Understanding the difference between merchant accounts and payment gateways

Merchant accounts and payment gateways are two essential components of payment processing. In this comprehensive guide, we’ll explain the difference between merchant accounts and payment gateways – and how they can help securely process customer transactions.

What is a merchant account?

A merchant account is a holding account for business funds. It’s similar to a business bank account, which enables a company to electronically accept and process transactions, particularly credit card transactions and online payments from customers.

What is a payment gateway?

A payment gateway is the method used to process a customer’s payment. After processing, it is deposited into a business’s merchant account and briefly held before being transferred into the business’s main bank account. The payment may be processed through a physical card reader in a brick-and-mortar store, or a payment page on an ecommerce site.

Payment gateways securely transmit payment data between the customer, merchant, and financial institution. A secure and reliable payment gateway is essential for online businesses to keep themselves and their customers safe from payment fraud. Increasingly common and costly, ecommerce payment fraud resulted in estimated losses of $41 billion worldwide in 2022 – expected to grow to $48 billion in 2023.¹

Key differences between merchant accounts and payment gateways

Merchant accounts and payment gateways have different functions:

• A merchant account is a bank account, while a payment gateway is a software service.
• A merchant account holds funds. A payment gateway, on the other hand, is responsible for transaction authorization.

The payment process: How merchant accounts and payment gateways work together

An online payment process flow is triggered when a customer uses their card or mobile wallet to pay a business online or in-person.

First, the payment gateway takes the customer’s payment data, encrypts it, and contacts the customer’s bank or credit card company to decrypt the payment data and process the transaction. Once the transaction is authorized, funds are transferred to the business’s merchant account before being transferred to the business’s bank account.

Throughout payment processing, customer payment details are securely transmitted and completely unreadable to potential fraudsters.

Choosing the right merchant account and payment gateway for your business

As a business owner, it’s important to research and compare different service providers to ensure ease of integration and the highest possible level of security.

Here are our suggestions of factors to consider when choosing a merchant account and payment gateway:

Which security features are included?

Secure transmission is extremely important for protecting both businesses and customers. Secure transmission refers to the encryption and protection of sensitive payment information as it travels between the customer, merchant, and payment processor, and uses ID verification, two-factor authentication, 3D security, and encryption to protect data. A payment gateway and merchant account collaborating with these security features may help prevent identity theft, chargeback fraud, card-not-present fraud, and many other fraud types.

Are there any extra fees?

Selecting a payment gateway comes with costs, but they’re not always clear upfront. During your research, compare setup costs and transaction fees across different providers before committing. This can help ensure you’re getting the best deal.

Does it integrate well with existing digital processes?

When looking for a payment gateway and merchant account, check to see if it can easily integrate into existing business software and processes. The ease of integration can vary depending on the provider you choose, your existing software, level of support provided, and more.

Using PayPal to accept payments

Merchant accounts and payment gateways have different functions and processes but work together smoothly to make payment processing secure and simple for businesses.

PayPal can be a small business’s payment processing, providing online checkouts and POS systems that integrate seamlessly with your existing business software and processes.

Our solutions empower businesses to securely accept a broad range of payment methods, providing convenience, security, and peace of mind for both owners and their customers.