Overview: Merchant Account vs Payment Service Provider vs Payment Gateway
If you use credit cards, you’ve likely heard of payment gateways and merchant accounts. But do you know the distinction between Merchant Account vs Payment Service Provider vs Payment Gateway? If you are unaware of how they differ, you are not alone.
There’s a misperception that your company needs either a merchant account or a payment gateway, depending on your needs. The two really perform very separate tasks: a payment gateway makes it possible for you to engage in transactions via the Internet, whereas a merchant account acts as a holding account for those funds until they are put into your typical bank account.
In this article, we will differentiate between Merchant Account vs Payment Service Provider vs Payment Gateway. We will individually analyze each of these and would give the difference between the three. Also, we would recommend which one would be suitable for your business.
What Is A Merchant Account?
In this first comparison between Merchant Account vs Payment Service Provider vs Payment Gateway, we will discuss merchant account first. A merchant account can be seen as a special bank account to which all your clients transfer their online payments to it. Online payments can be for buying any product, availing of any services, or purchasing a new subscription. all their payments would first come to the merchant account. all the money in the merchant account can be transferred into the regular account of the merchant once the settlement day comes which is once every week.
Online payments from popular debit and credit cards like Mastercard, VISA, or American Express are only allowed to be collected from an authorized merchant account. An individual merchant id will be given to each merchant after successfully applying for a merchant account. merchant id or MID as abbreviated is a unique code provided by the payment processor to the store owner once they successfully apply for it.
Difference between a high-risk merchant account and a low-risk merchant account
There is a difference between a regular business account and a high-risk business account.
- Low Risk Merchant Account: The most common merchant account is the low-risk merchant account which is mainly used by eCommerce stores. The business would be of high transparency and of low risk. Only one currency would be accepted by the business. There would be fewer returns as well as refund claims.
- High Risk Merchant Account: On the other hand, high-risk merchant accounts are used if your business has a huge return as well as refund claims. Unlike low-risk merchant accounts, multiple currencies are accepted here. Average monthly sales are above 20000 USD and average credit card sales are above 500 USD. Your business is in high fraud countries. High-risk merchant accounts are mainly used for subscription plans, and tickets that are usually considered high risk.
What is a Payment Service Provider (PSP)?
If merchants want to start accepting online payments without using a merchant account or merchant ID then the payment service provider would allow provisions for that. A single merchant account with a single merchant ID is being operated by the payment service provider. When they want to add a new merchant to their service, they would simply create a new sub-account under a big merchant account and all other merchants would be aggregated. This is why a payment service provider is usually called a payment aggregator. This is because they aggregate transactions from over more than 1000 merchants under the same account.
The payment service provider is indeed one of the fastest methods of transaction. But it lacks flexibility and there are chances of fraud if you have a bad merchant as your neighbors since you all share the same merchant ID. there is also the chance of getting your sub-account suspended. There are also chances of getting transaction declines also. This is because since you all use the same merchant ID, the acquiring would usually see you as a single merchant. Collective responsibility is in force if you are using a payment service provider or PSP. If the other merchant in your neighborhood charges with a lot of refunds and frauds then your transactions might get declined or your sub-account might get suspended. Payment service providers also lack customizations as they are using some other entities’ services.
What is a Payment Gateway?
The next option we are checking out in this series of “Merchant Account vs Payment Service Provider vs Payment Gateway” is a payment gateway. It is considered as an interface that is above merchant account and payment service provider. A payment gateway securely collects your transaction details and sends them to the payment processor or acquiring bank. When a customer makes an online payment using payment gateway they don’t interact with your merchant account or payment service provider. But they actually interact with the payment gateway.
Totally we can say that payment gateways work like credit card payment forms on the front end and on the backend, there is transaction encryption as well as verification systems. You have bigger choices of payment gateways if you have a merchant account since most of the merchant account and payment service providers give the service of payment gateway over the other services. Talking about customizations then we can say that there are a lot of customization and optimization options available for the UX of the payment gateway as well as its performance.
Comparison between Merchant Account vs Payment Service Provider vs Payment Gateway
|Payment service provider
|Account approval and adding new members
|Merchant has to go through a lot of verification process which might last through a lot of weeks
|Instant approval and doesn’t need a long verification process
|You can get instant access to payment gateway even before your account gets approval
|Full freedom to implement and integrate with a gateway of your choice
|No freedom or flexibility
|Can be an easy or difficult task.it depends upon the technology you use
|Low chances of having your account getting suspended or getting frozen suddenly
|High risk of getting your account suspended or terminated since a lot of merchants share the merchant ID
|Depends on whether you integrate with a PSP or merchant account
|Will get a dedicated merchant ID and account
|You will get a sub-account under the main merchant ID. you are supposed to share that with thousands of other merchants
|Depends whether you integrate with a payment service provider or merchant account
|Pricing and cost
|You would have flexible pricing options.it would depend upon your business model
|You don’t have the option of flexible pricing. The prices are fixed and nonnegotiable
|Depending upon the integration and usage if you are using a third-party solution
|UX and conversions
|User would have full freedom to customize the UX and the performance
|User would have little to no option to customize or optimize the UX and the performance
|It is fully negotiable
|There are limits
|Does not matter
|Fraud and risk management
|Depends on your provider
|Terms and conditions
|Predefined and not negotiable
|Does not matter
It is essential for everybody involved in online commerce to comprehend the differences between merchant accounts, payment service providers, and payment gateways. The choice depends on the particular requirements of your organisation and how these components will be used to conduct online transactions. The main objective is to give your clients a simple and safe payment experience, regardless of whether you want to manage individual merchant accounts and gateways or select a simplified payment service provider.
Any questions you may have regarding a merchant account vs a payment service provider vs a payment gateway or any other topic can be discussed with our professionals at OnDemand International.
Merchant Account can be seen as a special bank account to which all your clients transfer their online payments to it. Online payments can be for buying any product, availing of any services, or purchasing a new subscription. All their payments would first come to the merchant account. All the money in the merchant account can be transferred into the regular account of the merchant once the settlement day comes which is once every week.
If merchants want to start accepting online payments without using a merchant account or merchant ID then the payment service providers would allow provisions for that. A single merchant account with a single merchant ID is being operated by the payment service provider
It is considered as an interface that is above the merchant account and payment service provider. The payment gateway securely collects your transaction details and sends them to the payment processor or acquiring bank
A payment gateway makes it possible for you to conduct transactions over the Internet, whereas a merchant account acts as a holding account for those funds until they are put into your standard bank account.
A payment service provider (PSP) is a financial organization that permits transactions through the Internet, whereas a payment gateway (PG) is the software that facilitates payments made with credit cards between a merchant and their clients.