Payment Gateway vs. Merchant Account

Selling online is a fantastic way to expand your business and to open up a world of new opportunities. However, for many new online merchants the process of selling online can seem complicated and getting set up can potentially be a difficult process. Failing to understand the basics of ecommerce and simply setting up a payment system with the first bank or service provider you come across can be a recipe for disaster.
When selling something online you will require both a payment gateway and a merchant account. Knowing the difference between the two is essential information when setting up an ecommerce website and getting your product or service online. By understanding the difference between the two, why they are required, and what they actually do, you can save yourself from unexpected and unnecessary fees. This is important information in particular for small to medium sized businesses where the margins may not be very large when first setting up online.
In this guide, we will explain the difference between a payment gateway and a merchant account, how they relate to each other, and other essential information for those new to ecommerce or those looking to stop excess fees.

What is a Payment Gateway?

A payment gateway is a service that processes credit or debit card transactions on behalf of your company. When a customer enters their payment details on your ecommerce website, they enter their credit card information including the long number, expiry date, and CCV code. This information is then sent to your payment gateway by the ecommerce website so the transaction can be authorized and the payment processed.
The payment gateway checks to ensure the information entered matches the information that is on file with the institution which issued the card and if it does and there are enough funds in the customer’s account, the transaction is authorized and the payment gateway transfers the money from the customer’s account to your account. The account which the money lands in is called the merchant account.

What is a Merchant Account?

Payment gateways are generally discussed more than merchant accounts, however, it is generally merchant accounts which are the more complicated of the two. A merchant account is essentially a bank account which is located online and is designed to temporarily hold funds from transactions until the money is moved into an actual bank account where it can be withdrawn.
Once a sale is made, the money from that sale is transferred into your merchant account where it will generally sit for between two and seven days until it is automatically transferred into your actual bank account. The account it is transferred into is the one you would use deposits for and consider as your everyday account. The best way to think about a merchant account is to consider it as a place which temporarily holds your funds from online sales.

Merchant Account Types – Dedicated Vs Aggregate

There are two types of merchant accounts available for online businesses. A dedicated merchant account is one which is set up just for your online business. Using a dedicated merchant account allows you to negotiate custom rates and fees for your sales with the rates generally based on the volume of sales your business makes online as well as the type of products you sell. If you like the idea of having more control over your money and like having the ability to negotiate custom rates then a dedicated merchant account could be a viable option. However, this type of merchant account also requires an in-depth credit check and underwriting process.
An aggregate merchant account, on the other hand, is one where money from your sales lands into an account with a number of other companies. The process of getting an aggregate merchant account is far less complicated and much faster than a dedicated merchant account. This is a viable option for small to medium sized businesses. The only downside to an aggregate merchant account is that you have a little less control over how long it takes you to get your money and the rates are usually non-negotiable.

Can You Have One Without the Other?

It is possible to have a payment gateway without a merchant account, in which case customers are redirected to the gateway’s site to complete a purchase. A good example of this is PayPal. However, if you want to keep customers on your website when they make a transaction you will require both a payment gateway and a merchant account. It is generally beneficial to keep customers on your site during the payment process as it gives you more control over the checkout process.

Compatible Services

Many payment gateways offer an integrated merchant account to help ease the process of getting set up online. However, it is also possible to separate the two if you desire. If you decide this is the best way to save fees and get a better rate it is essential to ensure that both the payment gateway and merchant account you choose are compatible before you sign up and sign a contract. One of the most important aspects of a payment gateway and merchant account is that the system is smooth and uncomplicated for both your customers and for you as a merchant.

Getting Your Money

If you are able to obtain a dedicated merchant account, the longest it will take for you to receive your money is approximately two days. This is the length of time between the sale occurring on your website and the money landing in your ‘actual’ bank account. However, with an aggregate merchant account the length of time between the sale and the money landing in your everyday bank account can be up to seven days.

For more information about payment gateways and merchant accounts, or to get free quote, contact EthosPay today. We will set up a payment gateway and merchant account for your ecommerce business without any fees, offer fast approval to businesses who have been declined elsewhere, and offer first class ongoing customer service to all clients.