Merchant Account vs. Payment Gateway: Know the Difference

Payment processors, payment gateways, and merchant accounts are standard terms used in the eCommerce industry. These terms represent necessities that you need to sell online. Although these concepts are commonly thrown around by people, many do not fully understand the ins and outs related to the concepts, how selecting and configuring them can affect their business. Some even conflate a merchant account and a payment gateway, but they are not quite similar.

So, even if you are an expert eCommerce merchant or just getting started, you must be familiar with these terms and concepts. For your convenience, we have explained what a merchant account and a payment gateway are in this guide. Keep reading as we compare payment gateway vs. merchant account.

What Is a Merchant Account?

In simple terms, a merchant account is an account that lets merchants process payments. In this case, your bank or payment gateway sets up the account for you, and funds from sales are deposited there. In addition to that, based on the designated schedule by your payment gateway, the funds are transferred automatically from your merchant account to the business bank account you have set up. Many people confuse a merchant account and a business bank account as the same thing. However, they are not the same as you do not have any control over your merchant account. It is simply a place where deposits are held.

You might be wondering, why can’t the money from sales simply get deposited into your business bank account directly? This is because buyers can return goods, and as a result, some money you receive might be returned. In that case, it accounts for a certain level of risks in your business transactions. Payments made due to returns are subtracted from the total amount in the merchant account with the rest transferred to your business account.

Aside from that, another reason is that your payment gateway will likely be getting deposits from many sources. So, rather than give you multiple deposits at once, it gathers them into your merchant account and combines them into one deposit, making it easy to reconcile.

Types of Merchant Accounts

Currently, there are two types of merchant accounts, including payment service providers (PSPs) and independent sales organisations (ISOs). PSPs best serve small and medium-sized businesses because they are easy to set up and have low maintenance. In addition, they tend to be affordable for businesses with low demanding needs. On the other hand, ISOs are ideal for large companies since they are more robust and handle high volumes. Additionally, these accounts have lower transaction fees, offsetting the higher upfront cost.

What Is a Payment Gateway?

To simplify, a payment gateway refers to the exact technology that connects all merchants, including online merchants and payment networks. At the most basic level, any payment gateway does everything on the list below within seconds.

• It integrates with the online store by giving it one or more ways to utilise online card processing capabilities with all the business operations.
• It captures every payment detail for each customer transaction securely. So, when the merchant sends the buyer’s information to the payment using the tools provided by the gateway. In addition to that, to ensure that the transmission is secure, the gateway encrypts the payment information as the process starts.
• It moves the information to an acquiring bank or a payment processor. At this point, the acquiring bank takes over the transaction. In addition, the bank is likely to do some fraud screening, and then it routes the transaction to the card networks.
• Finally, it sends an approval or a decline message back to the merchant. Based on the response, whether yes or no, the merchant might direct the shopper to a confirmation page or even ask them to present another form of payment.

A payment gateway will ensure that incoming funds are always transferred to the intending merchant account without any third-party interception for every transaction you make.

Types of Payment Gateways

With payment gateways, you can choose between the classic and modern types. A classic payment gateway will require you to configure your merchant account and bank account. However, a modern payment gateway is all-inclusive, and setting up takes just a few minutes with no merchant account required. Although modern payment gateways are easy to set up, classic gateways are more affordable and offer a better customer experience.

How to Find the Right Merchant Account & Payment Gateway

When choosing a merchant account or a payment gateway, compatibility is an essential feature to consider. Many payment gateways have limits on the banks, merchant accounts, and payment methods they will work with. Some even restrict entire industries. In that case, you should consider going with a payment processor that providers both merchant and payment gateway services. For instance, PayKassma covers all the intricacies of payment processing needs. You will benefit from lower hosting costs, seamless compatibility, and streamlined services when you do this. In addition, the setting up process is a lot easier, and you do not have to worry about getting your merchant account and payment gateway on the same page. Ensure that you only choose a provider that’s secure, affordable, and reputable.

Bottom Line

This article compares merchant account vs. payment gateway, and we hope that you have seen the difference between the two. However, you must integrate both payment solutions into your business to ensure a successful and secure payment processing service. A payment gateway customarily exchanges information between the acquiring bank account and the merchant. In contrast, the merchant account keeps your money until it is time to be transferred to your bank. So, in case a customer returns a product and wants a refund, you can resolve that using the money in your merchant account.