Merchant Account Vs Payment Gateway | What’s the Difference?

One way to get the most out of your online business is to choose the best payment processing options available. Knowing the difference between a merchant account vs payment gateway will help you better understand merchant services and payments in general.  

Running a successful e-Commerce business entails handling digital transactions that are seamless and secure for customers.

However, it also consists of accepting credit card payments and the only way to do this is by setting up a merchant account.

Both merchant accounts and payment gateways are vital tools that help many small businesses achieve this aim. 

While some businesses may think it is good to use only one of these payment options, the only option is to use them both.

Understanding how a merchant account vs payment gateway differs will help you negotiate the best rates and fees when discussing credit card processing.

What is a Merchant Account?

A merchant account is an account used to accept and process credit and debit card payments in multiple currencies.

It is also a temporary depository in case there is a need to issue a refund to a dissatisfied customer or possibly revert money after a fraudulent incident.

Most merchant services and payments accepted without any issues usually stay in a merchant account for 1-7 days before the funds are ultimately transferred into a business bank account.

Note that a merchant account is not the same as a business bank account. Business owners have little control over merchant accounts. They are simply used for authorizing credit cards and eventually settling payments before they are deposited into a merchant’s business bank account.

Due to the nature of accepting credit cards, there is always the likelihood that money paid into a merchant account can be rescinded. 

There are technically 2 types of merchant accounts: A dedicated merchant account and an aggregate merchant account.

A dedicated merchant account is used strictly by one business entity, while an aggregate merchant account is used by several companies under the payment aggregator’s master merchant account profile.

What is a Payment Gateway?

A payment gateway is the digital technology that allows business owners to process online payments through a merchant processor and acquiring bank.

When payments are eventually settled, they are sent to a merchant’s business bank account.

Payment gateways are mostly e-commerce applications that bridge the gap between a business’s online sales and a payment processor.

Using a payment gateway involves entering card details during the checkout process after selecting or purchasing products and services.

The online store sends the payment card information to the payment gateway for authorization and processing.

During this process, the payment gateway accepts and confirms the information on the credit card.

If the information is correct, payment is approved and the funds are transferred from the customer’s bank account to the merchant’s account.

However, there are popular payment gateway merchant account solutions that do not require a dedicated merchant account. These payment aggregators include Stripe, Braintree, PayPal and Payoneer.

These payment gateways are easy to integrate with online stores, but they have their downsides too.

First of all, these all-in-one solutions are not one size fits all. They can attract huge transaction charges, especially for higher volume merchants. Secondly, they can occasionally redirect customers to alternate payment pages which reduce conversion rates.

Larger payment processors, acquirers and sponsoring banks tend not to aggregate transactions. They choose to issue direct merchant ID’s (MID’s) and route transactions through a separate payment gateway.

Merchant Account vs Payment Gateway Considerations

When considering operating a direct merchant account, always align with a provider that allows you to do business in your primary currency and has no problem with your type of business.

If you deal in high-volume transactions, ensure that there are no caps on your monthly processing volume.

Furthermore, when choosing a payment gateway, top-tier security is your watchword.

The best payment gateways are Level 1 PCI compliant and have SHA-256 iron-clad SSL certification.

While merchant accounts tend to settle funds in a single currency, your payment gateway should be compatible with multiple currencies, especially if you operate a cross-border business.

Merchant Accounts vs Payment Gateway Options

There are 2 types of merchant accounts. They are for independent sales organizations (ISOs) and payment service providers (PSPs).

ISOs are for large enterprises that handle high transaction volumes. This type of merchant account attracts lower transaction fees and over time evens out initial costs.

Small and medium-sized businesses on the other hand are ideal for PSP accounts because they are easier to use and require low-cost maintenance. It is imperative you understand the difference when asking the question, “can I negotiate a better merchant service?”

With payment gateways, you can choose between a legacy payment gateway and a modern gateway.

A classic legacy merchant account requires merchants to connect their merchant accounts to the payment gateway. This is a fairly easy process and is mostly done by the payment processor.

While gateways like Stripe and PayPal which take less than 5 minutes to set up require no merchant account. Payment gateways & APIs can be a bit more complicated to set up but tend to offer a much higher level of service, especially when doing business with high-risk merchants.

They offer a more professional customer experience because customers are not redirected to the payment page.

Merchant Account vs Payment Gateway | Why You Need Them Both

Compatibility is key for any merchant looking for the ideal merchant account and payment gateway.

A large number of payment gateways select the banks they work with and are limited in the payment methods they offer. 

While some gateways avoid doing business with certain industries.

If you are a retail business that sells out of a physical store using a virtual terminal, you are using a payment gateway.

In contrast, payment gateways tend to be best for online businesses. They allow customers to enter their payment information either online, in person via a POS system or even from their mobile devices.

Understanding the difference between a merchant account vs. a payment gateway gives your business leverage in a competitive environment to better serve your business needs.

The payment gateway helps you handle online transactions through a processor. These funds are deposited into a merchant bank account.

This is a vital requirement in today’s fast-paced and ever-changing business environment. And merchants not using these solutions are simply giving their competition the opportunity to dominate their market space and take customers from them.

Merchant accounts and merchant gateway services complement one another and do not compete against each other.

To ensure that your business performs at full capacity, always use an effective vetting process when choosing your online merchant account and payment gateway.

Conclusion

Merchants should only consider reputable payment processors when it comes to using payment gateways and merchant account services.

SecureGlobalPay is a quintessential example of a provider that offers a gamut of payment processing solutions.

When merchants bundle their payment processing demands, they enjoy lower costs as well as convenient compatibility.