Merchant Account vs. Payment Gateway Explained



When you move to a new city, one of your first tasks is to scope out the neighborhood in order to understand the lay of the land, the culture and what resources are available to you as a resident. When you’re an entrepreneur setting up a new ecommerce store, you will encounter a similar challenge. It’s necessary to quickly achieve a clear understanding of the different players involved in your payment ecosystem, and the two most important are payment gateways and merchant accounts.

Facts About Payment Gateways

When a customer submits an order for one of your products online, the payment gateway is the first place the order goes. In short, a payment gateway helps to make the payment possible by facilitating its approval. It is, in effect, the intermediary between you as the retailer and the payment processor. It is responsible for securing and encrypting all types of transactions, including credit and debit card as well as alternative payments. Transactions can occur in several ways: via an integrated shopping cart, a hosted page or an application program interface (API). Regardless of which of these you use, the payment will first travel to the payment gateway. Then it goes to the payment processor, on to the credit card network and, at long last, to the customer’s credit card issuer where it can be authorized. Once this happens and the charge is approved, it wings its way electronically to your merchant account. Perhaps the most amazing aspect of this process is that everything takes place within a matter of seconds, and as long as the gateway you choose is PCI compliant, you can rest assured that the customer’s sensitive financial information remains safe.

Before selecting a payment gateway, get the answers to the following questions:

  • How soon do you need it?
  • How much are you willing to pay?
  • Is the payment gateway Level A compliant?
  • Does the gateway offer customer support that you are comfortable with using?
  • Does the gateway accept the types of payments you want to provide for your customers?
  • Does the gateway allow for automatic recurring payments?
  • Does the gateway offer hosted payments that take the customer to a secure site during checkout and then return them to your site afterwards? This is a much more secure solution.
  • Does the gateway integrate with your current accounting, billing and shopping cart solutions?

Facts About Merchant Accounts

Whereas the payment gateway is the first step in the payment process, your merchant account is the last. It is the place where everything is reconciled before the funds from successful sales are transferred into your business account. This holding tank for your funds can accept many different types of payments: credit and debit card, wire, ACH and digital wallets. Generally speaking, the funds in your merchant account are sent to your business account on a regular schedule. Keep in mind, however, that there will be a period of time, usually two to seven days after money has been added to your merchant account, that you will be unable to access it (some providers do offer next-day funding). Check the terms of your payment gateway contract to learn what your specific setup dictates in terms of this waiting period duration. If you have not signed on with a payment gateway yet, you can often negotiate wait time duration as one of the terms in your agreement.

When choosing the merchant account that is best for you, get the answers to the following questions:

  • Does the account offer 24-hour live customer support? If not, are you happy with what they do provide?
  • Does it allow you to process online and offline transactions?
  • Is the solution PCI-compliant?
  • How long does it take on average to process funds?
  • What fraud protections do they offer?
  • What is the length of the contract, if applicable?
  • Are there early termination penalties?
  • What other fees are involved?

Dedicated Vs. Aggregate Merchant Accounts

There are two different types of merchant accounts. As the name implies, dedicated merchant accounts are set up just for you, the business owner. You have the ability to receive rates from your payment processor based on your sales numbers. As you might imagine, this increased level of control comes at a price. You will need to go through an extensive underwriting process that involves a good deal of paperwork and jumping through other hoops, but the end result almost always justifies the extra work. By contrast, aggregate accounts are a lot easier to obtain but do not allow you to have the same degree of control over your rates or when your money gets paid out to you. They basically combine your money with funds from many other businesses, and you pretty much have to live with whatever rates the company gives you.

A Brief Word About End-to-End Payment Platforms

Wouldn’t it be nice if your payment gateway and merchant account were seamlessly integrated and you did not need to purchase them separately from different companies? Well, an end-to-end or full stack payment platform does just that. If the idea of smooth integration appeals to you, find a provider that combines your shopping cart, payment gateway and merchant account. If all of the moving parts are administered by the same provider, you are sure to have fewer hitches in what can sometimes be a very complex payment ecosystem.

Sure, accepting payments represents only a tiny part of your entire business model. Your staff, products, website, physical store and future plans are bound to take up most of your time and energy. However, the entire house of cards that is your retail business can collapse in a heap if your payment environment is poorly executed. If you dedicate yourself to choosing the best payment processing, gateway and merchant account providers who are equipped to meet your unique business needs, you will reap the rewards for many years to come. So act like you would if you have just relocated to a new neighborhood. Find the people and networks you can make the most fruitful connections with, and you are sure to quickly feel right at home.