Merchant Account vs. Payment Gateway

Oct 26, 2022 by Kelsey Banerjee

Over the past decade, payment processing has changed, often for the better. And as online payments become the norm, the payment process becomes more complicated. For finance teams looking to build out their payment strategy, it's about more than payment options. It's joining hands with the right merchant service providers.

And the trend is here to stay.

Analysts predict that cashless payments will double by 2030. And in the United States, it's poised to move even faster, with digital B2B transactions believed to reach $1.5 trillion in 2024, up 742.697% from 2020.

For B2B organizations, this means investing in their payment infrastructure. Processing payments efficiently and securely, with more access to customer payment data, translates into better visibility and healthier cash flow.

But it all starts with figuring out what components you need. Can you get away with just purchasing a payment processor for credit card processing? What about ACH and bank-to-bank payments? And will your solutions fit with your ERP?

It can be overwhelming, but it's often easier than it sounds. Choosing the best payment solution often begins with selecting a payment gateway and merchant account.

But before we get there, let's talk a little bit about getting paid.

First: The Problem with Getting Paid

Most businesses go through stages of expanding their payments network because as they scale, a simple business bank account isn’t enough.

And it’s usually the CFO and the accounting team that gets to deal with designing the most efficient system. But every account receivable pro knows that getting paid and getting paid efficiently are two very different things.

And with the payments revolution and dozens of vendors handling every part of the accounting process, there’s more to consider than your select ERP.

What makes matters more complicated is that each payment method has its own complex process. And you need to factor those issues in when setting up your invoicing system.

After all, just consider how cumbersome credit card payments are. We probably don’t have to tell you, but just take a look at the key players for every transaction:

  • The Issuing Bank, or the customer’s credit card issuer, deducts the transaction from the customer’s account.
  • The Acquiring Bank (AKA your bank provider) adds the funds to your account minus fees from the other middlemen.
  • The Card Network (Visa, Mastercard, American Express, etc) you accept takes a percentage fee of the payment.
  • The Credit Card Processor takes a fee for processing your payment and generally coordinating the transaction between all the parties.
  • The Payment Gateway is what sends information to the credit card processor. It may require a percentage of each transaction or a flat fee based on your overall transaction volume

Bank-to-bank transfers and ACH aren’t much different-although the processing cost is usually less than credit card payment costs.

Either way, most businesses need two things to begin accepting payments online: A merchant account and a payment gateway.

What is a Merchant Account, and Why Would You Get One?

A merchant account essentially holds and collects transaction information. Once the information is verified, it passes the funds to your business bank account. Think Stripe or PayPal.

If you plan to accept credit card payments, merchant accounts are pretty much mandatory. And there are several benefits to investing in a merchant account, such as:

  • More sales
  • Better customer experience
  • Tap into new markets, including international customers

What is a Payment Gateway?

If the merchant account is your transaction hub, the payment gateway is how you bring payments into your platform. Basically, it’s where your customers check out and add their payment information, which is eventually sent to your merchant account.

The benefit of having a gateway is that your customers can fill out payment information themselves. And depending on your solution, the payment portal will likely be secure and compliant, which mitigates your risk of fraud.

Is a Payment Gateway the Same as a Payment Processor?

No, payment gateways and payment processors are different, even though they are similar. While a payment gateway sends the initial payment information to your merchant account, a processor actually connects with all the different networks and moves the money.

Generally speaking, a payment processor tends to be a mainstay of Point-of-Sale (POS) systems, which don’t necessarily require a payment gateway.

But as more and more businesses use virtual terminals for both in-store and online purchases, there is a shift to using both for a seamless experience.

Merchant Account vs. Payment Gateway: What are the Differences?

The easiest way to compartmentalize the two is that a merchant account moves funds, and a payment gateway moves information. You’ll need both to process credit card and debit card transactions.

Another way to look at these two concepts is by who uses them. A merchant account is used by the business to move transactions into its business bank account. But a payment gateway is used by the end customer to pay for a service or product.

Both do have some similarities, however:

  • For pricing, both services tend to take a percentage with an additional fee for each transaction. Merchant accounts take up to 5% with a +$0.30 charge, while payment gateways can cost up to 3% + $0.10 per transaction. That said, some vendors will have flat fee rates.
  • Both can often be accessed via the web or mobile app.
  • Depending on your solution, you can integrate your merchant account or payment gateway into your ERP.

What to Look for In a Payment Solution

Let’s face it: Finding the perfect payment solution isn’t exactly a bundle of fun. There are many options out there — the good, the bad, and the ugly. So how can you determine which payment solution is right for your business?

There are a few different features to consider outside of their integration with your other applications:

  1. Budget — Every purchase needs to be justified, and that’s no different when looking at payment solutions. Flat fee pricing based on volume is often better than individual transaction fees. However, it’s also important to consider how much you will save. If, for example, you save up to 50% on receivables, that’s a pretty big win. Recognizing the solution’s potential can affect your budget and make “expensive” products more affordable.
  2. Security — Accepting payments through third parties is a significant risk. We can’t speak for every solution out there, but at Paystand, we use secure AES-256 encryption and fund-on-file tokenization. We also maintain PCI DSS and SSOE 1086 compliance to all transactions and sensitive data are safe.
  3. Usability — At the end of the day, two groups of people need to be able to use your payment solution: The finance team and your customers. The interface needs to be intuitive for both parties. And ideally, you’ll have a self-service payment portal for customers that gives them various payment options.
  4. Payments Network — What kind of payment options your provider has, and how extensive their network makes it easy to determine how convenient their solution will be for end-users? For example, you want a provider with a large bank network if you plan to take ACH or bank-to-bank payments. And if you accept credit cards, they should be able to process payments from all major card issuers.
  5. Strategic Features — Want to incentivize ACH by making it “free”? What to charge a convenience fee for credit cards to discourage their use or at least cover processing fees? What about automating the collections workflow? Payment platforms that offer these kinds of features can help you fine-tune your payment strategy, reduce DSO, and improve cash flow.
  6. Enhanced Data — Your solution should provide end-to-end visibility into the payment process. With additional analytics, it’s easier to slice and dice reports and optimize your payments strategy.

Take Your Payments to the Next Level

Often called the Venmo of B2B transactions, Paystand is an end-to-end payment solution that can process just about any payment option—checks, eChecks, ACH, credit cards, debit cards, bank-to-bank transfers - you name it. With our seamless invoicing and "pay now" functionality, your customers can effortlessly and securely send and store payment information. And we integrate with all major ERPs, including NetSuite, Sage Intacct, WooCommerce, and Xero.

Clients have seen up to 60% decreases in DSO, 50% in savings on account receivables, and more.

Find out if our platform meets your needs in a short customized demo today.