Merchant Account vs. Payment Gateway
A group of people are sitting at a table with laptops and papers.
Payment Processing Expert | More
When considering a merchant account vs. payment gateway, it's essential to understand that both are key components of digital payment processing. A merchant account is an account that stores funds for businesses, while a payment gateway collects payments from a customer and deposits them in your account.
Online businesses and high-risk merchants must understand how these two work in order to manage their finances and ensure a smooth customer experience. This article will explain the differences between merchant accounts and payment gateways, the pros and cons of these tools, and advice on how to choose the right option for your needs.
What is a Merchant Account?
A merchant account is a temporary holding account for customer payments, like credit and debit card payments, before they are transferred to your business bank account. This assists with funds settlement and merchant cash flow management, ensuring that all transactions are processed before becoming available in your bank account.
How a Merchant Account Works
- Customer Initiates a Transaction: The customer enters their payment details at checkout.
- Authorization Process: The payment is sent to the acquiring bank (merchant account provider), which then communicates with the issuing bank (customer’s bank) to authorize the transaction.
- Funds Settlement: Once the merchant account verifies the transaction, the funds are temporarily held in the merchant account before being transferred to the regular business bank account, usually within a few days.
Merchant accounts and payment gateways work together to complete transactions efficiently.
Types of Merchant Accounts
There are two primary types of merchant accounts: dedicated merchant accounts and aggregated merchant accounts. Both have benefits and downsides, making it essential to consider which one works best for you.
| Dedicated Merchant Account | Aggregated Merchant Account | |
|---|---|---|
| Account Type | Custom-tailored to specific business needs | Shared among multiple businesses |
| Provider | Available through specialized providers | Integrated with third-party payment service providers like PayPal or Stripe |
| Benefits | Greater control, lower transaction fees | Quick setup, integrated with payment processing |
| Downsides | Requires an underwriting process | Higher fees and less control over the account |
| Business Size | Large and international businesses | Small businesses that don't require dedicated support |
| Transaction Volume Limits | Typically higher | Typically lower |
| Good For | High-risk merchants like CBD, travel, or eCommerce | Low-risk merchants like brick-and-mortar stores with an eCommerce component |
When deciding which option is right for you, consider factors like your industry type, business size, and monthly transaction volume.
What is a Payment Gateway?
A payment gateway acts as the digital bridge between the customer, merchant, and financial institution. The payment processor captures the payment information from the customer, then securely transmits it to the acquiring institution. To protect the customer's financial data, the payment processor will use encryption and tokenization in line with industry standards.
Once the acquirer processes the information, the payment gateway sends an acceptance or decline message back to the customer to confirm that the transaction went through.
An eCommerce Payment Gateway is an essential component for any online business, particularly for high-risk merchants, who may need to use specialized payment gateway providers to accept online payments.
How a Payment Gateway Works
- Customer Makes a Payment: The payment details are entered at online checkout or the Point of Sale System (POS).
- Encryption & Transmission: The payment gateway encrypts the transaction data and forwards it to the payment processor.
- Transaction Authorization: The payment processor requests authorization from the issuing bank.
- Approval or Denial: The issuing bank approves or denies the transaction and sends the response back through the gateway.
- Completion of Transaction: If approved, the transaction is completed, and funds are transferred accordingly.
When accepting credit card payments or performing debit card transactions, you must be PCI-DSS compliant. These are the security standards, like SSL encryption, that ensure the customer's card data is kept safe during the transaction. Every part of the payment infrastructure must adhere to these standards, or you may not be able to accept electronic payments.
Adaptiv Payments uses next-level encryption and fraud detection to keep payment data safe, helping you build customer trust and maintain your good standing.
Types of Payment Gateways
- Hosted Payment Gateway: Redirects customers to the provider’s secure payment page (e.g., PayPal, Stripe).
Integrated Payment Gateway: Embeds directly into the merchant’s website, providing a seamless checkout experience (e.g., Authorize.net, Braintree).
Self-Hosted Payment Gateway: Merchants collect payment information on their site and pass it to the gateway for processing.
API-Based Gateways: Integrate payment processing directly into your website or app via an Application Programming Interface (API), ideal for companies that need full integration flexibility across multiple platforms.
Your gateway choice can support your business growth by enabling you to accept all popular payment methods, thereby improving cash management. Most importantly, a secure payment system for online transactions will build customer trust.
A laptop on desk with an ecommerce website open.
Key Differences Between Merchant Accounts and Payment Gateways
Both payment gateways and merchant accounts are key components of payment processing, but it is essential that you understand the difference. Merchant accounts are an intermediary between the customer's issuing bank and your regular bank account, while payment gateways protect sensitive payment information and verify transactions. Consider this simple table of merchant account vs. payment gateway comparisons to understand what each is for.
| Merchant Account | Payment Gateway | |
|---|---|---|
| Function | Holds payments before they are deposited in the business's main bank account | Authorizes and encrypts transactions |
| Primary Role | Intermediary between the customer account and the business account | Facilitates secure communication between websites and banks |
| Necessary for Transactions? | Yes, to receive payments from a customer's credit card | Yes, to complete transactions |
| Processing Time | 1-3 business days | Almost instantly, but requires merchant account to accept payments |
| Payment Methods | Credit cards | Credit cards, debit cards, contactless payments |
Many payment service providers offer combined merchant accounts and payment gateways, which can be convenient for managing your business finances on a single platform. However, some merchants may want to work with multiple service providers. This can be ideal if you want to offer more payment options, work in regions where certain payment processors don't operate, or would like to reduce risk.
Why Do You Need Both?
For most businesses, a payment gateway and a merchant account are both required to process transactions successfully. The payment gateway ensures the transaction is securely transmitted and authorized, while the merchant account temporarily holds the funds before transferring them to the business’s bank account.
Some third-party payment processors, such as PayPal and Square, offer both a payment gateway and a merchant account in a bundled solution. However, customized solutions can offer better scalability and greater control over your finances, which is especially important for growing businesses or those in high-risk industries.
Choosing the Right Merchant Account Provider
When selecting a merchant account provider, businesses should consider factors such as transaction fees, payout schedules, customer support, and security features. Adaptiv Payments is a highly recommended option for businesses seeking a reliable merchant account provider.
When evaluating potential providers, consider these elements:
- PCI-DSS compliance and data security
- Pricing and potential fees
- Payout speed
- Customization options
- Integration options
- Customer service
Adaptiv Payments offers custom solutions for a broad range of industries, with transparent pricing, comprehensive support, and multiple integration options for maximum efficiency.
Adaptiv Payments Logo
Credit: Adaptiv Payments
Why Choose Adaptiv Payments?
- Custom Solutions: Enjoy tailored processing solutions for diverse industries, including high-risk sectors such as CBD, ecommerce, and nutraceuticals.
- Competitive Fees: Receive a custom quote tailored to your specific needs, with lower transaction fees than other processors.
- Robust Security: Advanced fraud protection and chargeback prevention reduce risk, while PCI-DSS compliance ensures you can continue receiving credit card payments.
- Seamless Integration: Integrate with major ecommerce platforms like Shopify, WooCommerce, and more.
- Comprehensive Support: Work with a dedicated account specialist experienced in your industry, whether that's firearm sales or CBD.
Adaptiv is a leading provider of high-risk merchant accounts, offering secure, industry-compliant payment solutions. We improve cash flow, reduce payment friction, and help you build customer trust, all with competitive rates and dedicated customer service.
How to Choose the Right Payment Gateway
- Choosing a payment gateway requires considering factors such as integration capability, security, and pricing structure. Review which accounts and platforms the gateway supports and whether it complies with PCI-DSS standards. You should also review the typical fees to ensure you can maintain adequate cash flow.
Popular payment gateways include:
- Authorize.net – Well-established with strong security features.
- Stripe – Ideal for businesses needing a flexible API for custom payments.
- Braintree – A PayPal-owned solution with advanced fraud protection.
- Square – Best for small businesses and in-person transactions.
The Future of Merchant Accounts and Payment Gateways
New technologies are advancing the financial industry, including merchant accounts and payment gateways. Real-time payments, such as through contactless methods, speed up funding times, while AI fraud detection reduces chargebacks. Embedded payment solutions, such as API gateways, are also allowing for greater flexibility and customization.
Adaptiv Payments is staying ahead of the game by adopting advanced security and automation technologies. We're committed to making our payment solutions faster, safer, and easier for everyone involved.
Common Mistakes When Comparing Merchant Accounts and Gateways
Assuming All Providers Are Equal: Certain accounts or processors will not accept high-risk industries, while others have higher fees or unnecessary services. Check that they work with your industry before applying.
Overlooking PCI Compliance: PCI-DSS compliance to avoid issues like data breaches or fraud. Check that your provider is PCI-DSS compliant.
Choosing Based on Fees Alone: While fees are important, you also need to consider customer experience, ease of integration, and customer support.
Final Thoughts
Both merchant accounts and payment gateways play an important role in your overall business operations. A merchant account holds funds before they are transferred into your bank account, while a gateway verifies and encrypts transactions.
Choosing the right provider can significantly enhance your payment experience. Adaptiv Payments offers tailored high-risk merchant account solutions, competitive pricing, and robust security that helps you build trust. Contact us today for a consultation, and we'll provide a competitive, custom quote based on your unique needs.
A merchant account holds funds before they are released to your bank account, while a payment gateway serves as a bridge between the customer's account and your merchant account.
