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May 31, 2021
by David Goodale

The difference between a merchant account, payment gateway and payment processor.

(Slightly edited from video transcript for greater readability)

Key Takeaways

Merchant Account
A merchant account is a special type of bank account that holds funds captured from credit card payments.
Payment gateway
A payment gateway listens for incoming transaction requests. It's the technical thing that your website talks to when it needs a payment to be processed.
Payment Processor
A processor is a payment switch that routes transactions to the various card networks (for example to Visa/MC). The term payment processor is sometimes also used to generically to describe a credit card processing company.
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Hello, David here at Today I'm going to demystify the difference between a merchant account, a payment gateway and a payment processor. These are 3 things that all sound like the same thing, but they're not.

If you understand the difference between them it will make it easier to set up credit card processing for your business.

The Merchant Account

We'll start by talking about the merchant account. This is the part of the system or the transaction flow that facilitates the movement of money. Whenever you take a credit card payment money does actually move. If you need a comparison, a merchant account is kind of like a bank account. The money from the credit card sale gets deposited into your merchant account. Prior to the transaction those funds are sitting in your customers account at their card issuing bank - all ready to be spent. When they purchase from you funds are taken from your customers card put into your merchant account. From there it's sent to your business bank account, either daily or on a weekly basis.

The merchant account is very important from a pricing perspective. In fact, it's the most important fee that merchants pay. That fee is called a discount rate, and it's paid every time a transaction is processed. It's a percentage based fee that you pay whenever you run a card. If you're' confused about this we lots of material to teach you about pricing.

The merchant account is the main cost, so when you are looking at your credit card processing infrastructure this is the most important cost to pay attention to.

This is also where you're going to go look at your statements. The merchant account is where you go to reconcile and balance transactions. It is all of the financial side of the transaction. If you understand this we can look at the payment gateway.

The Payment Gateway

The payment gateway is the technical service that your website interacts with when it wants to process a transaction. That is perhaps a terrible explanation in that it doesn't really explain what it is.

In a Plain English since, a payment gateway is what your website talks to when it wants a transaction to be processed. Like: "Hey payment gateway. I have a transaction that needs to be processed. I want to process $100 for this customer. Here is a credit card number, here's the person's details, can you check and see if they're good for the $100?"

Back into a more technical explanation, your website makes an API call to submit a transaction request to the gateway. The gateway receives the request from your website, and behind the scenes it goes to Visa or MasterCard and ultimately onto the card issuing. The gateway will find out if the customer has enough money for the transaction. If it's approved the funds will be transferred to your merchant account. At the same moment the transaction flow now happens in reverse.

In the same way that your website spoke to the payment gateway, the payment gateway will send a response back to your website. It all happens in milliseconds. If written in plain English the gateway would respond: "Hey you asked me about this customer John like a second ago, to see if he had $100 available on his card. Turns out he did, so the money is in your merchant account. Here is an approval code for your reference in the future".

When broken down to what it is, the payment gateway is just the technical thing that your website talks to when it wants a payment to be processed.

It's very important to understand that your website must know how to talk to the payment gateway. If your building a website, and if you want it to be e-commerce capable, then the website must know how to talk to the payment gateway. The technical term for this is called "integration". The software on your website must be compatible (it must be integrated) to the payment gateway. This is an area we do a fair amount of consulting on at, because if we help our clients set up payment processing but the website isn't compatible, then the merchant won't accomplish their goal of begin able to take payments online. If you have any questions about your project contact us to discuss your business.

As far as costs go the payment gateway is a flat per transaction fee. Where the merchant account is a percentage based fee per transaction, the payment gateway is always a flat cents per transaction fee. For example, like 20 cents per transaction. It is usually called the gateway fee. If we're being really technical accurate, that per transaction fee is like a database query. Every time your system asks the gateway to check a card or run a transaction you incur the per transaction (gateway fee). The only time the gateway fees can become more important than the discount rate is if you do very small tickets. (Average sales of $1 or $2). Other than that the fees for the merchant account will be more important than the gateway.

The Payment Processor

This takes us to the last term: "Payment processor". This term does cause some confusion because non-industry folks like business owners talk about their payment processor, their credit card processor, and their merchant services provider interchangeably. This is generally fine and not an issue.

However, behind the scenes, and I don't want to get overly technical so I'll keep it brief, but I mentioned that when your website has a transaction to process it sends the request to the payment gateway. I had said that the payment gateway then talks to Visa. What I skipped over is that there is a link between the payment gateway and Visa or Mastercard. When a transaction is received, if it's a Visa it's obviously got to go to Visa, and MasterCard has to be routed to MasterCard. A "processor" is the switch that routes the transactions to the card brands, these processing platforms have different capabilities. Some processors might have multi currency functionality, others might have the ability to do things like support a dynamic descriptor. (A dynamic descriptor is where every time you run a transaction you can print something different on the customers credit card statement).

Generally speaking, if you're approaching or discussing payment processing it's better that you use the phrase your merchant account provider / merchant services provider, or your gateway provider. For the layperson some of these terms are interchangeable, but for an industry person when talking about the processor it's talking about the processing switch in the background.


I hope this article has helped to make sense, and demystified a little bit of the difference between a merchant account, payment gateway, and a payment processor.

If you're setting up ecommerce payments for your business, or if you're overwhelmed, reach out to us at

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David Goodale About the Author

My name is David Goodale, CEO at Merchant I launched our business in 2001 and have over 20 years of expertise in the field of online payments. If you have a payments related question or project, and especially if it relates to multi-currency or international e-commerce don't hesitate to contact me. I'm always happy to help with an honest opinion, and enjoy chatting with folks from interesting businesses.

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