Merchant Account vs. Payment Gateway: What’s the Difference?
Electronic payment has become an essential part of the payment process, and with electronic payments in trend, merchant account, and payment gateway have become a necessary tool for businesses that accept electronic payments. According to the data for 2021, 82% of US customers have started using electronic payment in their daily transactions. If you have a business and have been accepting payments electronically, you have seen an appropriate increase in your business revenue. Accepting electronic payments helps companies compete and thrive in the digital economy. Electronic payment transactions help businesses expand their customer base, increase sales, improve cash flow, and process payment more efficiently.
Setting up various components of a payment system can be difficult. But if a business wants to thrive, the complexity and the task need to be done. Before building a payment system that meets your business’s needs, you must understand what each part does and how they work together.
This guide will help you understand what merchant accounts and payment gateways are, how they differ, and how they work together.
What is a Merchant Account?
A merchant account is a specialized type of bank account that allows businesses to accept electronic payment, such as credit and debit card transactions. Businesses use a merchant account specifically for processing and settling electronic payments, while they use their regular business bank accounts for general banking transactions, such as deposits and withdrawals.
While paying for credit or debit cards during the purchase process, the merchant acquirer requests the card issuer to authorize the transaction. If the issuer authorizes the transaction, the acquirer “captures” the funds, asking the issuer to transfer the funds from the customer’s account to the merchant account. After completing the process, the merchant account provider processes the transaction, deducting any fees and depositing the remaining funds into the business’s regular bank account.
Who needs a merchant account?
Every business planning to accept electronic payments needs a merchant account. The merchant account doesn’t specify any particular business; the process works for all sizes and types, from startups and local retailers to large multinational corporations.
Electronic payments are essential for businesses operating in industries with high transaction volumes, such as retail, e-commerce, and healthcare. They are also crucial for companies wanting to grow their customer reach, improve their cash flow, and streamline the payment processing operations.
Business who want to streamline their payment operations can open their merchant accounts.
What is a Payment Gateway?
A payment gateway is a technology that securely transfers transaction information from a business’s website or app to the bank, verifying whether a customer has the funds needed to purchase. Think of it as the “middleman” that ensures everything in the transaction process is safe and reliable, helping customers feel secure about their purchases.
When a customer enters their card details online, the payment gateway encrypts the data and sends it to the payment processor. This information then undergoes authorization and is sent to the merchant account, completing the transaction.
Who Needs a Payment Gateway?
A payment gateway is essential for businesses that accept online payments, such as e-commerce stores, subscription-based services, and apps with in-app purchases. Any business selling online or taking remote payments needs a payment gateway to keep transactions secure and quick and allow customers a smooth shopping experience.
How Do Merchant Accounts and Payment Gateways Work Together?
Merchant accounts and payment gateways work together to process payments. The gateway securely captures and transmits payment details, and the merchant account manages the transfer of funds. Together, they enable businesses to accept payments efficiently and securely—one handles the technical side, and the other takes care of the financial side.
Merchant Accounts vs. Payment Gateways: Key Differences: –
| Aspect | Merchant Account | Payment Gateway |
| Purpose | Manages the transfer of funds to the business’s bank account | Transfers and encrypts payment data securely |
| Needed For | In-store and online transactions | Primarily online or remote transactions |
| Fees Involved | Transaction fees, monthly fees | Transaction fees, setup fees (vary by provider) |
| Complexity | Financial account setup and management | Tech setup on website or app |
Parting Note
Understanding the roles of merchant accounts and payment gateways can help you make informed decisions for your business. Each plays a unique role, but when combined, they create a seamless payment experience for customers, allowing you to handle transactions easily.
