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Merchant accounts vs payment gateways

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Last editedOct 20212 min read

As a business owner, you’re probably familiar with the fact that both merchant accounts and payment gateways are essential for taking payments, particularly for online payment processing. However, the exact ways in which you can configure these can be a bit more complicated, and this can have a significant impact on your business. Whether it’s your first time setting up an e-commerce store or you’re trying to streamline the processes of an established business, this simple guide will answer some of your most pressing questions, including what is a payment gateway and what is a merchant account?

What is a payment gateway?

Put simply, a payment gateway is the technology that connects merchants with payment networks. The payment gateway is integrated with your online store and carries out a number of different tasks in order to successfully process customer payment.

Firstly, it must securely collect the customer’s payment details, which it does by encrypting the information as it is transmitted. This information is then sent to a payment processor or acquiring bank, and based on this the payment gateway will send either an approval or failure message back to the merchant. The merchant can then direct the shopper to a confirmation page or ask for an alternative form of payment if it was declined.

How do I choose the right payment gateway?

Every payment gateway will carry out the basic tasks mentioned above, but there are certain distinguishing features that make some different from others. The wrong payment gateway might be limiting your growth, so it’s important to consider the different factors that go into this choice. For example, you should consider:

  • Does the payment gateway allow for recurring billing? If you’re using a subscription model for your business, then this is an essential feature. You can use this to customise payment plans, automatically collect payments and send out reminders.

  • What kind of payment analytics do they provide? Detailed data can give you a better picture of how your business is performing and the steps that you can take to improve it.

  • What kind of protection against fraud is offered? Online payments can be risky, and fraud can negatively impact your business through chargeback fees. Ensure that the payment gateway offers strong fraud protection to avoid this.

What is a merchant account?

A merchant account works together with the payment gateway to process payments. The payment gateway will deposit any funds from your sales into this merchant account, which can then be transferred into your business account. In this way, it acts as a kind of intermediary or holding place for funds as they are being transferred from the customer to your business.

The merchant account is different to the business account, as you have no control over the funds. Any money in your merchant account will remain there for a certain period, and this is used to account for the risk in your transactions. For example, a customer might decide that they want a refund, and if so the money will be deducted from the merchant account.

What are the different types of merchant accounts?

You might be wondering which merchant account is best for you, and there are a number of different things that make them different.

Firstly, you should consider whether the merchant account allows for payment in multiple currencies. If you do business globally or are looking to expand, this is of course an essential feature. Secondly, some merchant accounts offer ‘shared’ or ‘aggregate’ accounts, which means that your information will be combined with other merchants using the service. This can be either an advantage or a disadvantage depending on how your business operates. Finally, different merchant accounts will have a different approval process when you apply for the account, which may affect your decision depending on the level of risk involved in your transactions.

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