Payment Gateways vs Payment Processors – The Difference, Explained

Written by Andy Pearson

In the digital world, we’re used to things happening instantly. We regularly complete complex tasks, as if by magic. Online payments are a prime example.

As customers, we make payments online every day without really thinking about the mechanics behind the scenes.

But, if you are running a small business or membership organisation you quickly find there is a lot to learn in order to take payments online. It is a complex topic and it can be hard to navigate and understand what advice actually applies to you. 

This article explains what payment gateways and payment processors are, why you need them, and how White Fuse’s membership management software can help automate your online payments and streamline your admin. 

Gateways and processors explained

There are typically four parties involved in online transactions.

  • The customer
  • The merchant
  • The customer’s bank (the ‘issuing bank’)
  • The merchant’s bank (the ‘receiving bank’)

The payment processor is the part that actually executes the transaction, transmitting data between the merchant, the issuing bank and the receiving bank. This operates largely behind the scenes but is of course critical to safely process transactions.

The payment gateway is the interface with the customer. Its primary purpose is to create a secure connection between your website and the payment processor and send encrypted payment data. It’s sort of the equivalent of a point-of-sale terminal for the online world. The gateway will also communicate updates or outcomes back to the customer and merchant.

A good payment gateway will also allow you to embed a payment form directly on your website instead of redirecting users to the payment processor’s own website. This generally makes for a better user experience and helps promote your brand throughout the process.

Example of a transaction

To help illustrate, here’s an example of a transaction showing the software used at each step.

  • A customer browses your website and selects a product
  • The integrated payment gateway provides a payment form for them to complete
  • The gateway encrypts the customer data and sends it to the payment processor
  • The processor communicates with the issuing and receiving banks to transfer the funds
  • The processor sends a response to the gateway
  • The gateway tells the customer and the merchant the outcome of the transactions

Payment service providers

Most small businesses that want to take payments online need both a gateway and a processor. You can acquire these separately but it is generally easier to get them bundled together in what’s often known as a payment service provider (PSP). A PSP will provide the full stack of payment functionality you need making it easier to set up and integrate with.

There are dozens of PSPs on the market including household names such as PayPal, Stripe, GoCardless and WorldPay. Each has its own distinct characteristics and there are nuances that might affect your decision on which to choose.

The main benefit that these services offer is the ease with which you can sign up, create a merchant account and start selling on your website.

Subscription management

Most membership organisations need one extra piece of the puzzle. The ability to manage recurring subscriptions. Some PSPs have their own built-in subscription tool that allows a customer to set up a recurring payment method. Often, however, membership organisations need a bit more than this. They typically require 3 main tools:

PSPs typically don’t provide these things. White Fuse is a membership management platform that does. It integrates directly with Stripe and GoCardless allowing you to easily take secure online payments.

White Fuse handles auto-renewals, payment reminders, expiration and access to member-only content. It makes it easy for you to manage your contacts and communicate with them via the built-in email tool. It’s an important layer of functionality for anyone looking to escape spreadsheets and manual data entry and really grow their membership organisation.

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