Payment Gateway vs Payment Processor: What's the Difference?
A payment gateway is the technology that securely captures and encrypts payment information, while a payment processor routes that information between banks to authorize and settle transactions. The gateway is the front door that accepts card data; the processor is the messenger that communicates with financial institutions. Most online businesses need both, but in-person merchants primarily need a processor with a physical terminal serving the gateway function.
Quick Comparison
| Aspect | Payment Gateway | Payment Processor |
|---|---|---|
| Primary Function | Captures and encrypts payment data | Routes transactions between banks |
| Where Used | Online, e-commerce, virtual terminals | All card transactions |
| Customer Interaction | Yes (checkout page) | No (behind the scenes) |
| Physical Equivalent | The card reader/terminal | The network and banking connections |
| Examples | Authorize.net, Stripe Gateway, NMI | First Data, TSYS, Worldpay |
What is a Payment Gateway?
A payment gateway is the technology layer that captures payment information from customers and securely transmits it for processing. Think of the gateway as a virtual point-of-sale terminal for online transactions.
How Payment Gateways Work
- Customer enters payment info: Card number, expiration, CVV on checkout page
- Gateway encrypts data: Sensitive information is encrypted for secure transmission
- Data sent to processor: Gateway forwards encrypted transaction to payment processor
- Response received: Authorization approval or decline returns through the gateway
- Result displayed: Customer sees confirmation or error message
Payment Gateway Functions
Security:
- SSL/TLS encryption for data in transit
- Tokenization to replace card numbers with secure tokens
- Fraud detection and prevention tools
- PCI DSS compliance support
Transaction Management:
- Authorize, capture, void, and refund transactions
- Recurring billing and subscription management
- Virtual terminal for phone/mail orders
- Transaction reporting and search
Integration:
- Shopping cart plugins (WooCommerce, Shopify, Magento)
- API access for custom integrations
- Hosted payment pages
- Mobile SDK for apps
Types of Payment Gateways
Hosted Payment Pages: Customer is redirected to the gateway's secure page to enter payment information. Reduces PCI compliance burden but creates extra checkout steps.
API/Direct Integration: Payment form embedded directly in merchant's website or app. Seamless customer experience but requires more development and PCI compliance effort.
Local Integration: Payment data processed locally before transmission. Used for point-of-sale applications and mobile card readers.
What is a Payment Processor?
A payment processor is the company that handles the actual transaction routing between the merchant, card networks (Visa, Mastercard), issuing banks, and acquiring banks. The processor moves the money.
How Payment Processors Work
- Receive transaction request: From gateway (online) or terminal (in-person)
- Route to card network: Send to Visa, Mastercard, Amex, or Discover
- Network contacts issuing bank: Bank verifies card and available funds
- Authorization returned: Approved or declined response sent back through the chain
- Settlement: At end of day, approved transactions batched and funds transferred
Payment Processor Functions
Authorization:
- Real-time transaction approval or decline
- Address verification (AVS)
- Card verification (CVV)
- Fraud screening
Settlement:
- Batch processing of approved transactions
- Fund transfer to merchant accounts
- Interchange fee calculation
- Dispute and chargeback handling
Reporting:
- Transaction history and details
- Settlement and funding reports
- Chargeback and dispute tracking
- Fee and rate analysis
Types of Payment Processors
Front-End Processors: Connect to card networks and handle authorization. Examples: First Data, TSYS, Global Payments.
Back-End Processors: Handle settlement and fund movement after authorization. Sometimes the same company handles both.
Full-Service Processors: Provide both processing and gateway services. Examples: Stripe, Square, PayPal.
How Gateways and Processors Work Together
For an online transaction, here's the complete flow:
Customer → Payment Gateway → Payment Processor → Card Network → Issuing Bank
↑ ↓
←──────────────────── Authorization Response ←─────────────────
Step-by-step example:
- Customer clicks "Pay" on e-commerce checkout
- Gateway captures card number, encrypts it, performs initial fraud checks
- Gateway sends encrypted data to processor
- Processor formats message and routes to Visa/Mastercard network
- Card network forwards to customer's bank (issuing bank)
- Issuing bank checks card validity, funds, and fraud signals
- Issuing bank sends approval or decline back through the chain
- Gateway receives response and displays result to customer
Settlement happens later (usually end of day):
- Merchant batches approved transactions through gateway
- Processor submits batch to card networks
- Funds move from issuing banks to merchant's acquiring bank
- Acquiring bank deposits funds in merchant account
Do You Need Both?
It depends on how you accept payments:
Online/E-commerce Businesses
Need both: Gateway to capture online payments + processor to authorize and settle.
Many providers bundle both services:
- Stripe = Gateway + Processor
- Square = Gateway + Processor
- PayPal = Gateway + Processor
Or use separate providers:
- Authorize.net (gateway) + Merchant account with any processor
In-Person/Retail Businesses
Need processor, terminal replaces gateway: Physical terminals handle the "gateway" function of capturing card data.
Your setup:
- Payment terminal (replaces gateway)
- Payment processor
- Merchant account
Omnichannel Businesses
Need both: Gateway for online, terminal for in-person, same processor for both.
Unified reporting and settlement across channels.
Choosing a Payment Gateway
Consider these factors:
Integration Requirements:
- Does it work with your e-commerce platform?
- API quality for custom development
- Mobile support if needed
Pricing:
- Monthly gateway fees ($0-$50)
- Per-transaction fees ($0.05-$0.25)
- Setup or integration fees
Features:
- Fraud prevention tools
- Recurring billing support
- Multi-currency capabilities
- Tokenization for stored cards
Security:
- PCI compliance level
- Encryption standards
- Fraud detection capabilities
Popular Gateways:
- Authorize.net (versatile, widely supported)
- NMI (developer-friendly)
- Stripe Gateway (modern API)
- Braintree (PayPal-owned)
Choosing a Payment Processor
Evaluate on:
Pricing Structure:
- Interchange-plus vs. flat-rate vs. tiered
- Transparency of fees
- Contract terms
Settlement Speed:
- Standard 1-2 day funding
- Same-day or next-day options
- Hold and reserve policies
Support:
- Availability (24/7 preferred)
- Technical support quality
- Chargeback assistance
Industry Fit:
- Experience with your industry
- High-risk acceptance if needed
- Appropriate risk tolerance
Frequently Asked Questions
Can I use any gateway with any processor?
Not always. Some gateways work only with specific processors (Authorize.net works with most; Stripe is Stripe-only). Some processors include their own gateway. Check compatibility before committing.
Do I need a gateway for in-person payments?
No. Physical card terminals serve the gateway function for in-person transactions. You only need a processor and terminal for card-present sales.
Why do some companies offer both gateway and processing?
Bundling simplifies setup and support. Companies like Stripe and Square provide gateway, processing, and merchant account as one integrated service. This convenience may come at slightly higher per-transaction rates.
Which is more important for security?
Both are critical. The gateway protects card data during capture and transmission. The processor must maintain security throughout authorization and settlement. PCI compliance spans both functions.
Can I switch gateways without switching processors?
Sometimes. If your processor supports multiple gateways, you can switch. If you use an all-in-one provider (Stripe, Square), gateway and processor are tied together.
Key Takeaways
- Payment gateways capture and encrypt card data; payment processors route transactions between banks for authorization and settlement
- Online businesses need both a gateway and processor; in-person businesses need a processor and terminal
- All-in-one providers (Stripe, Square, PayPal) bundle gateway, processor, and merchant account together
- Separate gateway and processor arrangements offer more flexibility but require more setup
- For omnichannel businesses, choose providers that support both online and in-person with unified reporting
Red Rock Payments provides payment processing with gateway integration for seamless online and in-person acceptance. Learn more about our complete payment solutions.
