Are you about to start a new business or have you recently done so? If you are, you are not alone. Every month at least 500,000 new businesses open their doors. If your business is planning to take debit card and credit card payments, and you probably should because most Americans have at least one. Roughly 70% of American adults admit they have at least one credit card while most people in the United States have more than one. You may have asked yourself, “how does credit card payment processing work ?” You may have heard of payment processors and payment gateways and wondered to yourself what the difference between the two was and whether or not it mattered. Maybe you have thought of this as a payment service provider vs payment gateway situation and wondered if they were the same thing. It is, they are different animals all together.

First we need to go over the parties that are a part of all transaction that is made with a debit card or credit card. There are more players than just the customer and the merchant. Of course, the merchant and customer are a part of it but you also have the bank that issued the debit card or credit card to the customer and the bank that provides processing services to the merchant.

Payment Service provider vs Payment Gateway

What does the payment processor do?

If you want to accept payment on a debit card or a credit card, it is necessary that an account with merchant service provider be set up. When credit card or debit card transactions are executed, data is transmitted between your company, the bank that issued the credit card or debit card and your bank. All of this is handled by the payment processor. You will need equipment to take these kinds of payments and you would get that from the payment processor (most of the time). The payment processing industry is huge. At least 94% of all retail sales take place at brick and mortar establishments.

What does the payment gateway do?

E-commerce sites need to be able to accept credit card and debit card payments. (Yes, they can also accept payments from services such as PayPay and Dwolla but not everyone uses those so taking credit card and debit card payments is crucial for the success of e-commerce sites.) The payment gateway securely authorizes these transactions.

It is really important to have a good payment gateway company because there are nefarious people out there who do try to purchase items fraudulently by making a credit card payment with a stolen card. E-commerce sites often have a problem with chargebacks. Brick and mortar stores are at risk for this kind of thing but there are ways they can prevent credit card fraud that they can use that are not available to e-commerce sites.

So, with the payment service provider vs payment gateway question, which do I need?

That can be answered by looking what kind of business you are going to run. Will you have a traditional brick and mortar store? Do you plan to only sell your goods online? Do you plan to do both? If you are only going to sell things in a store, you need a payment service provider. If you only plan to do e-commerce, a payment gateway is what you need. Of course, if you are planning to sell to people in person and online, you need both.

What is this about chargebacks?

A chargeback is the name of what happens when a person finds something on their credit card statement that they do not recognize. There are a number of reasons these happen but most of the time, if a credit card payment is received and then the charge is challenged, the amount from the sale is refunded to the customer, taken from the merchant and often the merchant is charged a fee. If a merchant gets too many of these it can hurt their relationship with their bank and the credit card payment processing service company that they use.

Hopefully, this article answered at least some of your questions about accepting credit card payments and answered the payment service provider vs payment gateway question.