Merchant Account vs. Payment Gateway: Key Differences
Overview
If you are starting an online business or looking to accept payments from customers, you might have come across two important terms: merchant account and payment gateway. While both are essential for processing payments, they serve different purposes. In this guide by Academic Block, we will break down the key differences between a merchant account and a payment gateway, how they work, and which one is best suited for your business.
What is a Merchant Account?
A merchant account is a special type of bank account that allows businesses to accept credit card and debit card payments from customers. When a customer pays using their card, the funds are first deposited into the merchant account before being transferred to the business’s main bank account.
How Does a Merchant Account Work?
- A customer makes a purchase using their credit or debit card.
- The payment details are sent to the merchant account provider for verification.
- The transaction is processed, and the funds are held in the merchant account temporarily.
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After a set period (typically 1-3 days), the funds are transferred to the business’s bank account.
Benefits of a Merchant Account
Who Needs a Merchant Account?
- E-commerce businesses
- Brick-and-mortar stores
- Subscription-based services
- Businesses that accept high volumes of card payments
What is a Payment Gateway?
A payment gateway is an online tool that processes credit and debit card transactions securely. It acts as a middleman between the customer, the merchant account, and the bank to ensure smooth payment processing.
How Does a Payment Gateway Work?
- A customer enters their card details on the checkout page.
- The payment gateway encrypts the data for security.
- It sends the information to the bank and card network for authorization.
- Once approved, the payment gateway confirms the transaction and completes the purchase.
Benefits of a Payment Gateway
Who Needs a Payment Gateway?
- Online stores & e-commerce websites
- Businesses accepting online payments
- Service providers with digital payment options
Key Differences: Merchant Account vs. Payment Gateway
To better understand how a merchant account and a payment gateway function, here is a side-by-side comparison of their key differences:
Best Merchant Account Providers
Here are some of the best merchant account providers and why they stand out:
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Helcim : Offers low transaction fees and transparent pricing, making it ideal for small and medium-sized businesses looking for cost-effective solutions.
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PaymentCloud : Specializes in high-risk businesses (e.g., e-commerce, CBD, adult industries) and provides customized payment solutions with fraud protection.
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Stax : Best for businesses with high transaction volumes, as it offers a subscription-based pricing model that reduces per-transaction fees.
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Dharma Merchant Services : A great choice for small businesses and nonprofits, offering ethical pricing, low fees, and excellent customer support.
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Square : A popular all-in-one payment processor that provides free point-of-sale (POS) software, easy setup, and flat-rate pricing, making it ideal for startups and small businesses.
Do You Need Both a Merchant Account & Payment Gateway?
Yes, in most cases, businesses need both a merchant account and a payment gateway to process payments efficiently. The payment gateway handles the transaction, while the merchant account holds the funds before transferring them to your bank. However, some payment processors like PayPal, Stripe, and Square combine both services, meaning businesses don’t need to set up a separate merchant account.
When to Choose a Merchant Account?
- If you process high-volume transactions
- If you need better control over payments and chargebacks
- If you want lower transaction fees (compared to all-in-one solutions)
When to Choose a Payment Gateway?
- If you are an online business
- If you need secure, encrypted transactions
- If you want quick and easy payment processing
Best Payment Gateway Providers
These are some of the best payment gateway providers and why they are widely used:
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Stripe : A developer-friendly payment gateway that is easy to integrate with websites and mobile apps, supporting customizable APIs and multiple payment methods for seamless transactions.
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PayPal : One of the most popular choices for online businesses, offering quick setup, buyer protection, and global reach, making it ideal for e-commerce stores and freelancers.
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Authorize.net : A highly secure and widely used payment gateway, providing advanced fraud detection, recurring billing, and compatibility with multiple merchant accounts for seamless transactions.
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Square : A great option for small businesses, offering a built-in POS system, flat-rate pricing, and a user-friendly dashboard for in-person and online sales.
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Adyen : A global payment gateway that supports multiple currencies and payment methods, making it ideal for large enterprises and businesses with international customers.
Final Words
Understanding the difference between a merchant account and a payment gateway is essential for businesses accepting online payments. A merchant account holds funds before transferring them to your bank, while a payment gateway secures transactions. Some providers, like PayPal and Stripe, offer both services for convenience, simplifying payment processing. Hope this article by Academic Block gave you a deeper understanding of the topic. We truly value your feedback! Please leave a comment to help us improve and enhance our content. Thank you for Reading!
This Article will answer your questions like:
While it is technically possible to have a payment gateway without a merchant account, it’s highly unusual. A payment gateway processes the transactions, but without a merchant account, funds cannot be deposited into your business account. Most providers require both to ensure secure, efficient transaction processing.
For small businesses, the ideal solution often depends on their needs. Integrated systems like Square or PayPal are generally recommended due to their ease of use, low upfront costs, and straightforward setup. They offer both payment gateways and merchant accounts, making them more convenient for smaller operations with less technical expertise.
A merchant account is a type of bank account that allows businesses to accept payments from customers, holding funds temporarily. A payment processor, on the other hand, is a service that handles the transaction details, including authorization and communication with banks to process payments securely. Both are vital for processing electronic payments.
The cost of a merchant account varies depending on the provider, business size, and transaction volume. Typically, there are setup fees, monthly service fees, and per-transaction charges. Small businesses may incur costs of around $10-$30 per month, plus a transaction fee of 2% to 4% of the sale amount.
The safest payment gateways include those that comply with PCI-DSS standards. Well-known providers such as PayPal, Stripe, and Square offer robust security measures like encryption, tokenization, and fraud detection to ensure safe processing of customer data during transactions.
Stripe is a widely-used payment gateway designed for online transactions. It enables businesses to accept payments via credit cards, debit cards, and other methods. Known for its developer-friendly tools, Stripe provides features like recurring billing, mobile payments, and international support, making it ideal for businesses of all sizes.
A payment gateway is a service that processes credit and debit card payments for online and in-store transactions. Examples include PayPal, Stripe, and Square. These platforms securely transmit payment information from the customer to the merchant, ensuring that the transaction is authorized and completed successfully.
Stripe is both a payment gateway and a payment processor. It facilitates payment gateway services, such as securely transmitting payment data, while also processing transactions between banks and merchants. It handles authorization, payment capture, and funds transfer, making it a comprehensive solution for online payments.
Stripe functions as both a payment gateway and a merchant account provider. It processes payments on behalf of businesses while also providing the infrastructure for merchant services, such as the ability to accept and manage payments securely. This makes it a comprehensive payment solution.
A merchant in the context of a payment gateway refers to the business or individual that accepts payments for goods or services through electronic means. The merchant’s role is to offer the product or service and process payments via payment gateways like Stripe or PayPal for completing transactions securely.
Some popular payment gateway providers include PayPal, Stripe, Square, Authorize.Net, and Braintree. These platforms enable businesses to accept payments securely through various methods, such as credit cards, debit cards, and digital wallets, while ensuring compliance with global security standards.
PayPal is one of the most popular online payment gateways worldwide. It offers businesses and consumers a simple, fast, and secure way to make payments online. Known for its ease of use, PayPal supports multiple currencies and payment methods, making it a go-to choice for many e-commerce businesses.
Yes, you generally need a merchant account to accept payments through a payment gateway. The gateway facilitates the transaction, while the merchant account is where funds are held before being transferred to the business’s bank account. Some payment gateways, like Stripe or Square, combine both services, eliminating the need for a separate merchant account.
The best payment gateways for small businesses include PayPal, Stripe, and Square. These providers offer low fees, easy setup, and comprehensive tools for online and in-store transactions. They also offer features such as mobile payments, recurring billing, and international support, making them ideal for small operations.
A merchant account and payment gateway work together to facilitate secure transactions. The payment gateway processes and encrypts the customer’s payment information, while the merchant account stores the funds temporarily before they are transferred to the merchant’s business account. Together, they enable seamless, secure payment processing, ensuring businesses can accept payments both online and in-person.
A payment gateway is a service that processes payment information, authorizes transactions, and securely transmits data. A merchant account, however, is a bank account that temporarily holds funds before they’re transferred to the business’s primary bank account. In essence, the gateway enables payment transactions, while the merchant account facilitates the holding and transfer of funds.
Merchant acquiring refers to the financial institution that partners with a business to provide a merchant account, allowing the business to accept payments. A payment gateway, however, is a service that handles the encryption, transaction authorization, and secure communication between the merchant and the acquiring bank. In short, acquiring deals with the financial side, while the gateway manages the technical side of payments.