Merchant accounts vs. payment gateways: which solution do you need?

Merchant accounts and payment gateways are essential for businesses to send, receive, and process payments made with credit and debit cards.

Online businesses need both to provide a comprehensive, efficient, accurate and secure online payments system for their customers. Both solutions work in different ways as payment processing tools, but combined successfully, they offer startups the best option for taking online payments.

This article will detail what a merchant account is, what a payment gateway is, the differences between the two, the specific roles each plays in processing payments, whether your business needs both, and how to choose the right solution.

What is a merchant account?

Merchant accounts are a special type of bank account that facilitate businesses accepting card or electronic transfer payments.

They function as a holding area for payment funds. When a customer buys something from a business with a credit or debit card, the money is initially deposited into a merchant account.

Businesses cannot directly access funds held on their behalf in a merchant account. Instead, the funds will be automatically transferred to the business’s designated bank account when the payment has cleared. This can be completed in a day by some providers, but others can take three to five working days.

What is a payment gateway?

A payment gateway is used by online retailers to accept card and digital wallet payments securely and efficiently.

Payment gateways are also available for card reading machines used in bricks-and-mortar shops. QR codes and Near Field Communication (NFC) technology can also now be used in payment gateways in shops.

Payment gateways encrypt data sent by a customer during online checkout, so it’s secure when sent from the customers payment method, via the retailers’ processing system, to the respective banks.

“Payment gateways securely send payment info between customers, stores and the companies that process payments,” said Steven Kibbel, a financial advisor at Prop Firm App. “Think of them as bridges connecting everyone involved in a sale.”

During a transaction, the payment gateway connects with the payment processor, and the payment details are then sent to the customer’s bank, which verifies and approves or declines the payment. This decision is then sent back to the retailer.

What are the differences between merchant accounts and payment gateways?

A merchant account is the first destination for a customer’s funds when they make a purchase. It holds funds while payments are verified and transactions are authorised. A payment gateway, on the other hand, is a software service that encrypts and transmits credit and debit card information between the issuing and acquiring banks, and verifies payments.

There are other notable differences. A merchant account can be integrated with a payment processor, and is used by businesses to receive electronic payments and then settle the funds paid by card.

Their roles within the payment process

Merchant accounts and payment gateways have distinct and separate roles within the payment process, even though both are required for fully functioning online payments system.

After a customer makes a payment, the payment gateway captures, encrypts and then sends card details to the issuing bank to be decrypted and verified.

Once the payment has been approved, the payment gateway sends that information to the merchant account. The transaction is then processed and funds taken from the customer’s account and sent to the merchant account. When the funds have cleared, they are deposited in the retailer’s business bank account.

Costs

“Costs can vary wildly,” said Kibbel. “Merchant accounts typically come with many fees, including setup charges, monthly maintenance costs, and per-transaction fees, which fluctuate based on provider and transaction volume.

“Payment gateways usually stick to a simpler fee structure – a monthly fee plus a per-transaction charge.”

Merchant accounts costs depend on the product and provider but, typically:

• Debit card transactions incur a processing fee of between 0.5% and 1.5% of the transaction cost
• Credit card processing fees are higher, usually between 1% and 3%
• An authorisation fee of between 1p and 3p is usually charged

Monthly subscription fees for card machines and mobile card reader usually sit between £20 and £40. Higher fees can apply, and generally come with extra features and fraud protection. A minimum monthly service charge is often levied, but only payable if the retailer fails to meet the minimum monthly number of transactions set by the provider. Setup fees, chargeback fees, and early termination fees can also apply.

Payment gateway monthly fees tend to cost between £20 and £50, often with a minimum contract period, though pay-as-you-go options are available. Transaction fees are typically 1% to 5% of the transaction value, or more for international payments.

Setup costs are usually around £30, and provide businesses with a card machine and/or  mobile card reader for contactless payments.

Both merchant accounts and payment gateway providers also enable customers to buy or rent card machines or mobile card readers, also known as point of sale (POS) machines, either for an upfront price or a monthly fee.

Security features

Both merchant accounts and payment gateways usually have some security features included as standard, with extra features available from premium subscription packages.

“When it comes to security, merchant accounts and payment gateways have slightly different approaches,” said Kibbel. “Merchant accounts usually come loaded with built-in fraud protection measures and comply with industry standards.

“Payment gateways use advanced encryption and tokenization techniques to disguise and protect sensitive data.”

Payment gateways send information using secure internet addresses, and a hash function validates the request by using a secret word known only to the merchant and the payment gateway. This verifies the IP address of the requesting server to check the payment is secure.

Other payment gateway security features can include 3DS authentication, white label integrations for digital wallets, and tokenisation, so if data is breached the information remains secure.

Integrations

Both merchant accounts and payment gateways need to integrate with a businesses own software and systems and be compatible with each other. This ensures a business can process online payments effectively.

The ease of integration depends on which merchant account and payment gateway you select, the functionality each product has, the level of support provided, and the existing software your company uses.

Merchant accounts normally have more complex setups and direct integration with businesses’ existing systems. Payment gateways often have more user-friendly integration options for ecommerce operations, such as plug and play options, which are easier to set up and can be cost-effective.

“All options need to align with their specific situation,” said Kibbel.

Settlement times

This is an important consideration as it impacts cash flow. In general, merchant accounts take one or two business days to process payments. Payment gateways’ standard processing times are longer, though some boast quicker options that cost more.

Settlement times for merchant accounts depend on the time it takes for funds to clear, which is impacted by the issuing and receiving banks’ speed, but tends to be faster because there are fewer cogs in the process.

Settlement times for payment gateways can take longer because the payment gateway has to connect with the payment processor before the payment details are sent to the customer’s bank, which then has to verify and approve or decline the payment before relaying that information back to the retailer.

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

To take payments online or in-store, businesses need both, because a merchant account is required to accept an initial customer payment, and a payment gateway is needed to collect and process the card data.

A payment gateway captures and processes the customer’s card data and acts as a bridge to the other stakeholders involved in authorising and moving the payment.

It connects the merchant account with the payment processor by sending card data between the card issuer and the retailer’s bank account. A payment gateway will also flag up any issues with the transaction and ask the retailer how they want to proceed.

How to choose the right solution for your business

There are many options for businesses to choose from. Research and compare different products and providers, and read customer reviews to find the right option for your business.

Using and integrating both systems together allows you to know your customer payments are checked, authorised, processed and settled quickly, efficiently and securely. Some providers, for instance Stripe, offer products that combine both.

“While some providers bundle them together in an all-in-one package, understanding how each piece fits into the puzzle is key to making the right choice,” said Kibbel.

You should consider the following factors when deciding which provider to choose:

• How does the product integrate with your existing software and systems?
• How much are all the fees, including transaction fees, setup costs, monthly subscription costs, and any extra charges?
• What security features are included and what card ID verification is used? For example encryption, 3D security, and two-factor authentication

Some payment providers let businesses access a merchant account without having to hold one themselves. These are known as payment facilitators or PayFacs. They use the acquiring licence of another company to provide payment services to sub-merchants.

They become responsible for managing sub-merchants and processing their transactions. Businesses who sign up as clients get help with the onboarding of processes, compliance services and paying sub-merchants.

You should be aware that, to acquire a merchant account, you need a business licence.

Benjamin Salisbury - business journalist

Benjamin Salisbury is an experienced writer, editor and journalist who has worked for national newspapers, leading consumer websites like This Is Money and MoneySavingExpert.com, business analysts including Environment Analyst, AIM Group and written articles for professional bodies and financial companies. He covers news, personal finance, business, startups and property.