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 how these choices affect business performance – from setup to everyday operations. 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 initially deposited there. This setup is particularly important when handling subscription models and recurring payments, as it supports consistent billing, refunds, chargebacks, and settlement processes. According to the schedule set by your payment gateway, the funds are then transferred automatically from your merchant account to your business bank account.

Many people confuse a merchant account with a business bank account, but they are not the same. You don’t have direct control over the merchant account – it acts as a temporary holding place for incoming transactions.

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

Merchant accounts generally fall under two categories: those provided by payment service providers (PSPs) and those offered by independent sales organizations (ISOs). Some modern platforms also offer hybrid solutions that combine the roles of gateway, merchant account, and payment processor.

PSPs are ideal for small and medium-sized businesses – they are easy to set up, require minimal maintenance, and are cost-effective for companies with simple payment needs. ISOs, on the other hand, are better suited for large businesses that handle high volumes and require more robust infrastructure. These accounts typically offer lower transaction fees, which can offset their higher initial setup costs.

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 online stores through APIs or plugins, enabling them to accept payments via cards, UPI, digital wallets, and other local or international methods.
• It captures every payment detail for each customer transaction securely. When the merchant submits the buyer’s information using the gateway’s tools, the system immediately encrypts the payment data to ensure secure transmission from the very beginning of the process.
• 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 ensures secure and compliant data transmission, directing approved transactions to the associated merchant account without delays or unauthorized access.

Types of Payment Gateways

With payment gateways, you can choose between the classic and modern types. Traditional payment gateways typically require manual configuration of a separate merchant account and business bank account. In contrast, modern all-in-one platforms handle both gateway and merchant services in a single package, simplifying onboarding and reducing time to activation. 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 provides 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. Choosing the right setup depends on your business structure and expected transaction volume. Your business type – such as sole proprietorship, LLP, or Pvt Ltd – can influence eligibility and onboarding requirements for specific merchant accounts and payment gateways. If a customer requests a refund, the funds available in your merchant account can be used to process it efficiently. Choosing an integrated provider that offers both a gateway and a merchant account can significantly reduce technical complexity and improve operational efficiency.