PAYMENTS GATEWAY OR PROCESSOR


As a merchant one of the most fundamental decisions that you are required to make is around the model of your online business. Merchants should take into consideration whether they actually require a Payments Gateway or whether a Processor (commonly known as an Aggregator) is a better option for their current needs.

What’s the difference?

The best way to explain the difference between a Payments Gateway and a Payment Processor (or Aggregator) is to provide you with some common examples. An example of Payments Gateway’s in Australia are Merchant Warrior, SecurePay and IP Payments. If you use a Payments Gateway you will be required to establish a merchant facility with a Bank (also referred to as an Acquirer) that is supported by the Payments Gateway.

The most common Payments Processor (or Aggregator) that we all know about is PayPal. When a merchant signs up with PayPal they are NOT required to establish a merchant facility with an Acquirer, instead PayPal handles this on the merchant’s behalf.

PayPal allows a merchant to get up and running very quickly by setting up the merchant facility for the merchant and offering them a Hosted Payment Page solution that can be placed into any website very easily. A Payments Gateway Provider often take longer than PayPal to have a merchant facility established as the process has to go through a number of processes which often takes between 7-21 days (depending on how well the merchant’s website has been prepared).

Generally speaking PayPal is a much more cost effective solution for new online businesses who have no online trading history. As a merchant’s volume begin to grow it will always be more cost effective to switch to a Payments Gateway and establish a merchant facility with an Acquirer.

Cost difference?

Let’s take a look at the costs of both a Payments Gateway and a Processor:

The table above lists PayPal’s standard merchant service fees for establishing an online payment solution. As PayPal is one of the biggest Processor’s in the world this pricing is most probably one of the lowest pricing structures that you will find when dealing with an Aggregator.

There are no annual, monthly or establishment costs associated with PayPal. Other Processor’s do have these costs, however, we will only deal with PayPal in this case.

In comparison to the above, a Payments Gateway will require you to first establish an online merchant facility with a Bank (or Acquirer). An online merchant facility from a Bank will have the following fees associated: Annual, Monthly, Merchant Service Fee, Minimum Monthly Service Fee, Establishment. These fees are explained in the FEES EXPLAINED article. After you have established an online merchant facility with a Bank you will be required to pass this information to a Payments Gateway. A Payments Gateway has two major costs: Annual and Transaction Cost.

In short it’s easy to see from the above information that there are a lot more capital fees associated with a Payments Gateway solution as compared to a Processor. Where the Processor will make their money back is on the large Merchant Service Fee that is charged. Where PayPal charges 2.4% + $0.30 per transaction a Bank may charge anywhere from 0.5%-2% and a Payments Gateway may charge anywhere from $0.15-$0.40 per transaction. Which solution is best for you is determined by the number of transactions and total revenue that your online website is processing or planning on processing.

Choosing between a Payments Gateway and a Processor is a decision that has to be made depending on your current requirements and budget. In the short term if you are looking to keep your capital costs low then a Processor is a cheaper solution. If your business can handle taking a higher cut from the sale of your product then a Processor will come in handy in reducing your capital cost.

What’s best for me?

If you are planning for the future and can afford the capital costs that are associated with a Payments Gateway (Merchant Facility costs and Annual Payments Gateway Cost) then a Payments Gateway will always be the better option. A Payments Gateway will allow you to instantly process transactions, remain PCI DSS compliant (this is covered in the PCI DSS Compliance page), achieve a lower merchant service fee (reduce your business costs) and receive daily settlement to a Bank account which you control. A Processor will not allow you to take advantage of daily settlement and to a lot of companies (start-ups included) this is a major drawback.

If you’re curious to find out if a Payments Gateway or a Processor is better for your business model feel free to call Merchant Warrior -  (07) 3166 5489 for honest advice on the topic.