+ What's the difference between a merchant account and a payment gateway? | Inovio Payments

What's the difference between a merchant account and a payment gateway?

At first glance, a new entrepreneur would be forgiven for believing that ecommerce only involves a merchant, their website, and a consumer interested in purchasing products and services. Dig a bit deeper, however, and it soon becomes apparent that online retail is a good deal more complex and includes two very important additional players: The merchant account and the payment gateway. Understanding what both are, as well as how they relate to each other and to your workflow, is essential if you intend to sell items via the internet.

What is a merchant account?

Many people mistakenly believe that your business account is also your merchant account. In reality, these are two very distinct and separate entities. Although you definitely need to work with your local bank to open and maintain a business account to receive funds from your sales, you also will require a merchant account where information about the payment transactions you conduct, as well as the funds you earn, is held. Once the payment is verified with the other players in the process, those dollars are transferred to your business account.

If you only accept cash, you have no need for this type of account. However, most retailers would quickly go bankrupt if they did not offer their customers the option to pay with plastic. Merchant accounts, which are provided by acquiring banks, enable businesses to accept payments of various types, including from credit and debit cards, as well as ACH payments.

What is a payment gateway?

After a customer chooses the items they want, places them in your online shopping cart, proceeds to the checkout stage, and submits the purchase, a lightning-quick but complex process is initiated. To simplify things, it is essential for the customer’s bank to interact with a middleman that connects it to your merchant account. Without this link, known as the payment gateway, the funds would not be properly directed to the right place.

Payment gateways work in several ways. Some, known as hosted gateways, may require that a customer be redirected to a secure third-party site in order to submit their payment. On the other hand, integrated gateways work seamlessly with your shopping cart. After the customer enters their payment details, the information is transmitted to the URL of your payment gateway provider. 

Application Programming Interface- or API-hosted gateways enable buyers to enter their credit card information directly onto your site’s checkout page for processing. This type of gateway is fully customizable and can even be integrated with tablets and mobile devices. However, under this scenario you are responsible for all aspects of security and PCI DSS compliance.

Advantages of merchant accounts.

Since the dawn of the credit card, merchant accounts have played a crucial role. They allow businesses to securely process non-cash payments in a timely manner. As a result, cash flow is increased considerably. 

Advantages of payment gateways.

Although payment gateways particularly lend themselves to mobile and ecommerce merchants, businesses of all types can experience the advantages they offer. Customers can enter their payment information into the gateway with the peace of mind that comes from knowing that their data will be encrypted, and will remain secure throughout the transaction. In addition, merchants can also utilize the gateway to manually enter customer credit card information from email or phone orders from anywhere, at any time. All that is needed is an internet or data connection.

Do you really need a merchant account?

Yet another misconception that many business owners hold is that it is not actually necessary to have a merchant account at all. They believe that modern payment gateways are sufficient unto themselves. The reality is that every gateway is linked to a merchant account.

As you can see, there is a lot more involved in the payment process than first meets the eye. A savvy business owner must take full responsibility for doing thorough research in order to determine which configuration works best for their business and customer base. While this process may seem overwhelming at the outset, the information you gain about your own goals and your buyers’ preferences can be invaluable in finding the merchant account and payment gateway setup that’s right for you.

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