Merchant services: What’s the difference between a payment gateway and a merchant account?

Many aspiring e-commerce managers, or non-technical members of staff may be confused by the number of concepts at stake in online payment systems. Payment gateways and merchant accounts, especially, are often misunderstood realities, and sometimes professionals even mix up the definitions of these two terms.

There’s a big difference between payment gateway and merchant account. Michael Boeke, Product Manager at Braintree (which is at the same time a payment gateway and a merchant account provider) summarized this difference quite simply by saying : “You can think of the merchant account as the business component to accepting credit cards, and the payment gateway as the technical component ”. Let’s see what this means in detail.

Purpose and features of a payment gateway

Payment gateways are basically technological interfaces that connect with relevant organizations to securely authorize a transaction demanded by the end-customer through his credit card operation.

1) An intermediary position...

A payment gateway is an third tier between the customer and the business, but also between the business and the banks, that ensure the transaction is taking place securely. In essence, a payment gateway has the same purpose, and schematically, follows the same operational process as a retail point of sale terminal at a physical shop.

2) ... to handle payment authorization

Based on the information submitted by the customer through his or her credit or debit card, and the invoice registered by the retailer’s system, the gateway will connect with the credit card issuer and the customer’s bank to obtain an authorization for the transaction. The process is further developed in a dedicated article about payment gateways in this guide.

Purpose and features of a merchant account

As Kathryn Aragon sums it up, “a merchant account is essentially a contract under which an acquiring bank provides a merchant with the ability to accept payment card transactions”. The idea of a contract is important: it means that the account is just a service from the bank, assimilated with a loan. The technology is often included in the service package, but very rarely developed or maintained by the bank: that’s an essential difference between payment gateway and merchant account.

1) Credit card handling

The main feature of a merchant account is to accept and handle credit card payments from their customer’s end-customers, on behalf of their customer.

2) Data transmission

The merchant account gathers information from the merchant submitted by the payment gateway and sends it back to the end-customer’s bank, vouching for the integrity of the purchase details.

3) Clearing

Information about the transaction is sent back to the merchant account from the end-customer’s account, through Automated Clearing House (ACH), with processing and interchange fees deducted.

Pros and cons of an aggregate approach

Many gateway providers now also provide merchant accounts, further blurring the difference between payment gateway and merchant account. Selecting a “full-stack”, aggregate approach is not necessarily the wisest choice, but definitely has its benefits.

1) Benefits of choosing a “full-stack” payment provider

It looks so much easier for the business customer, who just has to sign up with one vendor to get all the merchant account services and a payment gateway.

Compared with traditional bank offerings or dedicated merchant account solutions, this solution:

• may also be cheaper,

• may be more flexible,

• brings the most modern payment gateways to the business customer.

2) Benefits of choosing a separate merchant account provider

A dedicated merchant account provider, like traditional banks but also like authorize.net or PayLeap, has the following advantages:

• custom rates may be negotiated,

• transfers to the actual business account may be much faster ( 2 days instead of 7, typically).