The Difference Between Merchant Accounts, Payment Gateways and Third Party Processors

Many questions arouse after having read about e-Commerce merchant accounts and credit card processing. When trying to clarify the technology behind online credit card processing and the terminology we try to provide the most up-to-date information and a comprehensive knowledge base. Many future and current e-Commerce merchants find it difficult to understand some instances of online credit card processing and it’s up to us, e-Commerce merchant service providers, to make things seem and, more importantly, feel easy. One of the most hard to understand things when dealing with online CNP (card not present) transactions is the mixing up of the terms used and their corresponding definitions. We will try to explain the difference between the three most commonly mixed up terms used in online/e-Commerce credit card processing: a) e-Commerce merchant accounts, b) payment gateways, and c) third party processors.

Let’s start with the basics on a) e-Commerce Merchant Accounts:

An e-Commerce merchant account allows any (or almost) online business (also known as an e-Business or e-Commerce business) to accept credit cards/debit cards, gift cards and other forms of payment cards online based on the CNP (card not present) transaction principals, including MOTO (mail order/telephone order) transactions. e-Commerce merchant accounts can also be referred to as: online credit card payment accounts, online credit card processing accounts, credit card transaction accounts, and others. An e-Commerce merchant can get an e-Commerce merchant account from a merchant bank or a merchant service provider in his/her local area (city, state, country) or in another country (offshore/international e-Commerce merchant account). An e-Commerce merchant account is basically a service for which e-Commerce merchants apply, and thereafter use online credit card processing services; just like you would expect an e-mail account to work for you providing SMTP and POP3 (i.e. e-mail transmission) services.

E-Commerce merchant accounts are acquired from either merchant banks or MSP (merchant service providers), as already stated above. The process of acquiring, or applying for, an e-Commerce merchant account is different and depends on the provider itself (terms, guidelines and conditions), the type of e-Commerce merchant account and the e-Commerce merchant. For example, some types of e-Commerce merchant accounts can be setup in just a few minutes, while others will take days to approve a merchant. Fees and rates will also differ much.

Some of the types of e-Commerce merchant accounts are:

• Direct e-Commerce merchant account – a type of account usually applied for directly at a merchant bank.
• Local e-Commerce merchant account – an e-Commerce merchant account in one’s home country.
• Offshore e-Commerce merchant account – an account outside the country of the applying e-Commerce merchant. Also known, in some cases, as an international merchant account.
• High-risk e-Commerce merchant account – a merchant account for online businesses with a high percentage of chargebacks and returns; for example, adult, IP telephone cards, internet gambling, etc.
• Third-party e-Commerce merchant account – see below for a basic explanation on 3rd party merchant accounts.
• Pharmacy e-Commerce merchant account – a specialized merchant account designed specifically for online pharmacies and drug e-Stores.

b) Payment Gateways:

A payment gateway can be called the relay between the e-Commerce merchant account affiliated website (online shop) and the merchant bank, which is also connected to a large network of credit card issuing banks. One of the other main functions of credit card processing payment gateways, besides communication, is encryption. A payment gateway uses SSL 128-bit encoding technology to encrypt and decrypt all the data being sent through it. Safety and security in online credit card processing is a very vital point. Without encryption all the credit card holders’ data could be stolen and used illegally.

Understanding how a payment gateway works is important as to know, for example, why and where an error occurs that may lead to unsanctioned use, malfunction, etc. Thus, we bring you a brief step-by-step working cycle of a typical (no auxiliary/external verification/encoding/protection systems engaged) payment gateway:

• A cardholder/customer orders a product or service at an e-Commerce merchant’s website by clicking the ‘Order’ or ‘Send to Shopping Cart’ buttons.
• The cardholder is taken to an automatically generated (by an integrated shopping cart script) order form, where he/she is asked to provide the credit card details and the shipping details.
• After clicking the ‘Submit Form’ button at the bottom of the form(s) all the data is encrypted (SSL 128-bit) by the cardholder’s web-browser, a key is generated and passed on, along with the details, to the e-Commerce merchant’s payment gateway.
• The payment gateway (if function available and switched on) decrypts some of the information (only for statistical usage, no credit card details are held), re-encrypts it and forwards it to the e-Commerce merchant’s acquiring bank.
• The acquiring bank forwards the data to the credit card issuing bank for verification and authorization.
• The issuing bank sends a so-called response code back to merchant bank, and the latter sends it to the payment gateway. This response code is used to denote any error that might have had occurred during the verification or transaction process.
• If everything is in order the credit card is billed and, usually, at the end of the day the funds are transferred to the merchant bank, where they are safely deposited until the payout day.
• The e-Commerce merchant’s website also generates feedback based on the response code received by the payment gateway. Some of the codes may be interpreted as: “You card has been billed.”, “Error. Insufficient funds.”, and so on.

The whole process takes only a few seconds. The important part that payment gateways play in online credit card processing is evident and must never be underestimated. Make sure that you get a secure, stable payment gateway with much flexibility and third-party options.

Finally, c) Third party processors:

Third party processors are what e-Commerce merchants get when getting third party merchant accounts. For more information on 3rd party merchant account visit our “Merchant accounts” section in our Articles knowledgebase. Basically, third party processors are connected via an additional secure payment gateway to a direct credit card payment processor. A third party processor contributes to the work of the direct processor, sharing its’ expenses, i.e. paying much less. Many third party processors make up a network of e-Commerce merchants sharing one secure direct merchant account. Third party processors are great for beginner e-Commerce.

To sum everything up, and to differentiate the mixed up terms e-Commerce merchant accounts, payment gateways and third party processors:

An e-Commerce merchant account is a whole service, a solution allowing e-Commerce merchants to accept credit card payments over the Internet; a payment gateway is one fragment of a whole system (chain of elements) involved in online credit card processing, functioning as a secure ‘relay’; a third party processor is a type of e-Commerce service which makes up a network of direct merchant account affiliated e-Commerce merchants.

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