and Security: It encrypts sensitive information, such as credit card numbers, to ensure secure transmission over the internet and prevent unauthorized access to sensitive customer data.
• Payment Processing: It integrates with a payment processor, which takes care of the actual money movement from the user's account to your merchant's account.
• Payment Confirmation: The payment gateway sends a confirmation to both the buyer and the merchant once the transaction is successfully processed.
• Error Handling: It manages errors that may occur during the transaction process, ensuring a smooth experience for users.

PaymentProcessor

Integration with Payment Processor

1. PaymentProcessor does not provide all the features that PaymentGateway provides. When it comes to handling the actual movement of money from a user’s account to the merchant's (application) account, a payment processor steps into the picture.
2. Stripe, BillDesk, and Adyen are some common and well-known payment processors.
3. So, by directly integrating with PaymentProcessor, your application gets additional responsibilities that PaymentGateway performs. Due to this, PaymentProcessor charges are less than PaymentGateway, and PaymentProcessor integration is very costly and time-consuming. Also your application must handle:

• Securely storing and managing payment instrument data, such as credit card numbers and bank account details.
• Implement industry-specific data security standards, such as PCI DSS (Payment Card Industry Data Security Standard), ensuring the secure processing and storage of payment data.
• Implementation of robust access control mechanisms to restrict access to sensitive payment data, ensuring that only authorized people/systems can access this information.
• Implementation of strong encryption protocols for data transmission and storage, including encryption of data both in transit over the internet and at rest within the application’s systems.
• Implementation of audit trails and monitoring mechanisms to detect unauthorized access or suspicious activities related to payment data.
• Providing a user interface for users to manage additions, deletions, and updates to their payment instruments securely.

3. And a payment processor's primary responsibilities are:

• Transaction Settlement: The payment processor is responsible for settling transactions, ensuring that the funds are transferred from the customer’s account to the merchant’s (applications) account.
• Interaction with Financial Institutions: It communicates with the relevant financial institutions, including banks and card networks, to facilitate the movement of funds.
• Risk Management: Payment processors often employ sophisticated risk management tools and fraud detection mechanisms to mitigate the risk associated with transactions.
• Currency Conversion: In cases where transactions involve different currencies, payment processors handle currency conversion to ensure that the merchant receives the funds in their preferred currency.
• Funds Payout to Merchants: Once a transaction is successfully authorized and settled, the payment processor initiates the transfer of funds to the merchant’s account, on a periodic basis.
• Reconciliation: Payment processors perform reconciliation to ensure that the transactions recorded align with the actual funds received and disbursed.
• Chargeback Management: In the case of chargebacks or disputes, payment processors play a role in managing the resolution process, which involves investigating and responding to disputes initiated by customers.

It’s important to understand that while direct integration provides more control, it also requires a higher level of commitment to security and compliance. Businesses opting for direct integration should invest in robust security measures and stay informed about evolving regulatory standards to maintain the integrity of their payment processing operations.

References

1. https://razorpay.com/blog/difference-between-payment-processors-and-payment-gateways/#:~:text=A%20payment%20gateway%20is%20a,bank%20and%20the%20merchant%20bank.
2. https://stripe.com/in/resources/more/payment-processor-vs-payment-gateway
3. https://en.wikipedia.org/wiki/Payment_processor
4. https://en.wikipedia.org/wiki/Payment_gateway

Thank you for reading!! I hope you liked the content and got clarity on the differences. Feel free to follow me on LinkedIn and Medium for more such content.