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Accepting payments for a business shouldn’t be hard, but given the multiple ways of accepting payment, whether it’s online, in-store, mobile application, or a SaaS platform, payment gateways and payment processors are always involved.
Although used interchangeably, payment gateway vs payment processor play different roles in a payment lifecycle. Understanding the difference between them is essential to ensure faster settlement, fewer payment failures, stronger security, and to deliver a better customer experience.
Simply put, a payment gateway transmits information related to the payment between the customer, business, and the payment processor by encrypting the data for secure transfer. A payment processor, on the other hand, is the facilitator for electronic transactions between customers and businesses.
Let’s take a deep dive into the difference between a payment processor vs payment gateway.
TL;DR – Key Differences Between Payment Gateway and Payment Processors
Core Function
- Payment Gateway: A technology or software that collects, stores, encrypts, and transmits customers’ payment information. It authorises credit card, debit card, and other digital payment methods information.
- Payment Processor: Processes payments by transmitting payment information submitted through card or bank details from the merchant’s POS system to the card or bank networks. This is an intermediary between the customer’s bank (issuer) and the business bank (acquirer).
Area of Operation
- Payment Gateway: Customer-facing layer, including the checkout page, APIs, and UI elements.
- Payment Processor: Supplies the backend engine that actually moves money between the issuer and acquirer.
Key Responsibilities
- Payment Gateway: Data extraction, storage, encryption, tokenization, and checks for fraud.
- Payment Processor: Handles authorization, clearing, settlement, declines, approvals, and disputes.
Who Needs Them
- Payment Gateway: Any business that transacting money online.
- Payment Processor: Any business that accepts online payments, including cards, digital wallets, etc.
Understanding the Payment Ecosystem – How it Works?
From collecting information to approving a payment, there are multiple players involved;
| Player | Role or Purpose |
| Customer | The end user who initiates a payment by entering card information or bank details. |
| Payment Gateway | Captures, encrypts, and securely transfers the customer’s payment data to the processor. |
| Payment Processor | Communicates with issuing and acquiring banks to authorize, approve/decline, and settle the transaction. |
| Card Networks | Routing systems that move authorization requests between processors, issuing banks, and acquiring banks. |
| Issuing Bank | The customer’s bank verifies available funds and approves or declines the transaction. |
| Acquiring Bank | The merchant’s bank that receives transaction information and facilitates the settlement of funds. |
| Merchant Account | A special account where approved funds are temporarily held before being settled to the merchant’s bank account. |
The core difference between a payment processor and a payment gateway is that the gateway securely captures and transmits customer payment data, while the processor authorizes the transaction and facilitates the movement of funds between banks.
What is a Payment Gateway?
Payment gateways collect a customer’s credit card or debit card details and send them to the payment processor. They are integral to any online payment ecosystem, and every payment gateway has a purchasing page or a checkout page where the customers are supposed to enter the information.
The introduction of payment gateways into the payment lifecycle is to solve three challenges between online merchants and the banking or card network.
- Security
- Connectivity
- Scalability
The purpose?
To make completing payments through online networks safer, automated, and user-friendly. The payment gateways also reduce the compliance burden on merchants as they enable one-click checkouts, which is crucial to eCommerce platforms to ease customer experience, especially when multiple payment methods are involved.
Key Elements of Payment Gateways that Make Them Important
- Security and PCI-DSS compliance: Merchants are not equipped to store and transmit customer information security, payment gateways provide the security layer needed. They encrypt data while ensuring PCI-DSS compliance so that the data flows through a high-security infrastructure, reducing theft and data breach.
- Bridge Merchants and Banks: In a payment flow, the processor is the bridge between banks and merchants as it handles authorization, clearing, and settlement messaging while following the banks’ and card network protocols. The role of the payment gateway is to capture the checkout data and route it to the processor, ensuring secure and seamless communication leading to frictionless checkout.
- Ease of Business for Merchants: Without gateways, every merchant will integrate separately with processors and acquirers. They will also have to maintain those integrations as rules and interfaces evolve. Payment gateways ease their burden by centralizing everything and handles error codes, evolving regulations, and regulatory updates.
- Integrating Modern eCommerce Features: Payment gateways provide higher-level features, including multiple payment method support, recurring billing, saved cards via tokens, fraud rules, and analytics. This has particularly helped eCommerce businesses transact online with international payments.
What is a Payment Processor?
A payment processor is the backend engine responsible for moving transaction data between banks, card networks, and authorizing the processing of a payment. A payment processor makes sure that the funds are transferred to the merchant from the customer.
Core Purpose of a Payment Processor
- Authorization: As soon as a customer submits payment information, the processor sends an authorization request through the card’s network to the issuing bank (or customer’s bank). It checks for card’s validity, funds available, fraud indicators on the card or customer, and merchant risk rules. Through this, the processor returns every transaction with an approved or declined response.
- Clearing: Once authorized, the process then formats the transaction and sends it through the card networks to the banks. The banks then send the transaction into clearing while recording the amount, currency, and merchant ID. It also calculates the fees and interchanges while ensuring everything is done according to the compliance rules.
- Settlement: The payment processor then supervises the transfer of funds from the issuing bank (customer’s account) to the acquiring bank (merchant’s account).
- Refunds and Chargebacks: Payment processors issue refunds on a completed payment in case of an issue and ensure the funds are sent back to the customer’s account. They also investigate and manage disputes initiated by the customer’s bank, leading to chargebacks.
Technical Compliance Responsibilities of Payment Processors
Payment processors, in order to fulfill their duties, must adhere to and follow some strict financial regulations and data standards, including;
- PCI/DSS Level 1 Compliance: Secure handling of sensitive cardholder data.
- Card Network Rules: Visa, Mastercard, RuPay, Amex, and others define authorization, clearing, settlement, chargeback, and dispute guidelines, which processors must follow.
- AML/KYC Requirements: Risk management systems to detect suspicious transactions.
- Network Certifications and Uptime SLAs: Payment processors have to meet performance standards for latency, redundancy, failover, and transaction uptime guarantees.
- Fraud and Risk Monitoring: Real-time risk engines, BIN checks, velocity rules, and fraud scoring.
Difference Between Payment Gateway and Payment Processor
| Parameter | Payment Gateway (PG) | Payment Processor (PP) |
| Primary Role | Captures payment data securely, encrypts it, and routes it to the processor for authorization. | Connects the gateway to banks/card networks and handles authorization, clearing, and settlement. |
| Who They Work With | Merchants, processors, aggregators, banks. | Gateways, banks, and card networks. |
| Key Functions | Tokenization, encryption, routing, fraud checks, and transaction initiation. | Authorization, clearing, settlement, chargebacks/refunds. |
| Merchant Account Needed? | Yes, gateways can connect either to aggregators or individual merchant accounts. | Yes, but they must work with dedicated merchant accounts of businesses or aggregators. |
| Risk Ownership | Low risk as it is mainly a technology service provider. | Medium risk because they have to ensure secure processing, but do not underwrite merchants. |
| Regulatory Requirement | Usually not regulated directly; must comply with PCI-DSS. | Must comply with PCI-DSS, network rules, and banking regulations. |
| Settlement Responsibility | No, they only collect transaction details. | Yes, they need to settle payments to banks and merchant banks, or if there’s an aggregator involved, but they don’t settle with the merchants directly. |
| Technical Complexity | High (tokenization, fraud filters, routing logic). | Very high (real-time authorization systems). |
| Ideal For | Any merchant needs a checkout interface and secure payment capture. | Banks, large enterprises, and fintech infrastructure providers. |
| Examples | Cashfree Gateway, PayPal Gateway, Stripe Gateway. | FIS, Worldpay, First Data, Cybersource Processing. |
How to Choose A Payment Gateway for Your Business Needs?
A payment gateway directly impacts your business as it affects how a customer completes a transaction. Any issue in this process negatively impacts the customer experience and creates friction and abandoned checkouts. So choose your payment gateway provider carefully. Follow this checklist:
Payment Method Performance
Every payment gateway offers all the payment methods popular in the market, so the question is not about the number of ways but how well each method performs. So in addition to ensuring that a payment gateway supports UPI, cards, net banking, wallets, and EMI – also check whether it offers;
- Fallback routing when a payment fails.
- Optimizes the workflow for mobile and web users.
Checkout Experience
Check whether the payment gateway you are choosing can rapidly process payments with a smartly built checkout UI. Also, ensure it has minimal redirects, mobile optimized flows, and offers guest checkouts without forcing customers to create an account.
A better way is to assess the checkout experience on a slow mobile network. Look for performance issues, confusing UI/UX, or if the experience feels heavy; if it’s happening, conversions will suffer.
Security and Compliance
Security is paramount to protect your customers’ financial data and your business’s reputation. Any payment gateway without the following security and compliance components will always cause friction.
- PCI DSS compliance
- Card tokenization
- Secure data handling
- Robust authentication
- Fraud detection
- AVS and CVV Checks
While security is important, don’t overdo it to slow down transaction processing. Adding unnecessary layers of security can also hamper customer experience. So your payment gateway provider needs to have just the right mix of security components.
Reporting, Reconciliation & Analytics
Choose a payment gateway provider that can deliver real-time transaction dashboards, customizable reports, and exportable settlement and reconciliation reports.
Reconciling payments has to be easy; if not, it will impact growth and delay decision-making.
Long-Term Costs and Pricing
When discussing the pricing, go beyond the headline prices. Evaluate the following;
- MDR across payment methods
- Refund and chargeback fees
- Cross-border fees (if applicable)
- Costs tied to volume growth
Payment gateway providers may have hidden fees, like chargeback penalties, currency conversion markups, PCI compliance fees, and fees for failed transactions.
So when you see a payment gateway with low prices upfront, it can easily be a mask for the hidden fees, which means you may end up paying much more than expected.
How to Choose a Payment Processor in India?
A payment processor is the engine that authorizes transactions, routes them through card networks and banks, and settles funds to the merchant. Choose a payment processor using the following checklist.
Authorization Success Rates
The most important processor metric is how many valid transactions get approved. Check for authorization rates for credit/debit cards, UPI, and other modes of payment.
Two providers may support the same payment methods, but one may convert significantly more transactions due to better bank connectivity or any other reason. So, always check reports that mention the success rates.
Banking and Payments Network
Strong payment processors have three USPs;
- Have direct integrations with multiple acquiring banks.
- Have strong issuer bank coverage.
- Full support for Visa, MasterCard, RuPay, and UPI Rails.
Processors with stronger and multiple bank connections are more resilient during bank outages or network slowdowns.
Speed of Payment Settlements
Assess the speed of settlement while considering the timelines (T+1, T+2). Moreover, you need to check the availability of instant or same-day settlements. Payment processors with this capability may be better, but you also need to be sure about the accuracy of settlement.
Any payment processor with inconsistent settlement timelines or frequent mismatches in reconciliation reports has weak processing controls.
Refunds, Reversals & Chargeback Handling
Any payment processor’s responsibility, among many others, is to initiate refunds and reversals without causing any friction to the customers. They need to handle chargeback flows according to the card network rules.
Check their track record for poor dispute handling, and if they have a bad record, it will increase the financial risk and operational overheads for the merchants.
Scalability & Future-Proofing
Go for a payment processor that can support increasing transaction volumes and help you easily expand into new payment methods and regions. Plus, ask if they can also provide regulatory changes without any service disruptions.
As and when your business grows 5x, you need a solid payment processor at the back to support that expansion.
Why Cashfree is the Best Payment Processor for Indian Businesses?
We are India’s leading payment processor and payment services provider. From bringing together payment gateway, processing, payouts, and settlements into a single place, we also handle settlements, recurring billing, and set up risk control mechanisms.
With Cashfree, businesses get;
- Fastest settlement boasting checkout loads in under 200ms.
- 180+ ways to make and accept payments through UPI, cards, EMIs, pay later, and more.
- AI-driven payment routing for maximum success.
- Reduction in RTOs by up to 30% with COD masking.
- Revenue boost of 40% with smart nudging.
In other words, Cashfree does more than process payments; it helps Indian businesses take control of cash flow, reduce payment friction, and scale confidently in one of the world’s fastest-growing digital economies.
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