Merchant Acquirer vs Payment Gateway: Know the Difference

If the payment processing ecosystem was a theatrical production, the merchant acquirer would play the role of backstage manager. The acquirer facilitates the authorisation and settlement of transactions, acting as a liaison between businesses and the issuing banks.

The payment gateway, on the other hand, is more like the stage, where the customer payment data is securely collected and transmitted. 

Together, payment gateways and merchant acquirers perform the intricate ballet of modern commerce, ensuring that transactions are authorised, funds are successfully transferred, and everyone goes home happy.

What is a payment processor?

The term payment processor is very general. It has become something of a 'catch all' term for the many various entities involved that processes payment transactions.

Both acquirers and payment gateways are often referred to as payment processors. But this is where the confusion comes in. They are distinctly different.

The processor passes the transaction messaging to the merchant acquirer, whereas the acquirer manages the merchant's account.

We will be much more specific in this blog about the difference between acquirer vs payment processor.

What is a merchant account?

A merchant account is a business account that allows companies to accept card payments. It is different from a business bank account. The merchant account deposits funds from card sales into the business bank account.

The merchant's bank with whom they hold their deposit accounts will often be a popular choice for providing acquiring services. However, these can be expensive with relatively old technology and features.

What is a merchant acquirer?

A merchant acquirer, also known as an acquiring bank, is a financial institution (or a bank) that helps companies process credit and debit card payments. This is the entity that holds a merchant’s account and accepts the deposits from the merchant’s sales.

Basically, the acquirer is the entity that enables a business to accept card payments.

The below four steps highlight how acquirers typically work.

What is an issuing bank?

An issuing bank is the cardholder's bank that issues the credit or debit card.

What is a payment gateway?

A payment gateway is the interface that collects, verifies and transmits the customer’s payment information and transaction details to the merchant acquirer. It also informs the customer and the merchant whether the transaction has been approved or declined. 

A payment gateway is generally used to enable merchants to accept online payments such as purchases made via an eCommerce store.

The three steps below highlight how the payment gateway typically works

1. The customer initiates the payment journey when they enter their card details into the checkout of the eCommerce website. That's when the gateway starts processing the payment information and initiates the encryption process.
2. The encrypted information is then securely transferred to the cardholder's bank via a payment processor and a card network.
3. The payment is then either authorised or declined by the customers’ bank. The merchant and the customers are then informed of the outcome of the authorisation process.

What merchant acquirers & payment gateways have in common

Merchant acquirers and payment gateways are both part of the payment processing system and have a direct relationship with each other.

All eCommerce businesses need to use a payment gateway and a merchant acquirer to process electronic payments including credit and debit card transactions.

Merchant acquirers vs. payment gateways: The differences

1. Nature of the business

One essential difference is the nature of the organisation and role in making digital payments happen.

The payment gateway functions as a technical limb of the payment processing system. Using technology, gateways act as the interface for the transaction and receive information related to the transaction result. 

A merchant acquirer is likely to simply be a bank or a financial institution. A gateway is more of a technological component of the payment system.

 2. Types of transactions

Payment gateways are primarily used in card-not-present (CNP) transactions.

A merchant acquirer is used in both CNP and in-store transactions.

3. Role in the transaction process

The payment gateway is the interface of the payment processing system. They:

• Collect, verify and transmit the customer’s payment information;
• Inform the customer and the merchant whether the transaction has been authorised or declined;
• Take charge of the initial encryption process of the payment information.

In the context of card payments, merchant acquirers facilitate the authorisation and settlement of transactions between the business and the issuing bank. They also:

• Establish and maintain merchant accounts;
• Verify the transaction details and ensure that funds are available;
• Settle the funds with the business once a transaction has been approved;
• Provide credit card machines for accepting in-person card payments;
• Assume the risk of chargebacks, fraud and disputes related to card transactions.

4. Relationship with the merchants and with the customers

Payment gateways have a direct relationship between the merchants and the customers, holding and processing credit and debit card information for transactions.

By providing and managing merchant accounts, acquirers have a direct relationship with the business. However, the merchant acquirer does not have a direct interaction with the business.

5. Relationship with card networks and issuing banks

Payment gateways do not have a direct relationship with card networks and/or the issuing banks. The communication is facilitated via the payment processor.

Merchant acquirers communicate directly with the issuing bank through card networks. Acquirers are members of card networks, and they usually have agreements in place to process transactions on the networks.

Costs

There is no one-size-fits-all fee for payment gateways. Companies that offer payment processing services charge different fees. These typically consist of:

• Initial setup fees.
• A flat monthly fee.
• A small fee for each transaction.

Some may also charge a fraction of each purchase.

Merchant acquirers usually charge a transaction fee on every payment. These fees usually depend on the type of card used for the payment (debit vs credit cards).

There are also fees related to the maintenance of the merchant account and rental fees for the card machines (if needed).

Conclusion

Merchant acquirers and payment gateways are pivotal in the processing of card transactions.

A merchant acquirer handles the authorisation and settlement of transactions between businesses and issuing banks. They manage merchant accounts, verify transaction details, and assume risks associated with card transactions.

A payment gateway serves as the technical interface of the payment process, collecting and encrypting customer payment information and conveying transaction outcomes to both customers and merchants.

They do not directly interact with card networks or issuing banks. Instead, they communicate through payment processors.

While payment gateways maintain direct relationships with merchants and customers, merchant acquirers primarily engage with businesses, managing their accounts and ensuring funds settlement post-transaction approval.

Terminology is often used interchangeably, so understanding what you need from payment service providers is key. Be sure to communicate your needs to each potential service provider as you gather service and pricing information.

DECTA offers a full-stack payment platform equipped for every B2B payment need across various industries and multiple business scenarios. Talk to a payment master today.