Merchant Account vs. Payment Gateway: What's the Difference?

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.

Key takeaways

Merchant accounts are a specialised business bank account that facilitates accepting both physical and online payments.
A payment gateway securely captures, encrypts, and transmits payments from customers to the payment processing network.
You will need both a merchant account and a payment gateway to take payments both in-store and online.
Typical merchant account costs include transaction fees, PCI compliance, and Minimum Monthly Service Charge (MMSC).
The main costs you’ll encounter with a payment gateway are a monthly base fee, an overage fee, and a setup fee.

This article will cover:

What is a merchant account?
What is a payment gateway?
What are the differences between merchant accounts and payment gateways?
What are the costs of a merchant account and payment gateway?
Other important factors
How to choose the right solution for your business

What is a merchant account?

Merchant accounts are a special type of bank account that facilitates businesses accepting card or electronic transfer payments – functioning 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 brick-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 customer’s payment method, via the retailer’s processing system, to the respective banks.

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, which we cover in the table below:

Feature	Merchant account	Payment gateway
Primary job	Receives and clears the money from approved sales	Gathers, encrypts, and safely transmits card details at checkout.
Customer facing?	No - it operates entirely behind the scenes in the banking system	Yes, as it's the digital checkout form or payment window the customer sees
Where does the money go?	Holds the money for 1-3 days before transferring it to your business bank account	It never touches money - it only passes encrypted data

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 a fully functioning online payment 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 are 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.

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

Yes. To take payments online or in-store, businesses need both a merchant account and a payment gateway.

This is because 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.

What are the costs of a merchant account and payment gateway?

Merchant account costs primarily depend on the product and provider. However, you can find an estimate of the typical costs and fees in the table below:

Fee type	Estimated cost
Per-transaction fees (for pay-as-you-go providers)	1.69% to 1.75% per transaction for in-person payments, or 1.4% to 1.5% + 20p for online payments
Per-transaction fees (traditional dedicated providers)	0.3% to 3.5% per transaction, depending on card type
Monthly statement/service fee	Around £10-£25 per month for account maintenance
Card terminal rental	Around £15-£35 per month per physical handset
PCI compliance	Around £2.50-£5 per month
Minimum Monthly Service Charge (MMSC)	Around £15-£30 per month
Chargeback fee	£10-£25 per instance if a customer disputes a payment via their bank and wins a forced refund
Standard refund fee	30p-£1 if you voluntarily refund a customer
PCI non-compliance penalty	£30-£40 per month extra if you fail to fill out your annual security questionnaire

It’s a similar case with payment gateway fees, as it depends on whether you opt for an all-in-one solution or a dedicated gateway.

For an all-in-one payment gateway, you can expect to pay around 1.3% + 20p per transaction to 3.4% + 25p per transaction, depending on card type.

On the other hand, a dedicated/standalone gateway comes with several costs, including:

Monthly base fee: around £10-£28 per month
Overage fee: a small flat fee of 5-12p per transaction if you exceed your monthly transaction allowance
Setup fee: a one-off onboarding fee of around £50-£150

Other important factors

Aside from the costs that come with merchant accounts and payment gateways, it’s also important to look into the security features offered and how well they integrate with your business’s existing software.

Security features

Advanced security is included as a standard for both merchant accounts and payment gateways, with extra features available from premium subscription packages. The most essential security features include:

Data encryption: through Transport Layer Security (TLS) and advanced cryptographic protocols, card details are scrambled into unbreakable code before they’re sent across the internet, making them unreadable to hackers or bad actors.
Tokenisation: the payment gateway replaces card details with a randomly generated sequence of characters (AKA a “token”).
3D Secure 2 (3DS2): for high-risk transactions, 3DS2 triggers a pop-up requiring the customer to approve the purchase through their mobile banking app.
AI-powered & predictive fraud screening: advanced machine learning algorithms check if the device used to make the transaction has a history of fraud, flagging a transaction if a UK-issued card is suddenly being used on an IP address abroad, and running Address Verification Service (AVS) and CVV to ensure the billing address matches the cardholder’s file.

Integrations

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

To run efficiently, a merchant account and payment gateway should integrate with:

Ecommerce platforms, so that when a customer clicks “Buy Now”, the gateway securely opens, processes the payment, and tells the website to change the order status from “Pending” to “Paid”.
Accounting software to automatically record revenue, account for transaction processing fees, and reconcile bank deposits.
Electronic Point of Sale (EPOS) systems for physical stores, as when an amount is typed into the cash register, it instantly sends the amount to the card reader.
Inventory & ERP management software so that when a payment is successfully cleared by the gateway, it triggers an update across your stock logs and deducts items from your inventory to prevent overselling.
CRM software so you can see exactly what a customer has bought, when they bought it, and their lifetime value – making it easier to trigger automated marketing workflows (such as a discount email 30 days after a purchase).

How to choose the right solution for your business

When deciding on a merchant account and payment gateway, you should research and compare different products and providers, and read customer reviews to find the right option for your business.

You should also 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 (2FA)
How much card volume do you expect to process each month?
How do you want the payment screen to look? For example, a hosted gateway will take the customer away from your website to a third-party page to pay, whereas an integrated gateway keeps them on your website for the whole journey.
How long are the payout and settlement speeds? Look into whether they offer next-day, rolling multi-day payouts, or weekend payouts.
Does the gateway support other payments beyond Visa and Mastercard? (such as Apple Pay and Google Pay, or Buy Now, Pay Later solutions like Klarna and Clearpay)

Note: To acquire a dedicated merchant account, there are several requirements you will need to meet. You can find out more in our guide to merchant accounts.

Final thoughts

Merchant accounts and payment gateways serve different but equally important roles in the payment process.

While many modern payment providers now combine these services into a single solution, understanding how each works can help you choose the right setup for your business.

The best options come down to how you sell, how many payments you take, and what your business needs. Taking the time to compare your options will help you find a solution that keeps payment simple, secure, and hassle-free for both your business and customers.