Payment Service Providers vs Payment Gateways: How Do These Merchant Services Differ?

Baffled by the confusing terminology around card payment solutions? This article unpicks what you need to know about payment service providers and payment gateways.

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Payment Service Providers vs Payment Gateways

If you’re a merchant looking to take card payments, you might have come across some confusing labels like payment service providers and payment gateways. These sound like they might be the same thing, but in fact, they are different. This article explains what you need to know about these types of merchant services and highlights the critical differences between them.

What are payment service providers, and how are they linked to card payment solutions?

If you want to accept credit or debit card payments from your customers, you’ll need to sign up with a payment service provider, and in most cases, apply for a merchant account. A merchant account is a special kind of business bank account used to take card payments.

A payment service provider, also known as a PSP or a payment processor, is a third-party company or platform that helps merchants take card payments and other payment methods, such as Direct Debit and real-time bank transfers.

Payment service providers provide a connection between consumers, merchants, financial institutions and credit card networks all around the world. They are a key player in the global payments industry, bringing together all parties involved in a transaction to ensure a seamless payment experience for merchants and customers. This is essential for today’s consumer - the checkout process being too long or complicated is cited as one of the top reasons for cart abandonment.

Here’s an example of how a payment service provider works behind the scenes during online payment.

  1. The customer decides to make a purchase online and submits their credit or debit card details during the checkout process.
  2. The merchant’s website transfers the financial details to the payment gateway (more on this term soon).
  3. The payment gateway transfers the information to the payment service provider where the merchant holds an account.
  4. The payment service provider then relays the transaction information to the relevant card network, for example, Mastercard or Amex.
  5. The card network checks whether there are sufficient funds in the customer’s bank or credit card account to make the transaction.
  6. The card network relays a response of either ‘approved’ or ‘declined’ back to the payment service provider.
  7. The journey of transferring information continues, from the payment service provider to the payment gateway, to the merchant and then the customer.
  8. Finally, providing the transaction is approved, the funds are issued by the customer’s bank or credit card account into the merchant account provided by the payment service provider. And eventually, these funds are deposited into the merchant’s main business bank account.

As well as taking care of the transaction process from start to finish, some payment service providers offer risk management for online payments, transaction payment matching, reporting and fraud protection services.

Examples of payment service providers

There are several payment service providers to choose from in the UK, and they each offer different features and pricing options for merchants. These are some of the main ones you might come across:

  • PayPal: a well-known UK provider, the PayPal Commerce Platform is great for smaller businesses, helping them get set up easily with taking payments, as well as providing credit and fraud protection.
  • Worldpay: the company bills itself as the no.1 payments processor covering the UK and Europe and allows merchants to offer a full range of debit and credit card payments, as well as PayPal.
  • Stripe: a complete payments system that’s perhaps a bit trickier to use than say PayPal, which has a super easy-to-use interface.
  • Opayo: formerly known as Sage Pay, Opayo is a trusted payment service provider that’s recognised by all major banks and credit card companies.

The role of payment gateways in taking card payments

A payment gateway is a technology or application used at the point of purchase when online payments are processed. It encrypts the financial data used in a transaction and makes the authorisation request so the customer can proceed with their transaction (or not, as the case may be). Then it redirects the customer to the next screen, e.g. back to the merchant’s website.

Here’s where it gets confusing. A payment service provider can also offer a payment gateway. Hence this can be the same company. So, for instance, PayPal, Stripe and Worldpay are a payment service provider and payment gateway.

Types of payment gateways

Payment gateways can work in different ways. There are three main types to know about:

  1. Off-site redirect - an example for this PayPal. When customers choose PayPal as their payment method, they are taken away from the merchant’s system to PayPal, where checkout and payment processing happens.
  2. On-site checkout - this is where the customer goes through checkout on the merchant’s system, but the payment processing part of the transaction is done off-site through the backend of a payment gateway. Stripe is one provider that handles payments this way.
  3. On-site checkout and payment processing - this is where an entire transaction takes place using only the merchant’s systems. This option is typically used for large enterprises.

There are pros and cons to each type of payment gateway. For instance, off-site payment processing means less responsibility on the merchant’s shoulders, as customers’ sensitive financial data is handled off-site. But a completely off-site payment gateway, such as PayPal, involves a second step for customers, which means the process takes that little bit longer and isn’t invisible.

The key differences between PSPs and payment gateways

The terms ‘payment service providers’ and ‘payment gateways’ are often used interchangeably, so for clarity, let’s summarise the main differences between them:

  • A payment gateway is a tool that authenticates the customer’s card details during a transaction, either approving or declining the payment.
  • A payment service provider does the actual payment processing during a transaction and is involved in the entire payment process. It acts as the intermediary between consumers, merchants, the payment gateway and acquiring banks.

FAQs about these two card payment solutions

We often get asked questions like the following about payment service providers and payment gateways:

Q: Do I need to use a payment service provider to take a card payment?

To accept card payments, you’ll need to use a payment gateway. You can set up a payment gateway in association with your preferred credit card processing company, but the most common approach is to use a payment service provider as it’s often easier and more cost-effective.

Q: Can I accept card payments without setting up a merchant account with a payment service provider?

Yes, you can. PayPal is one example where you can accept payments without setting up a merchant account. You just need to enter your bank account and debit or credit card details when setting up a PayPal business account. 

Q: Do payment service providers facilitate over the phone card payments?

Many providers will allow you to take card payments over the phone, using a virtual terminal or secure webpage that you can access from your internet-enabled device. You don’t need your own website to make this happen. The payment from the customer goes into your merchant account, just like with online card payments, until it’s processed. 

Q: Which payment service provider or payment gateway is best to use?

Each one offers something slightly different. To get the best one for your business, you should determine your priorities. As a starting point, consider how many card payments you’ll be taking, whether these are usually local or global, whether you need a full-service provider or whether you need a simple, easy-to-use interface. 

Q: How much does it cost to start taking card payments?

It depends on the payment service provider or payment gateway you choose and the expected volume of customer transactions. Each has different fees, which can include initial set-up fees and a monthly recurring fee as well as transaction fees. 

Q: How do payment service providers and payment gateways keep cardholder details secure?

As a merchant, you’re responsible for payment security at every step of the purchasing and checkout process. If you intend to process, store or transmit customers’ financial data, you need to ensure you’re PCI compliant. 

Payment service providers and payment gateways are also required to be PCI compliant. They can simplify the burden of PCI compliance for yourself through safer card acceptance methods and encryption protocols.

* If you have any other questions not listed here, feel free to ask us directly.

Getting started with card payment solutions and merchant services

To conclude, both payment service providers and payment gateways are crucial in helping you get set up to take card payments. 

The main difference between them is that a payment gateway is a tool that verifies your customer’s financial details, while a payment services provider provides you with a merchant account and, quite often, a full suite of merchant services. A payment service provider can be the same company that provides the payment gateway.

Here at Card Payment Guru, we’re here to guide you towards the best card payment solution, whether that’s a card payment machine for selling in person or helping you set up card payments online.

Simply tell us your payment requirements, and we’ll do all the legwork in finding the best provider for your business needs and budget - free of charge. Get started today. 

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