Merchant Accounts Versus Payment Gateway

For most merchants, the ability to accept payments online as well as figure out the right integration for their business is usually their first step towards success. On the flip side, the online payment world can get quite confusing. If you are an e-commerce merchant who is looking to open a new online store or just switch between payment gateway providers, it is essential that you have proper knowledge regarding the basic online payment ecosystem and well as terminology. Most important of all, you will also need to understand the difference between merchant accounts and a payment gateway.

Difference Between Merchant Account and Payment Gateway

A payment gateway is normally the link which makes the connection between your merchant account and your customer’s bank, allowing all payments to flow into the former after the payment transaction has been cleared. A payment gateway is often used to facilitate online transactions as well as helping them get approved. This is also the first place a transaction goes when the customer submits their order online. The transaction will flow through the payment gateway, into the payments ecosystem and if it is approved, it is sent to the merchant account.

A merchant account such as, on the other hand, is regarded as a holding account in which all information regarding payment transactions is gathered and stored. For businesses that usually accept card payments, this is the platform where funds are normally held. And after the payment has been verified, the funds are then transferred to the business bank account. A merchant account makes it possible for your business to access various forms of payment including debit cards, credit cards as well as ACH payments.

If you still don’t seem to figure out the difference between these two, try to think about them with this analogy: the merchant account is similar to a central train station whereas the payment gateway is like the multiple rails connecting the central station to customers’ banks and every payment transaction is the train. Without the station, your train will have nowhere to return to or depart from and without the rail lines, the train has nothing to move on.

How Does a Payment Gateway Work?

A payment gateway lets merchants and e-commerce stores to process debit, credit as well as alternative payments online. And since retailers are usually prohibited from sending customer payment data straight to the payment processor, a payment gateway acts as the middleman, making sure that all customer data has been encrypted and secured. Once a customer has submitted their payment on your checkout page, the payment must first go through a payment gateway, to a payment processor, through the credit card network and eventually to your customer’s credit card issuer so that the payment is authorized. When the transaction is approved, funds will be transferred from the credit card into the merchant’s account.

Irrespective of your payment gateway choice, it is important to ensure that it is PCI compliant. Industry standards not only need merchants to adhere to a specific level of PCI compliance but also being in compliance with the highest standards means that you are in a better position to protect all sensitive payment information from your customers.

How Does a Merchant Account Work?

A merchant account is almost similar to the normal bank account. After a sale has been successfully made, money is usually transferred into the merchant account. With a merchant account, it is possible for your business to accept multiple forms of payment, such as debit cards, credit cards, wire transfers, and ACH. You could think of your merchant account as your online holding tank for all the sales your business makes online. After the funds are deposited into a merchant account, they are later transferred to your business bank account, from which they can later be withdrawn. The transfer process usually takes place on a specific schedule, let’s say weekly or monthly. A merchant account is a crucial asset for any online retailer and without it, funds would have no place to go and it would be impossible to bet paid for purchases made.

How Long Does Money Remain in the Merchant Account?

After funds have been transferred to your merchant account, there is usually a waiting period before these funds can get to your business bank account. The average waiting time is usually between 2 to 7 days but this could vary based on your payment gateway as well as the terms you agreed to when signing up for the merchant account.

Advantages of Payment Gateways versus Merchant Accounts

Payment gateways are the ideal choice for mobile and e-commerce retailers. Through the use of a payment gateway, a retailer can easily and securely enter as well as authorize debit card and credit card payments from their cell phone or mobile handset. And to a customer, these transactions are no different from what is done in a store.

Merchant accounts, on the other hand, have been in existence since the inception of debit and credit cards. Merchant accounts are the best option for retailers who sell mainly from the conventional brick and mortar store. Setting up a merchant account for your business can aid in increasing cash flow as well as remaining competitive in the ever-changing market.

Finding the Perfect Fit for Your Business

You are probably just a small business owner who is looking to start selling to customers online or probably a mobile business that requires an on-the-move debit card and credit card processing solution. You could also be a big enterprise that is looking to streamline its payment process. How do you know whether you require a payment gateway, merchant account or both?

In the case of a merchant account, there are normally two options: an independent sales organization (ISO) account and a payment service provider (PSP) account. PSP accounts are easier and quicker to set up and are mainly used by small to medium-sized businesses. ISO accounts are used by larger businesses and are more sophisticated to set up. Based on the specifics of your business, one account option will usually be a better option than the other.

Selecting a payment gateway is often about getting the appropriate fit. For instance, there are gateways that deal with specific banks and merchant accounts. Additionally, some might not work with some of your customers preferred payment options, like Apple Pay. There are many other factors, like support, security, and processing fees, which vary among payment gateways.

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