Merchant Accounts vs Payment Gateways: What’s the Difference?

So, you’ve heard about merchant accounts and payment gateways, but you’re not exactly sure how they work and how they differ.

Don’t feel bad! This stuff isn’t easy to understand, especially if you’re getting explanations loaded with industry-specific jargon.

In this article, we will give you an easily digestible description of merchant accounts and payment gateways, as well as a quick comparison.

Let’s get started.

Merchant Account: What it is, How it Works, and Benefits

What is a Merchant Account?

A merchant account temporarily holds customer funds from an electronic payment. 

To get access to a merchant account, a small business owner needs to partner with a merchant acquiring bank, which handles transactions.

How Does a Merchant Account Work?

After a customer pays via credit card, a request to authorize the payment is sent to the credit card issuer from a source, possibly a terminal.

If the card-issuing bank approves the transaction, it is settled by the payment processor. Data is transmitted between the merchant, card-issuing bank, and the merchant’s bank.

Next, the payment processor approves, and the funds are deposited into the merchant account. The merchant is allowed to move the funds to its business bank account after a period of time (typically a few days).

Benefits of a Merchant Account

A merchant account may sound like an encumbrance to your small business, but there are actually benefits in using a merchant account:

• Simplify accounting: the merchant account groups transactions, sending fewer deposits to your business bank account. For small businesses that process a high volume of transactions, this is a big time-saver.

• Catch fraudulent transactions: questionable payments are reviewed before reaching your business bank account.

• Allow your small business to accept credit card transactions: you need a merchant account to accept credit card transactions. Around four out of every five retail (in-store) transactions in the U.S. are made via credit card, so you may be leaving a lot of money on the table if you don’t accept credit cards.

Payment Gateway: What it is, How it Works, and Benefits

What is a Payment Gateway?

A payment gateway securely transmits card information to the merchant acquiring bank, connecting your customer’s payment to your merchant account.

How Does a Payment Gateway Work?

Let’s look at how a payment gateway helps to facilitate a credit card transaction:

A credit card processor takes credit card information from a source (e..g, terminal), and sends the information to a credit card network (e.g., Mastercard) through a payment gateway.

Benefits of a Payment Gateway

Here are a few benefits of a payment gateway:

• Secure: as mentioned earlier, a payment gateway securely transmits card information to the merchant acquiring bank. This lowers the risk of a customer’s information getting into the wrong hands.
• Catch issues with customer information: if there is an issue with the customer’s information, the payment gateway talks to the merchant about next steps.

Improve the checkout experience: payment gateways allow you to create a faster and easier checkout experience.

What’s the Difference Between a Merchant Account and a Payment Gateway?

Let’s look at the differences between a merchant account and a payment gateway:

Bottom Line

To accept credit card payments, you need a merchant account and a payment gateway. By knowing how they work, you are better able to evaluate payment solutions for your small business.

Gravity Payments can customize a payment solution for your small business, finding ways to position you for success. 

As one of our merchants said, “It is the one company I’ve built a lot of trust with.”

Learn more about how Gravity Payments allows you to accept payments your way.