What is the Difference Between a Merchant Account and Payment Gateway?

And why you need both to accept payments.

You need both a merchant account and payment gateway to process payments. In fact, they serve two totally different functions within the payment process. Let’s start by explaining both and how they differ.

What is a Payment Gateway?

The payment gateway sits between the merchant and the payment processor, who passes transactions to the card network (MasterCard, Visa, American Express, Discover, etc). The role of the payment gateway is that of a secure information conduit that complies with credit card processing security rules and regulations.

What is a Merchant Account?

Before you can accept payments, you’ll need to have a merchant account. Why? When customer transactions are processed, they are credited to you in your merchant account.

A merchant account serves as an intermediary between customers’ bank accounts and your business’s bank account as electronic payments, including credit card transactions, are processed.

To get a merchant account, you’ll need to apply. Payway Merchant Payment Services can assist you in selecting the merchant account as well as the completion and submission of your application. However, if you already have a merchant account, the harder work is done! You just need the payment gateway. Some payment gateways require you to use a merchant account with a specific bank while others, like Payway, do not.

How do a Payment Gateway and a Merchant Account Work Together?

Payment gateways and merchant accounts go hand in hand and are needed in order to accept payments.  However, they are very different and play different roles within the payment process. While a payment gateway routes the payment transaction information to the processor, a merchant account allows a businesses to receive the funds from these transactions.

Payment Service Providers as an Alternative to a Merchant Account

It’s not uncommon for start-ups to use a payment service provider (PSP) to handle the merchant account and payment gateway set up.  A PSP refers to a third-party company that provides payment services to businesses that accept online payment methods. Examples of PSPs include Amazon Pay, PayPal, Stripe, and Square.  With a traditional merchant account, the merchant has its own account. A PSP, on the other hand, combines a variety of different merchants under a single umbrella account. So, instead of getting a specific merchant ID number through a processing bank with a merchant account, you get a license to process payments through the PSP merchant account. You become what’s known as a “sub-merchant.”

For more information on what’s best for your business, read Merchant Accounts vs. Payment Service Providers: Which Should You Choose?

To begin accepting payments, you’ll need both a merchant account and payment gateway. They are separate and have different roles in the payment process. However, depending on your business needs, you may opt for a PSP which will provide both for you. However, as your business grows, a PSP may no longer serve or be profitable for you. This is when you’ll need to apply for your own merchant account (since you were using your PSPs account).This would also be a good time to reassess your payment gateway and whether it’s time to move onto another one.  For more help, read: “Five Things to Look for in a Recurring Payment Gateway”


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