For many merchants, accepting payments online and figuring out the correct integration for their business is their first step to success. Yet, the online payment world can get a little confusing. If you’re an eCommerce merchant looking to set up your first online store or simply switch payment gateway providers it is important to understand the basic payment ecosystem and terminology, perhaps most importantly the difference between a merchant account vs. payment gateway.
What’s the Difference Between a Merchant Account vs. Payment Gateway?
The payment gateway is used for facilitating online transactions and helping them get approved. It is also the first place the transaction goes when a customer submits an order online. The transaction flows through the payment gateway, to the payments ecosystem, and should it be approved, will eventually make its way into the merchant account.
Merchant accounts are for reconciling the funds sent to the merchant on successful sales. These are the funds that were approved through the payments ecosystem. All approved payments are paid out to you, the merchant, through your merchant account. This is the last stop before you receive the funds in your normal business bank account.
Pro Tip: Before choosing a payment gateway, make sure you ask all the right questions. Payment gateways can vary greatly in their sophistication and capabilities, especially when it comes to cross border eCommerce. Make sure you choose a merchant account vs. payment gateway as the one that will work best for your business and help you reconcile funds in a streamlined and efficient manner. For advice on what questions to ask check out our ebook, 10 Questions to Ask Before Choosing a Payment Gateway Provider.
Still need help determining a merchant account vs. payment gateway? Let’s dive a little deeper:
How a Payment Gateway Works
A payment gateway allows merchants like you to process credit, debit and alternative payments online. Since retailers are prohibited from sending a customer’s payment information directly to a payment processor, the payment gateway acts as the go-between, ensuring customer data is encrypted and secure.
With a payment gateway, transactions can occur either via a hosted page, API, or an integrated shopping cart.
Once customers submit their payment on the checkout page, the payment goes through the payment gateway, then to the payment processor, then through the credit card network and finally to the customer’s credit card issuer for authorization. If the transaction is approved, the funds will be transferred from the customer’s credit card to the merchant’s account.
Your Payment Gateway Should be PCI Compliant
No matter what payment gateway you choose, make sure that they are PCI compliant. Not only do industry standards require merchants to adhere to a certain level of PCI compliance, but by complying with the highest PCI standard you can better protect your customer’s sensitive payment information.
Pro Tip: Credit card security is essential in the payments industry. Having a payment gateway that is PCI DSS-Level 1 compliant will save you from having to worry about cardholder data being exposed.
How a Merchant Account Works
A merchant account functions almost like a normal bank account. After a successful sale, money is transferred into the merchant account.. A merchant account can accept many forms of payment, including credit and debit cards as well as alternative payment methods such as wire, ACH, giropay, etc.
You can think of the merchant account as an online holding tank for all of the sales you will make online. Once the funds have been deposited into your merchant account they are transferred to your normal business bank account, where they can then be withdrawn. This transfer process typically occurs on a set schedule, for example, weekly, bi-weekly or monthly.
Merchant accounts are critical for online retailers. Without one your funds will have no where to go and you will never get paid.
How Long is Money Held in a Merchant Account?
Once the funds get transferred into your merchant account, there is typically a waiting period before the funds make it to your normal business bank account. The average length of time you can expect to wait is an average of 2-7 days. However, this will differ depending on your payment gateway and the terms you agree to when signing.
Pro Tip: Pay out schedules can often be negotiated so make sure to discuss this with your payment gateway at the start of your relationship.
Merchant Accounts: Dedicated vs. Aggregate
There are two types of merchant accounts: dedicated and aggregate.
Dedicated merchant accounts are set up by your payment gateway provider, solely for you, the merchant. With a dedicated merchant account, you have the ability to receive custom rates from your payment processor based on your sales volume – the less you sell, the lower your rate; the more you sell, the higher your rate. Dedicated merchant accounts give you control of your money and your rate, which means you’ll have to go through an in-depth underwriting process to get one. Trust us though, it’s worth it.
Aggregate merchant accounts, on the other hand, are accounts into which your money gets deposited or pooled with many other companies. Although aggregate accounts, may be easier and quicker to obtain, you aren’t able to negotiate the rates and you have limited control over when your money gets paid out.
Pro Tip: For the most control over your account and funds, and the best rates, choose a dedicated merchant account.
What is a Payment Processor?
Payment processors are the financial institutions that work in the background to provide the core payment processing services used by an online merchant. These core processing services include authorization and refunding of transaction requests. Payment processors usually have partnerships with other companies, such as payment gateways, who deal directly with merchants to handle all processing needs.
Full Stack Payment Platforms
A full stack payment platform doesn’t make you choose between a merchant account vs. payment gateway, it gives both to you all in one — which means you don’t have to source each separately from different providers and then hope they’ll work seamlessly together. Using a full stack payment platform makes payment processing and fund payout much simpler.
Want to learn more about the payment’s ecosystem, learn more about merchant account vs. payment gateway, and discover how you can increase your online sales by as much as 40%? Contact a BlueSnap conversion consultant who will be able to answer all of your questions about accepting and processing payments online, plus help you choose the best payment platform for your business — or decide if its time to start searching for new one.