Merchant Acquirer vs Payment Gateway: Know the Difference

If the payment processing ecosystem was a theatrical production, the merchant acquirer would play the role of backstage manager. The acquirer facilitates the authorisation and settlement of transactions, acting as a liaison between businesses and the issuing banks. The payment gateway, in contrast, is more like the stage, where the customer payment data is securely collected and transmitted.

What is a payment processor?

The term payment processor is very general. It has become something of a 'catch all' term for the many various entities involved that processes payment transactions.

Both acquirers and payment gateways are often referred to as payment processors. But this is where the confusion comes in. They are distinctly different.

The processor passes the transaction messaging to the merchant acquirer, whereas the acquirer manages the merchant's account.

What is a merchant account?

A merchant account is a business account that allows companies to accept card payments. It is different from a business bank account. The merchant account deposits funds from card sales into the business bank account.

The merchant's bank with whom they hold their deposit accounts will often be a popular choice for providing payment acquiring services. However, these can be expensive with relatively old technology and features.

What is a merchant acquirer?

A merchant acquirer, also known as an acquiring bank, is a financial institution (or a bank) that helps companies process credit and debit card payments. This is the entity that holds a merchant's account and accepts the deposits from the merchant's sales.

The below four steps highlight how acquirers typically work.

1. After the payment gateway has captured and encrypted the transaction data, the payment processor forwards the transaction information to the merchant acquirer.
2. The merchant acquirer then sends this information to the issuing bank via the card network, such as Visa or Mastercard.
3. The issuing bank verifies whether there are sufficient funds in the customer's account and decides whether to accept or decline the transaction. If the transaction is approved, the issuing bank transfers the funds to the merchant acquirer.
4. The acquirer deposits the funds into the merchant account, typically within a few working days.

Authorisation, clearing and settlement

These steps fall into three stages:

The payment gateway is only involved in authorisation. Clearing and settlement are handled by the acquirer, which is why the acquirer, not the gateway, controls when merchants get paid.

What is an issuing bank?

An issuing bank is the cardholder's bank that issues the credit or debit card. It approves or declines each transaction based on available funds and its own fraud checks, and it is the bank a cardholder contacts to dispute a payment, which starts the chargeback process on the acquirer's side.

What is a payment gateway?

A payment gateway is the interface that collects, verifies and transmits the customer's payment information and transaction details to the merchant acquirer. It also informs the customer and the merchant whether the transaction has been approved or declined.

A payment gateway is generally used to enable merchants to accept online payments such as purchases made via an eCommerce store.

The three steps below highlight how the payment gateway typically works

1. The customer initiates the payment journey when they enter their card details into the checkout of the eCommerce website. That's when the gateway starts processing the payment information and initiates the encryption process.
2. The encrypted information is then securely transferred to the cardholder's bank via a payment processor and a card network.
3. The payment is then either authorised or declined by the customers' bank. The merchant and the customers are then informed of the outcome of the authorisation process.

Security and authentication at the gateway

Because it handles raw card data, a payment gateway must maintain PCI DSS compliance under the Payment Card Industry Data Security Standard. Gateways use encryption and tokenization to keep card details out of the merchant's own systems, which reduces the merchant's compliance scope and lets returning customers pay with a saved card.

For online payments in Europe, the gateway also runs 3D Secure authentication. This is how merchants meet the Strong Customer Authentication (SCA) requirements of PSD2, and when a cardholder is successfully authenticated, liability for fraud-related chargebacks generally shifts from the merchant to the issuing bank.

What merchant acquirers & payment gateways have in common

Merchant acquirers and payment gateways are both part of the payment processing system and have a direct relationship with each other.

All eCommerce businesses need to use a payment gateway and a merchant acquirer to process electronic payments including credit and debit card transactions. Many payment service providers (PSPs) bundle both into one contract, so the merchant signs a single agreement while the two functions still run separately behind it.

Merchant acquirers vs. payment gateways: The differences

The difference between a merchant acquirer and a payment gateway comes down to five areas.

1. Nature of the business

One essential difference is the nature of the organisation and role in making digital payments happen.

The payment gateway functions as a technical limb of the payment processing system. Using technology, gateways act as the interface for the transaction and receive information related to the transaction result.

A merchant acquirer is likely to simply be a bank or a financial institution. In contrast, a gateway is more of a technological component of the payment system.

2. Types of transactions

Payment gateways are primarily used in card-not-present (CNP) transactions.

A merchant acquirer, on the other hand, is used in both CNP and in-store transactions.

3. Role in the transaction process

The payment gateway is the interface of the payment processing system. They:

Compared to gateways, merchant acquirers facilitate the authorisation and settlement of transactions between the business and the issuing bank. They also:

4. Relationship with the merchants and with the customers

Payment gateways have a direct relationship between the merchants and the customers, holding and processing credit and debit card information for transactions.

By providing and managing merchant accounts, acquirers have a direct relationship with the business. However, the merchant acquirer does not have a direct interaction with the customer.

5. Relationship with card networks and issuing banks

Payment gateways do not have a direct relationship with card networks and/or the issuing banks. The communication is facilitated via the payment processor.

Unlike gateways, merchant acquirers communicate directly with the issuing bank through card networks. Acquirers are members of card networks, and they usually have agreements in place to process transactions on the networks. Card networks such as Visa and Mastercard set the rules acquirers must follow and charge scheme fees for every transaction they route.

Costs for E-commerce Merchants

There is no one-size-fits-all fee for payment gateways. Companies that offer payment processing services charge different fees. These typically consist of:

Some may also charge a fraction of each purchase.

By comparison, merchant acquirers usually charge a transaction fee on every payment. These fees usually depend on the type of card used for the payment (debit vs credit cards).

That transaction fee combines interchange fees paid to the issuing bank, scheme fees paid to the card network, and the acquirer's own margin. Under an IC++ pricing model, these three components appear separately on the merchant's statement, which makes acquirer costs easier to compare.

There are also fees related to the maintenance of the merchant account and rental fees for the card machines (if needed).

Conclusion

Merchant acquirers and payment gateways are pivotal in the processing of card transactions.

A merchant acquirer handles the authorisation and settlement of transactions between businesses and issuing banks. They manage merchant accounts, verify transaction details, and assume risks associated with card transactions.

A payment gateway serves as the technical interface of the payment process, collecting and encrypting customer payment information and conveying transaction outcomes to both customers and merchants.

They do not directly interact with card networks or issuing banks. Instead, they communicate through payment processors.

While payment gateways maintain direct relationships with merchants and customers, merchant acquirers primarily engage with businesses, managing their accounts and ensuring funds settlement post-transaction approval.

Terminology is often used interchangeably, so understanding what you need from payment service providers is key. Be sure to communicate your needs to each potential service provider as you gather service and pricing information.