Organizations that generate revenue via point-of-sale payments—or online payments and other card-not-present transactions—interact regularly with payment service providers, payment processors, and payment gateways to make payment processing possible. These intermediaries allow customers, merchants, and banks to communicate and exchange information to complete the payment process.
If you’re a merchant or vendor, you’re probably familiar with the terms “gateway” and “payment processor.” You might have even heard them used interchangeably with another popular payment term, “payment service provider.” Although there’s considerable overlap between a processor, a provider, and a gateway, these terms generally mean different things.
Each is integral to the processing of payments, but it’s important to understand their specific roles and responsibilities—and how they differ. Find out more about the difference between a payment gateway vs credit card processor vs payment service provider below.
Payment Service Provider (PSP) Definition
Payment service providers (PSPs) are the vendors or third-parties that provide payment services to merchants and other organizations that accept card payments. Because a PSP can be considered any entity that offers a payment service, both processors and gateways fall under that umbrella despite not always offering identical services. This is where it can get a little confusing, as the terms PSP, payment processor, and payment gateway are often used interchangeably—even when a PSP might not necessarily be both a processor and a gateway. So, when discussing these entities, it can be helpful to try to be as specific as possible.
PSPs: Payment Processor Definition
Payment processors serve as the threads between merchants and financial institutions. They allow merchants to interact with banks and other financial entities so that they can exchange payment information to accept various payment methods such as credit card payments and debit card transactions. These entities also connect credit card machines at the point of sale to banks and merchants.
Examples of popular payment processors include Square, BitPay, MerchantOne, and Flagship. These organizations are responsible for overseeing the exchange of payment data that occurs during the physical or in-store payment process.
PSPs: Payment Gateway Definition
Similar to payment processors, payment gateways also facilitate the exchange of credit and debit card data. A few popular gateways are PayPal, Stripe, and Authorize.net. They are the connections (or "gateways") that allow merchants, service providers, acquiring banks, issuing banks, and the customers themselves to interact via ecommerce channels. Without a payment gateway, merchants would be unable to connect to the parties and services they need to process online, digital, and other card-not-present transactions.
What is the Difference Between a Payment Gateway vs Credit Card Processor?
As we outlined above, although payment processors and payment gateways can both be considered payment service providers, that doesn’t necessarily mean they are the same thing. A simple way to think about the difference between a payment gateway vs processor is that gateways are responsible for exchanging data via card-not-present channels, whereas processors are responsible for exchanging data via card-present channels.
We've now established that although payment processors and payment gateways are both considered payment service providers, they offer different services. However, to further complicate matters, some PSPs function as both processors and gateways, providing comprehensive payments coverage for card-present and card-not-present transactions.
So the important takeaway here is to understand that despite the fact that a PSP can be both—or exclusively—a processor and a gateway, none of those terms are uniformly interchangeable. Again, to avoid confusion, we recommend being as specific as possible when discussing the roles of payment service providers. Describe the actual service they are providing rather than relying on the sometimes unclear acronym "PSP."
The illustration above represents a processor (left) and a gateway (right).
Payment Gateway vs Credit Card Processor: What You Really Need to Know
The transfer of cardholder data from merchant accounts to bank accounts is subject to Payment Card Industry Data Security Standard (PCI DSS) compliance, so the secure processing of this sensitive payment card information is a requirement. Payment processors work with chip-reader, PIN-pad, and other POS devices to protect and authenticate transactions, and gateways are likewise responsible for ensuring PCI compliance solutions are in place for authenticating online transactions.
Unfortunately, the same level of regulatory compliance obligations for security do not exist within other areas of the payment services industry. For example, there's no requirement that says a payment processor or payment gateway can't prohibit you from integrating with multiple PSPs or charge you for retrieving your tokens.
In fact, the payment services industry benefits from restricting merchants in these ways. As a whole, PSPs generate more revenue by establishing hooks such as processor lock-in, layered services, complicated conversions and integrations, and other operations that make it difficult for merchants to add new processors/gateways or leave their existing ones.
It's easy to recognize that the ability to integrate with multiple PSPs is a far superior setup for merchants because of the additional flexibility, affordability, and redundancy it provides. However, because the gateways, processors, and other payment service providers hold the leverage and benefit from difficult migration processes and other restrictive practices, they have no business incentive to change the way they operate.
As organizations scale, these issues become even more problematic. Enterprise conversions can be arduous, partly because of the technical complexity of handling systems and record volumes of that size and partly because of the value of existing customers and the subsequent cost of potentially losing them. So it's no wonder that many PSPs actively work against these operations.
As a result, PSPs also often limit organizations' ability to pursue multivendor partnerships or relationships. This further restricts businesses and contributes to the "processor lock-in" that protects gateways, processors, and other providers from losing business.
Payment Gateway vs Credit Card Processor: Best Practice Recommendations
By working with a third-party vaulting service or tokenization provider such as TokenEx, organizations can free themselves from the limitations of traditional PSP agreements. Securely storing your tokens in an independent cloud environment that can connect to nearly any processor, gateway, or other service provider gives you more leverage and freedom in determining your third-party relationships.
Additionally, working with multiple processors and/or gateways can enable infrastructure growth to expand your reach into new markets. It provides the flexibility and autonomy to offer integrations with more service providers, meaning easier connections that support multiple gateways and payment options.
Finally, more processors and/or gateways mean more fallbacks. Having a reliable backup or contingency plan affords you the freedom to pivot if a PSP goes down or you decide you no longer want to work with your primary processor or gateway.
TokenEx’s Cloud Security Platform supports multiple PSPs by facilitating the transmission of data to any API endpoint. Our simple integrations for third-party services and relationships allow you to build the digital ecosystem you need to streamline business processes and drive positive outcomes.