Payment gateways vs payment processors: What's the difference?

Key takeaways

• A payment gateway securely captures, verifies, and encrypts payment details when a transaction is made, and then transmits the data to a payment processor.

• A payment processor verifies and authorises a transaction with the customer’s issuing bank, then facilitates funds transfer from the customer’s bank account to the merchant’s bank account.

• Payment gateways and payment processors work together to ensure fast and secure online payments. Some fintechs, like Airwallex, offer both on the same platform to simplify financial operations.

Payment gateways and payment processors play distinct, important roles in the payment process. When a customer makes a purchase, a payment gateway encrypts and transmits payment data securely to a payment processor. The payment processor then orchestrates the verification and transfer of funds from the customer’s bank account to the merchant’s.

If you’re looking to accept payments online, you’ll need a payment gateway and payment processor. Below, we explain what payment gateways and payment processors are, how they differ, and how they facilitate secure and efficient transactions together. We’ll look at the types of payment gateways and payment processors, discuss their pros and cons, and guide you in finding the payment solution that works best for your business.

What is a payment gateway?

A payment gateway is the digital equivalent of a point-of-sale (POS) terminal in a physical store. Think of the payment gateway as a checkout page. On it, your customer will be able to select a payment method, enter their payment details, and make payment when ready. Their payment details may include credit card details or login credentials to their eWallet, and other information like their name and billing address.

That’s what your customer will see on the checkout page. Behind the scenes, the payment gateway captures, encrypts, and sends the payment information securely to a payment processor.

What is a payment processor?

A payment processor verifies transactions and facilitates funds transfer. First, it routes the data from the payment gateway to the relevant card network and the customer’s issuing bank. Once it verifies the payment details and confirms that the customer’s account has sufficient funds, it then facilitates the funds transfer to the merchant’s account. It also informs the payment gateway that the transaction is completed.

Key differences between payment gateways and payment processors

In short, payment gateways collect payment information and send them securely to payment processors, while payment processors verify and complete transactions accurately. Both operate in different parts of the payment process.

To break it down further, the payment gateway connects your website to the payment processor. It sits on the front end and integrates directly with your website (or the eCommerce platform you use), allowing customers to enter their payment details. It then verifies, encrypts, and sends the payment data securely to the payment processor.

The payment processor drives the transaction on the back end, passing information across financial networks, including the customer’s bank and your acquiring bank. It verifies payment details and fund availability, communicates the transaction's approval (or decline) to the payment gateway, and helps move funds from the customer’s bank account to your merchant account.

How payment gateways and processors work together

Payment gateways and payment processors work together by coordinating the different steps involved in payment processing.

Imagine a customer is browsing ‌your online store, looking for a pair of new running shoes. They find the perfect pair, and decide to make a purchase. Here’s how the process unfolds:

1. The customer makes a payment: On the checkout page, the customer enters their payment details, such as credit card number, expiration date, and CVV, and pays.

2. The payment gateway sends the payment data to the payment processor: The payment gateway verifies, encrypts, and sends the payment information securely to the payment processor.

3. The payment processor verifies the transaction: The payment processor checks that funds are available in the customer’s bank account and that the transaction can be authorised.

4. The payment processor facilitates the funds transfer: The payment processor instructs the customer’s bank to transfer the money to the merchant's bank account.

5. The payment processor informs the payment gateway that the payment has been completed: The payment processor sends a signal back to the payment gateway once it confirms that the transaction is successful.

6. The payment gateway confirms the purchase: The checkout page displays a confirmation message to show the customer that their purchase has been completed.

Even though payment processing involves multiple parties and systems, the entire process unfolds in seconds from the customer’s perspective.

Types of payment gateways

There are different types of payment gateways to meet the unique needs of businesses and industries. Depending on your setup and technical capability, there are several types of gateways to choose from:

Hosted payment gateways

Hosted payment gateways are a straightforward solution managed by third-party providers, often in the form of a pre-built, secure checkout page.

• Pro: easy to set up and secure.

• Con: redirects customers to an external site to complete payment, which can disrupt the checkout flow and increase cart abandonment

• Best for: businesses that want a quick, hassle-free way to accept payments with minimal technical setup.

Self-hosted payment gateways

Self-hosted payment gateways are integrated directly into your website, allowing customers to complete their purchase in the same environment. Payment details are collected directly on your site, allowing you to own the entire checkout experience.

• Pro: fully branded, on-site checkout that provides a smooth checkout experience and boosts conversions.

• Con: requires more technical know-how and full responsibility for meeting regulatory compliance, such as the Payment Card Industry Data Security Standard (PCI DSS)

• Best for: businesses with in-house developers who want more control over the customer experience.

API-based payment gateways

API-based payment gateways allow your developers to build custom checkout flows and collect customer payment details directly on your website.

• Pro: high flexibility to create customised checkout journeys, including features like one-click payments and mobile integration.

• Con: requires high development effort and technical expertise to integrate and maintain.

• Best for: tech-forward businesses or platforms looking to build custom, scalable payment experiences.

Payment links

Payment links are shareable URLs that you can use to collect payments without building a website. You can share payment links via email, social media, or messaging apps, allowing customers to make payments directly.

• Pro: no-code solution that’s fast to deploy and simple to use.

• Con: less suited for businesses needing a fully integrated or automated checkout system.

• Best for: freelancers, service providers, or small businesses that need an easy and quick way to collect payments.

Some fintechs, like Airwallex, offer all of these payment gateway options, so you can get started quickly with the level of customisation you need.

Types of payment processors

There are two types of payment processors: 

Payment aggregators

Payment aggregators let you accept credit and debit card payments without setting up an individual merchant account. Instead, you’re grouped under a larger account with other merchants.

• Pro: easier setup with minimal paperwork and lower upfront costs.

• Con: limited flexibility as your business grows and payment needs become more complex.

• Best for: small businesses, startups, or those with lower transaction volumes.

Merchant account providers

Traditional merchant account providers offer businesses their own individual or dedicated merchant accounts. With this setup, funds are deposited directly into your business account.

• Pro: greater customisation, support, and control over payment processing to meet specific business needs.

• Con: more complex setup and higher costs, with additional ongoing maintenance and fees.

• Best for: larger businesses or those with more complex payment needs.

When choosing between payment aggregators and merchant account providers, consider the scale of your business, the transaction volume, and the level of control and customisation you require.

Benefits and costs of payment gateways and processors

Using payment gateways and processors benefits you in many ways, though there are trade-offs that you need to be aware of.

Benefits

• Boost conversions with local payment methods: Payment gateways and processors can support a variety of payment methods, from credit and debit cards to digital wallets like Apple Pay and PayPal. From our recent research with Statista, 94% of shoppers globally say that the ability to pay using preferred payment methods is one of the most important aspects of the checkout process when buying online, cross-border. The more payment methods you accept, the more likely you are to reduce checkout friction and boost conversion rates.

• Expand your global reach with multi-currency acceptance: Many payment gateways and processors also offer multi-currency support, making it easier for you to sell to customers around the world.

• Secure transaction with advanced fraud detection tools: Payment gateways may implement address verification systems (AVS) and card verification value (CVV) checks to prevent unauthorised transactions. Some payment processors use advanced algorithms that monitor transactions and detect suspicious activity in real time to prevent fraudulent charges.

• Make strategic decisions with data insights: Some payment processors may also offer analytics tools that help you gain insights into your payment data.

Costs

You’re likely to come across various fees when processing payments online. Having a clear idea of what fees are involved will help you assess the fee structures offered by payment service providers:

• Interchange fees are paid to the card issuing banks to cover the costs of issuing cards and processing card transactions.

• Assessment fees are charged by card schemes like Visa, Mastercard, American Express, and Discover to maintain the electronic infrastructure that transmits payments.

• Payment processing fees ‌are paid to payment processors for their role in facilitating transactions. Businesses are often unable to deal directly with card associations and have to rely on payment processors. The fee structure can vary, depending on factors such as your business’ risk profile, transaction volume, and more.

• Platform fees or shopping cart fees may apply if you sell on an eCommerce platform or marketplace like Shopify, Magento, and WooCommerce. These platforms often charge a fee in exchange for the convenience of having an integrated payment processing solution.

Although there are costs involved, expanding your payments online, cross-border, can bring meaningful growth to your business and additional revenue streams.

How to choose between a payment gateway or payment processor

If you're accepting payments online, you'll need both a payment gateway to capture and securely transmit payment details, and a payment processor to process transactions and settle funds into your account. It's a good idea to look for a platform that offers both.

When assessing a payment service provider, it helps to ask yourself a few questions:

• Do you sell to customers globally? If you do, look for a provider that offers support for multiple currencies, local payment methods, and regional compliance.

• What’s your average transaction volume? Different providers have different pricing models, and their fee structures can vary based on factors like transaction volume.

• Do you need more than just payment processing? Think about what other requirements you have, such as FX, transfers, or spend management. Some payment service providers offer these additional features.

• How quickly do you need to access your funds? Settlement times differ between providers. Some providers can settle transactions instantly or within the same day, while others may take several days.

• Do you need integration with other tools? If you rely on accounting software such as Xero or NetSuite, check if the provider offers integration with these tools. Similarly, check whether they offer integrations with eCommerce marketplaces or CRM tools that you may already use.

• What level of reporting and insights do you need? Advanced analytics can help you optimise conversion rates, monitor chargebacks, and improve financial forecasting.

• What support do they offer? Reliable and timely customer support can make all the difference.

Simplify and secure global payments with integrated solutions

Unlike traditional setups that require separate payment gateways and processors, our platform, Airwallex, integrates these functions into a single platform, simplifying the entire payment process. With our platform, you can manage secure data transmission, tokenization, fraud detection, payment authorisation, and funds transfer all in one place. Airwallex also acts as an acquirer, where opening a single Business Account gives you access to local bank details in 23+ countries that you can use to accept multi-currency payments, without the need to open separate bank accounts.

Whether you prefer no-code, low-code, or fully customisable solutions, our checkout solutions allow you to start accepting payments in minutes, without the need for extensive technical expertise.

Accept payments in 180+ countries via 160+ local payment methods to connect with a wider audience. With our automatic currency conversion and pricing display in 130+ currencies, your customers will be able to see exact costs in their local currency during checkout, driving higher conversions.

Our machine-learning-powered optimisation engine further streamlines the payment process. With features like intelligent MCC assignment, automated retries, and ISO message optimisation, you can boost acceptance rates and reduce the risk of fraud.