Merchant account vs. payment gateway: What’s the difference and why It matters for your business

The world of payment processing is often seen as complicated, but understanding the difference between a merchant account and a payment gateway can simplify things for businesses. As the digital economy continues to expand, payments are a vital aspect of business operations. In fact, by 2023, the global digital payment market is projected to exceed $10 trillion. With such a significant portion of business transactions flowing through payment systems, understanding how these systems work is crucial for success.

In this article, we’ll break down the distinction between a merchant account and a payment gateway, how they function together, and why both are essential for a seamless payment experience. Whether you’re just starting with payment processing or looking to optimize your current infrastructure, having the right tools in place can drive revenue and reduce transaction issues.

What is a merchant account?

A merchant account is a specialized bank account that allows businesses to accept payments by credit card, debit card, and other forms of digital payments. It is the foundational payment system that holds funds after a transaction is made but before they are transferred to the business’s primary account.

The primary role of a merchant account is to facilitate the transfer of funds from a customer’s payment method into the business’s bank account. Merchant accounts work by temporarily holding funds until they’re authorized and cleared, allowing for secure transactions. This means businesses need to work with a bank or payment processor to set up and manage the account.

What is a payment gateway?

A payment gateway is a technology solution that authorizes and processes transactions for businesses. Think of it as a digital intermediary that communicates between the business, the customer, and the bank during a payment. Without a payment gateway, payments cannot be processed.

The payment gateway encrypts sensitive information, ensuring that payment details are securely transferred across the network. When a customer makes a purchase online, the payment gateway handles the communication with the merchant’s bank to verify the transaction before approval. Payment gateways support different types of payments, including credit/debit cards, mobile wallets, and more.

Key differences between merchant accounts and payment gateways

While merchant accounts and payment gateways are both crucial components of payment processing, they serve different roles in the payment cycle.

1. Functionality: The merchant account is where the funds are held temporarily after a transaction is made, while the payment gateway is responsible for securely transmitting payment details.

2. Ownership: Merchant accounts are typically provided by financial institutions, such as banks, whereas payment gateways are offered by technology companies or payment processors like Stripe, PayPal, and Square.

3. Security: Payment gateways focus primarily on security and encryption, ensuring that sensitive payment details are safely transmitted. Merchant accounts focus on fund management, ensuring money flows from the customer’s bank to the business’s account.

4. Transaction Flow: The merchant account holds the funds after the transaction is approved, and the payment gateway handles the encryption and authorization of the payment before the funds are processed.

Do you need both a merchant account and a payment gateway?

In most cases, yes—businesses need both a merchant account and a payment gateway to accept and process payments. The merchant account is essential for accepting payments, while the payment gateway facilitates the secure processing of those payments.

However, some companies offer both services in a single package, which simplifies things for businesses. Companies like PayPal and Stripe provide integrated payment solutions, offering both merchant accounts and payment gateway services within the same platform. This integrated approach reduces the complexity of payment processing by allowing businesses to manage all payment-related aspects in one place.

How payment orchestration bridges the gap between merchant accounts and payment gateways

As payment systems evolve, businesses are looking for solutions that streamline the payment process across multiple payment methods, providers, and regions. Payment orchestration platforms offer a centralized solution for managing both merchant accounts and payment gateways in a seamless manner.

Payment orchestration enables businesses to route payments intelligently, improving payment success rates, reducing payment friction, and offering customers more payment choices. With payment orchestration, businesses can manage multiple payment providers and methods from one platform, including credit cards, debit cards, digital wallets, and even Buy Now Pay Later (BNPL) services.

By integrating payment gateways and merchant accounts under a single platform, payment orchestration simplifies the entire payment lifecycle, making it easier for businesses to accept payments across different channels without worrying about compatibility or compliance.

What to look for when choosing a merchant account and payment gateway

When selecting a merchant account or payment gateway, businesses should consider several key factors:

1. Transaction fees: Different providers have different fee structures, including setup fees, monthly fees, transaction fees, and chargeback fees. It’s important to choose a provider whose fees align with your transaction volume and business needs.

2. Payment methods supported: Make sure the merchant account and payment gateway can handle the types of payments your customers prefer. Whether it’s credit cards, digital wallets, or ACH transfers, your payment processor should accommodate them.

3. Security: Look for PCI DSS compliance, encryption standards, and fraud detection tools to ensure secure transactions and protect sensitive customer information.

4. Integration with existing systems: Choose a provider that integrates easily with your existing sales platform, website, or POS system.

5. Customer support: Make sure the provider offers robust customer support in case something goes wrong. A provider with a responsive support team can help resolve issues quickly, minimizing downtime.

Challenges in payment processing: How payment orchestration can help

Processing payments comes with its own set of challenges, including payment fraud, chargebacks, international payment complexities, and system inefficiencies. These challenges can disrupt business operations and hurt the customer experience.

Payment orchestration helps address these challenges by centralizing the payment process and integrating multiple payment providers into one unified platform. It ensures seamless routing of payments, reduces transaction failures, and improves fraud detection across all payment channels.

With payment orchestration, businesses can optimize their payment workflows, streamline reconciliation, and handle cross-border payments with ease, making payment processing much more efficient.

Simplifying payment processing with the right merchant account and payment gateway

Choosing the right merchant account and payment gateway is essential for businesses that want to optimize their payment processes and enhance the customer experience. Both components play a crucial role in ensuring smooth, secure, and efficient transactions.

By understanding the differences between the two and how they work together, businesses can make informed decisions about which solutions best meet their needs. Additionally, payment orchestration offers an integrated solution that unifies both, improving payment success rates, fraud prevention, and transaction efficiency.

For businesses looking to streamline their payment systems and improve the payment experience, consider exploring Gr4vy’s payment orchestration platform for a comprehensive solution that helps you manage your payments with ease.

Contact Gr4vy to learn more about how our payment orchestration platform can support your business’s payment needs.