Merchant Accounts and Payment Gateways – The Differences

Concepts of merchant accounts and payment gateways are confusing concepts for online merchants, who are unable to differentiate between the two. The differences are important to understand when operating online retailing.

Listed here are the major differences you need to know:

Basic definitions of merchant account and payment gateways

A low or high risk merchant account is a bank account that is approved and fully capable of receiving credit/debit card payments. It is a bank authorized account that accepts all the major credit cards and e-cheques. Unlike regular bank accounts, a merchant account provided by a low or high risk merchant account provider doesn’t perform the function of holding funds for an extensive time, but is used to transfer payments to other bank accounts as designated by the internet merchant on a regular basis.

A payment gateway acts as an intermediary between the merchant account, often availed for quick and hassle free high risk credit card processing, and the actual credit card company. The payment gateway is the real online credit card processor or software that deals with the transfer and verification of requests. Therefore, unlike a bank account, payment gateway doesn’t hold funds; it only acts as a service account.  Users are provided with a log in facility where you can configure your payment gateway settings.

Merchant accounts and Payment gateways complement each other

Merchant accounts and payment gateways work together for the completion of transactions. The process is interesting, take a look:

1. When a customer makes a payment, his billing information is fed from the shopping cart into payment gateways.
2. A payment gateway then transfers the information to the credit card processor.
3. A merchant account then verifies the credit card information and sends it back for approval.
4. If approved, the credit card processor gets hold of funds and deposits them in the checking account. If not approved, a decline code is sent back.
5. On receiving an approval, the payment gateway will settle the transaction in the shortest span of time.
6. Payment gateways also alert customers about the approval or decline of transactions.

Payment gateway acts as middlemen between banks and businesses

An agreement is signed between the merchant bank and the business for the settlement of the credit card and/or debit card transactions. Payment gateway acts as middlemen between the two but it only talks to the actual credit card companies. For instance Pay Pal provides a payment processing service by acting as an intermediary. It collects money from the bank account of the cardholder and then transfers it to the merchant account on the behalf of the business maintaining complete security in the process.

On the other hand, merchant accounts are granted by banks themselves for facilitating online sales. Remember, a merchant account cannot endlessly hold money deposits, they only keep the money obtained through credit and debit cards, until the merchant transfers it to another account.

Conclusion

Both the local or offshore merchant account and payment gateway help the business in processing credit/debit card transactions and transferring money to the bank account. Every business must look towards incorporating a merchant account that is approved and a payment gateway that is well configured so that the default rate can be lowered down to the minimum possible.