Let’s Get Paid: Payment Gateways vs Merchant Accounts

Congratulations on starting your business! Now that you’re ready to accept payments, it’s important to understand the difference between payment gateways and merchant accounts. Both are crucial tools for handling electronic payments, but which one is right for your business? Let’s dive in and explore the basics.

Breaking Down the Basics

A payment gateway is the online equivalent of a physical point-of-sale device. It’s a secure portal that authorizes transactions between a customer’s bank and yours. Payment gateways allow you to accept credit cards, debit cards, and other electronic payment methods. Merchant accounts, on the other hand, are bank accounts that allow you to accept payments directly. Think of them as virtual cash registers that hold your money until you transfer it to your business bank account.

The Benefits of Payment Gateways

Payment gateways are convenient, fast, and easy to set up. They usually come with fraud protection and chargeback management features, which help protect your business from fraudulent transactions. Some payment gateways also offer customizable checkout pages that match your brand, as well as customer data management tools that enable you to analyze and optimize your sales funnel.

The Perks of Merchant Accounts

Merchant accounts are ideal for businesses with high transaction volumes, as they can save you money on processing fees. They also give you more control over your money, as you can choose when to transfer funds to your business bank account. Merchant accounts also offer more flexibility and customization options, as you can negotiate your processing rates and fees with your bank.

Which One is Right for Your Online Transactions?

Using a merchant account for online transactions from your WordPress website can present several challenges compared to using third-party payment processors like Stripe or PayPal. Here are a few potential challenges:

Technical Integration

Integrating a merchant account with your WordPress website may require technical expertise or developer assistance, which can lead to additional costs and time to set up. Here are a few potential factors that can impact the cost and time involved in the integration process:

Customization: Integrating a merchant account with your WordPress website may require custom coding to ensure that the payment gateway works seamlessly with your website’s checkout process. This customization can increase the cost and time required for integration.

Testing: Before going live with a merchant account, thorough testing is necessary to ensure that the payment gateway is working correctly and securely. This testing process can be time-consuming and require developer assistance.

Upgrades: As your website and payment gateway evolve over time, upgrades may be necessary to maintain compatibility and ensure continued functionality. These upgrades can result in additional development costs and time.

Troubleshooting: If issues arise with your payment gateway integration, troubleshooting and resolving those issues can require technical expertise and additional development time.

Overall, the cost and time required to integrate a merchant account with your WordPress website can vary depending on the complexity of your website, the features and functionality required, and the level of customization needed to ensure that the payment gateway works seamlessly with your checkout process. For businesses without the technical expertise or resources to manage this integration process, using a third-party payment processor like Stripe or PayPal may be a more convenient and cost-effective option.

Security and Legal Implications

There can be security and legal implications to using a merchant account for online transactions compared to using third-party payment processors like PayPal or Stripe. Here are a few potential security and legal considerations:

PCI Compliance: Accepting payments through a merchant account requires compliance with the Payment Card Industry Data Security Standards (PCI DSS), which are designed to protect cardholder data. PCI compliance can be a complex and costly process, requiring ongoing attention to security and risk management.

Liability: As the owner of a merchant account, you may be responsible for any losses or fraud that occur as a result of payment processing. This liability can result in legal or financial consequences for your business.

Chargebacks: If a customer disputes a payment and initiates a chargeback, the merchant account holder may be required to provide evidence to support the payment. This can be a time-consuming and potentially costly process.

Data Security: Accepting online payments requires the handling of sensitive customer data, such as credit card information. Ensuring the security of this data is critical to protect both your customers and your business.

Legal Compliance: Depending on your location and the location of your customers, you may be subject to various legal requirements, such as data protection laws or consumer protection regulations.

Using a third-party payment processor like PayPal or Stripe can mitigate some of these security and legal considerations, as these platforms typically handle much of the payment processing and compliance requirements. However, it’s still important to carefully review the terms and conditions of any payment processing platform and ensure that you’re taking appropriate measures to protect your customers’ data and comply with any legal requirements.

Limited Payment Methods

Merchant accounts may only accept specific payment methods, such as credit and debit cards, whereas third-party processors like Stripe and PayPal can offer a wider range of payment options, including alternative payment methods like e-wallets and cryptocurrencies.

Higher Fees

Merchant accounts may charge higher fees compared to third-party processors, especially for smaller businesses with lower transaction volumes.

While using a merchant account for online transactions can offer more control and potentially lower fees, it also presents challenges that businesses should carefully consider before making a decision. Using third-party processors like Stripe and PayPal can be a more convenient and cost-effective option, especially for smaller businesses or those without the technical expertise or resources to manage a merchant account.

What Type of Business Uses Merchant Accounts for Online Transactions?

Here are a few examples of businesses that may choose to use a merchant account for online transactions instead of a third-party processor like PayPal or Stripe:

  • Large E-commerce Stores: Some large e-commerce stores may choose to set up their own merchant account to manage their online payments in-house. This can provide greater control over the payment process and potentially result
    • Walmart
    • Air B&B
    • Uber
    • Amazon
  • Subscription Services: Businesses that offer subscription-based services may benefit from using a merchant account to manage recurring payments, as merchant accounts can offer more flexibility and customization options compared to third-party processors.
  • High-Risk Businesses: Businesses operating in high-risk industries, such as adult entertainment or gambling, may have difficulty finding a third-party processor that is willing to work with them. In these cases, setting up a merchant account with a bank or payment processor that specializes in high-risk industries may be necessary.
  • B2B Businesses: Businesses that primarily sell to other businesses may choose to set up a merchant account to manage their transactions, as these accounts can offer more customizable features and greater control over payment processing.

It’s important to note that each business is unique and there is no one-size-fits-all solution when it comes to payment processing. The decision to use a merchant account or a third-party processor will depend on various factors, such as business size, industry, and resources available.

What Type of Business Will Benefit From a Third-Party Gateway?

Many different types of businesses can benefit from using a third-party processor for online transactions. Here are a few examples:

  • Small and Medium-Sized Businesses: Small and medium-sized businesses* may not have the resources to set up and maintain their own merchant account, making a third-party processor a more convenient and cost-effective option.
  • Startups: Startups may also benefit from using a third-party processor as they work to establish their brand and build their customer base. Third-party processors can offer a streamlined payment process and help reduce friction in the customer experience.
  • Low-Volume Sellers: Businesses that process a relatively small volume of transactions may find that the fees associated with setting up and maintaining a merchant account outweigh the benefits.
  • International Sellers: Businesses that sell to customers around the world may find that a third-party processor like PayPal or Stripe offers greater flexibility and support for international payments and currencies.
  • Businesses with Limited Technical Resources: Setting up and integrating a merchant account can require technical expertise and resources that some businesses may not have. Third-party processors often offer simple integrations and user-friendly interfaces that can be easier for less technical users to manage.

Making the Right Choice for Your Business

The choice between a payment gateway and a merchant account depends on your business needs, size, and budget. If you’re just starting out and have a low volume of transactions, a payment gateway may be the best option for you. If you’re processing a lot of transactions and want more control over your payments, a merchant account may be a better fit.

Now that you know the basics of payment gateways and merchant accounts, it’s time to make a decision. Consider your business needs, budget, and growth plans when choosing a payment solution. Don’t be afraid to ask questions and compare providers to find the best fit for you. With the right payment solution in place, you’ll be able to focus on what you do best – growing your business.

We hope this article has helped you understand the difference between payment gateways and merchant accounts. Remember, both are essential tools for accepting electronic payments, so choose wisely. With the right payment solution, you’ll be able to provide a seamless checkout experience for your customers and boost your bottom line. Happy selling!

*The Small Business Administration (SBA) in the United States generally defines a small business as one that has fewer than 500 employees for most industries and annual revenues of less than $8 million for non-manufacturing industries and less than $38.5 million for manufacturing industries.

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