Payment Gateway vs. Merchant Account

May 3, 2022

When choosing a payment processing solution, the terminology alone can be confusing. 

Add in all the moving pieces – merchants, merchant accounts, processors, banks, gateways, integrations – and things can get jumbled pretty quickly. It’s common to wonder whether all of these parts are even necessary. 

Understanding each piece of the puzzle and knowing how they fit together can give you confidence and peace of mind to know you have found the best solution for your business.

Payment Processing – The Big Picture

An easy way to identify all the pieces is to imagine a typical trip to the grocery store. 

You drive to your local store, fill a shopping cart with your selections, and take them to a checkout lane where your items are tallied. 

You opt to pay by credit card and are directed to “tap, swipe or insert” your method of payment on a device that encrypts the transaction data and sends it off to be verified. 

A few seconds later an “approved” message appears on the screen. You collect your card, receipt, and groceries and head on your merry way. 

Breaking It Down

Online payments work exactly the same way with the same pieces. They just look a bit different. 

Here’s how it all lines up: 

The Store – In the online environment there are three parts to this first entity.

  1. The Merchant is the individual or corporate entity that owns the store. 
  2. The URL is the address of the store. Much like its physical counterpart, it is the exact location where the store can be found online. 
  • Example: is a URL 
  1. The Domain is the part of the URL that tells you the name of the store. This name is the DBA which stands for “Doing Business As”. 
  • Example: is a domain and Easy Pay Direct is the DBA. Most browsers can now find the URL automatically when just the domain is entered.

The Cart – Some Websites are designed with a cart built in. Many times this is a separate “plug-in” or piece of coding that needs to be added. Just like the physical version, it’s a real-time list of the things a customer wants to buy. 

The Card Reader – As in the physical world, this is not actually part of either the cart or the bank. It’s a separate entity that connects the two. In an online setup, this is called a payment gateway

The Processor – Also known as the Processing Bank, this is the entity that does the actual verification and approval of the transaction. The store owner (merchant) must have an account with this entity, known as a merchant account, in order to use their processing services. 

This article will take a closer look at the last two entities for a better understanding of how they work for your business. 

A Payment Gateway and a Merchant Account

Having both a payment gateway and a merchant account may seem redundant. 

One reason for this mistaken perception is that the “combined” services of aggregator processing give a false impression that they are the same thing.

What is an Aggregator?

Many business owners start out using an aggregator payment solution like Paypal, Stripe, or Square. Aggregators are designed to simplify credit card processing for the masses, and they do it really well. 

An aggregator is like a carpool driver for credit card processing. They manage all the complicated parts of having a processing account and let other merchants pay to ride along. 

But instead of sharing a car, they are sharing their large processing account with all the businesses who use their service.

The riders don’t need to know how to drive the car or how to get to the destination. But they still get the result of collecting credit card payments from their customers.

Using an aggregator payment solution is simple, but it gives the false impression that there is only one part to the puzzle, when in fact there are at least two – the gateway and the merchant account. 

Aggregator processing also gives a false sense of security. Most business owners don’t realize that the aggregator can kick them out of the car at any time for any reason. 

If an aggregator doesn’t like the way you smell, you may find your business on hold while you look for another way to accept credit card payments.

Businesses processing less than $30,000 a month usually find an aggregator is sufficient for their needs. But if your monthly processing is over $30k or your risk profile is too steep, you’ll need your own car. 

The Payment Gateway

As we’ve seen previously, a payment gateway serves as the card reader in an online environment.

The primary reason a gateway is necessary is that there are dozens of processing banks and countless types of carts in the e-commerce environment. Each cart needs a way to securely connect to each bank.

Rather than design a unique connection for every bank, known as integration, cart developers can create a handful of integrations that will work with various gateways. 

Gateways then design the integrations that meet industry security standards for all of the processing banks. 

This is an ongoing development process as technology advances, banks change their integration requirements, and more carts are introduced to the online marketplace. 

A payment gateway has two primary functions to perform in this role between the carts and the processing banks:

  1. It collects the details of the transaction, including the credit card information, into an encrypted packet.
  2. It sends that encrypted transaction data to be verified and approved by the processor and then reports back the result. 

The payment gateway generally includes features like transaction reports and a virtual terminal where transactions can be entered manually online. 

More advanced tools may also be available. A few examples include:

  • Encrypted customer data storage
  • The capacity to send invoices
  • Product and inventory management
  • Added security features

In addition to being the “bridge” from a cart to the merchant account, gateway providers like Easy Pay Direct can also help businesses obtain merchant accounts. 

To be fair, this may add to the confusion about the gateway and merchant account being separate entities. But it can also simplify the process of finding the right processor for your business. 

As a gateway provider, we have direct relationships with an extensive network of processing banks and we know which ones cater to which industries and business models. 

The Merchant Account

A merchant account is what entitles the business to use the processing bank’s services. Just as having an account with the wireless provider gives you access to their cellular service. 

In simplest terms, the service being accessed is the processor’s ability to verify the details of a transaction are valid and arrange the transfer of payment from the buyer’s bank to the seller’s bank. 

Some of the details of a transaction that get verified include:

  • Does the cardholder’s account exist? 
  • Does the data provided confirm the person using the card is the cardholder?
  • Is there enough money available to cover the purchase?

If the answer to any of those questions is “no” the transaction is declined. 

At the end of the day, all of the approved transactions are combined into a batch which is then prepared for deposit in the business’ bank account.

Managing Risk

One of the benefits of working with a traditional merchant account is that the right account has more tolerance for risk. 

The processing bank does a thorough review of each business before opening a merchant account so they are aware of the risks involved with every account. 

Some common risk items include things like: 

  • High ticket (cost) products 
  • Recurring payments 
  • Chargeback activity
  • Regulated industries (CBD, firearms, cryptocurrency, etc)

Traditional processors are far less likely than aggregators to close an account without warning based on a risk concern. But maintaining a healthy account assures processors that your business is worth the risk.

Keep It Healthy  

There are several ways to keep your processing account in good condition. 

Use It or Lose It If you are processing $50,000 a month or more, it’s wise to have multiple accounts in action. That way if there is ever a problem with an account your processing can continue uninterrupted. 

But an account that is approved and then sits unused for months may be closed for inactivity. There is no such thing as a “backup account”. 

Maintain a Bank Balance It’s not uncommon for businesses to operate on a thin margin. But take care to leave funds in the bank account to cover unexpected fees or chargebacks. 

Rejected payments can suggest an unhealthy business to processors. If they happen too often, the account may be closed for nonpayment.

Manage Chargebacks If chargebacks are a regular concern for your business, be proactive about keeping them as low as possible. 

A soaring chargeback-to-sales ratio is not only a bad indicator for the health of a business, it’s against the rules of credit card processing companies. 

We Can Help!

Our goal is to make the complicated world of traditional payment processing a little easier. 

One way we can achieve that is to help business owners get the right merchant account with the right processing bank to meet their specific needs as a business. 

Access the Easy Merchant Application to get set up with the payment gateway and merchant account arrangement that’s right for your business.

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