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Key Takeaways

Say Goodbye to Lost Sales: Integrating suitable payment processing options can prevent online businesses from losing up to 10% of international sales annually due to incompatible systems.

It Takes Two to Tango: Both merchant accounts and payment gateways are vital for a seamless payment process, each serving distinct roles to efficiently accept payments and enhance customer experience.

Understanding Merchant Accounts: Merchant accounts, distinct from general bank accounts, are specifically designed for accepting electronic payments from customers, ensuring funds are safe and fees are accounted before transfer.

Gateway to Customer Satisfaction: Payment gateways represent the customer-facing element of the payment system, handling the secure input and verification of payment details for online and in-person transactions.

Online businesses lose up to 10% of their international sales each year due to payment processing options being unsuitable for the customer’s country.

Without the right payment processing system in place, businesses are missing out on sales. So, it's very important to ensure you have everything in place so customers can securely pay you.

Both the merchant account and the payment gateway are important parts of your payment processing system, but they play very distinct roles.

You need both to accept payments efficiently and give the customer a great experience.

In this guide, I'm going to go through the difference between the two, how they fit into the overall payment process, and how you can integrate them into your current payment system.

OK, What is a Merchant Account?

A merchant account is a business bank account that allows you to accept electronic payments such as debit/credit card payments, in-person card payments, or digital wallet payments.

These accounts are designed for accepting customer payments. In that way, they are different from general bank accounts and business accounts, which are used to pay suppliers, invoices, and other expenditures.

The reason these accounts are separate is so customer payments are protected, and any fees or transaction costs can be removed and paid before you get the money in your general bank account.

If you sell products online and plan on accepting electronic payments, you need a merchant account of some kind.

You may not need to open a specific account yourself. There are a few different types of merchant accounts, including accounts offered by banks, payment providers, and digital wallet companies.

Then, What is a Payment Gateway?

A payment gateway is the customer-facing part of the payment processing system.

So, the card entry form at checkout and the process that securely checks the card details and accepts or rejects a payment.

The payment gateway also sends the encrypted card information and payment details to the payment processor. Essentially, it includes all the processes that allow a customer to enter their cardholder details and have a payment accepted.

Once the payment details are entered by the customer, the encrypted details need to be verified and checked for fraud.

When verified, the funds can be released to the merchant account and the money will be taken from the customer’s account.

Some payment gateways are online only, whereas some include point-of-sale (POS) devices, which is great if you are an omnichannel seller.

I use Square POS payment gateways when I am selling my products at trade shows or in-person events. I love how easy to use they are and how they integrate into my current system.

Payment gateways usually charge a per-transaction fee for their services, which could also include multi-currency transactions, chargebacks and returns. 

Nearly all online businesses need a payment gateway, since it's the only way to accept credit and debit card payments. That is unless you only accept money via ACH bank transfer, which is unlikely.

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Some Key Differences Between Merchant Accounts and Payment Gateways

While similar, payment gateways and merchant accounts are different systems that work together to allow ecommerce businesses to accept online payments.

They both form key parts of the payment processing system. While they have different functions, usually one can’t work without the other.

The payment gateway is the front-end facing part that the customer interacts with. It includes:

  • Credit/debit card entry
  • Payment detail encryption
  • Transmitting of the payment details to the merchant account
  • Customer communications such as payment accepted, payment rejected, refund processed etc.
  • Security and fraud protection

The merchant account is a bank account that accepts payments. It includes:

  • The ability to accept payments
  • The ability to process return payments
  • Security protocols to protect customer payments
  • Speedy transaction settlements
  • Transaction processing

What Does the Merchant Account and Payment Gateway Process Look Like?

Your payment gateway is the start of the payment processing journey. And, your merchant account holds the money from the payment securely while it's processed.

The payment processing system includes other processes too, which we go into in more detail in this guide.

These are the steps that happen in a payment solution:

  1. Your Customer chooses a product to buy and adds it to their basket.
  2. The customer enters their card details, including the card number, name, postal or zip code, expiry date, and security code.
  3. Your payment gateway takes that payment information, encrypts it securely, and sends a request to the customer’s bank to verify the funds and the card's details.
  4. The customer’s bank approves or rejects the payment, and sends the message back to the payment gateway.
  5. Your payment gateway sends payment to the payment processor, which checks for fraud and ensures the funds can be accepted.
  6. Once accepted, the funds are sent to the merchant account, where they will stay for a period of time as the payment is cleared and the funds are sent to the business. This allows the customer to cancel the payment or request a refund.
  7. A message is sent back to the payment gateway confirming the transaction has been successful.

This sounds like a lot of steps! But a good payment processor will complete all the steps in seconds. 

How to Choose the Right Option For Your Business

When choosing a payment gateway or merchant account, you have two main options. You can use a Payment Service Provider (PSP) or use a separate merchant account to your payment gateway and processing.

A PSP is the best option for most online stores and small businesses.

A customized solution doesn’t make sense unless you are an enterprise-level business. The reason for this is cost and complexity. A PSP may cost more for each credit and debit card transaction, but you don’t need a team of developers to install and manage.

Plus, a good PSP comes with the support to help you and your customers manage transactions securely.

Let’s look at the difference at a glance.

Payment Services Provider (PSP)

These are all-in-one solutions like Stripe, Square, and PayPal.

These are perfect for smaller businesses as they are easy to install and manage. They do generally charge processing fees on a monthly and a per-transaction basis, but these are quite low, and offer great value for money considering the work they are doing.

If you have a PSP, you won’t need a separate merchant account provider, as this will be included in the overall pricing.

Generally, PSPs accept most online transactions and payment card networks, and they may even accept digital wallet payments, buy now pay later (BNPL) such as Klarna, and even multiple currencies.

It is important to check what your requirements really are, as these other services often come with higher fees.

PSPs process payments quickly and securely, and they are easy to use.

Using a Separate Merchant Account and Payment Gateway

If you are doing a large amount of transactions, you can use a separate payment gateway and merchant account.

You'll have a separate payment gateway, which will often need to be installed into your website yourself. Your merchant account could be with your issuing bank or it could be with a different provider.

The advantage of using a custom setup like this, is you can get cheaper fees in the long run, so if you are doing a large amount of transactions, you can save a significant amount of money in the long run.

However, you need to factor in staffing costs such as developers, which you don’t need to consider so much when using a PSP.

An important consideration, if you aren’t using a PSP, is fraud checks, as you will need to make sure that any connections you create between a payment gateway and your merchant account are encrypted and secure.

Consider that you may need to comply with the regulations of multiple countries, too.

Generally, this would all be handled by a PSP, which is another reason why they are a much more convenient option for smaller businesses.

Important Integrations With Ecommerce Platforms to Consider

Software integration across your current systems is really important.

Obviously, the payment gateway needs to integrate with your ecommerce platform, but there are also some less known integrations you may not have thought of.

For example, you need your inventory management system to integrate with your payment gateway so that customers aren't able to buy stock that isn’t available.

Most of the big payment services providers will integrate with the major platforms such as Shopify and Woocommerce, but you should make sure that the platform you are currently using will accept the payment provider you are checking out.

It is better to choose a different payment provider than replatforming your whole ecommerce business!

Check to see how customizable your payment gateway's front end is. Some providers allow you to change the look and feel of a card entry form, and others will make you pay to change it.

This may or may not be important for your brand, but it is something to consider.

One of the key trends in online payment processing is digital wallets.

By 2026, 60% of online shoppers are expected to use a digital wallet. Make sure the payment provider you use can accept digital wallet payments.

Buy now pay later, such as Klarna and Clear Pay, are now widely accepted as payment methods, and they give customers great flexibility.

It's very easy to pay with these methods and they act as a second digital wallet, so customers can pay quickly without fumbling with a real wallet.

Most PSPs will allow you to future proof yourself against any new changes, which is another reason they are so convenient. 

Know the Differences So You Can Get Paid

The payment gateway and merchant account are two parts of the payment processing system, and whilst they are different, the system needs both of them to function properly.

Your merchant account is a bank account that holds the customer’s money and your payment gateway is the system that accepts cardholder details and sends the information to be processed.

For most businesses, you can use a payment services provider to handle your payments, as it includes a merchant account in the overall product.

If you are going to use a customized solution, then you need to make sure you have the technical staff to implement the system, and you are on top of all security issues.

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Teddy Smith
By Teddy Smith

Teddy Smith is an ecommerce brand founder and a former Senior Ecommerce Consultant for Accenture. He is also an independent ecommerce consultant, specializing in selling on Amazon and marketplaces. Teddy has 13 years of experience working with both enterprise and small scale ecommerce brands, and has provided over 3,000 hours of independent ecommerce consulting sessions.