How Do a Merchant Account and a Payment Gateway Differ From One Another?

When setting up your online store or upgrading your business’s payment systems, you’ll often hear the terms’ merchant account’ and ‘payment gateway.’ These two components are crucial to enabling seamless payment transactions; however, many business owners often confuse them with one another.

Both tools work together to process payments, yet they serve entirely different functions. You can streamline your payment processes, prevent unnecessary expenses, and ensure a seamless checkout experience for your customers by being aware of these differences.

This guide will explain each concept in detail, demonstrate how they work behind the scenes, compare their costs and security features, and help you identify the best option for your company’s requirements.

Understanding the Basics: Merchant Account vs. Payment Gateway

Before you can decide which payment solution to use, it is essential to understand the meaning of each term. Although often bundled together by modern payment service providers, merchant accounts and payment gateways play distinctly different roles.

What is a Merchant Account?

A type of commercial bank account specifically designed to hold funds from customer credit or debit card transactions is known as a merchant account. Instead of money going directly from a customer’s card to your business’s main account, it first lands in the merchant account.

Until all necessary procedures, including fraud verification, are completed, the merchant account serves as a temporary holding location. Afterward, the money is transferred to your regular business account, usually within 1–3 business days.

What is a Payment Gateway?

Secure technology known as a payment gateway connects your website or physical point-of-sale (POS) system to the customer’s bank or credit card network. It facilitates the authorization of payments by transmitting encrypted payment data between the customer’s bank (the issuing bank) and your bank (the acquiring bank).

You can think of the merchant account as the vault that holds the money, and the payment gateway as the courier that securely delivers payment instructions back and forth between the banks.

Key Functions of Each Component

Function	Merchant Account	Payment Gateway
Purpose	Holds customer payment funds temporarily	Transmits and authorizes payment information
Primary Role	Receives funds from approved transactions	Acts as a secure bridge between buyer and seller
Settlement Time	Typically 1–3 business days	Approves or declines payments instantly
Security	Monitors fraud and chargebacks	Uses encryption and PCI compliance for data security

Why Both Are Important

For a payment to go through successfully online:

• The payment gateway verifies and approves the transaction.
• The merchant account stores the approved funds before they are transferred to your main account.

Without a merchant account, you have no place to receive the money; without a payment gateway, you have no secure means to process the payment details.

Key Takeaway:

A merchant account holds your money, while a payment gateway moves it securely—you need both for smooth and secure transactions.

How Each One Works Behind the Scenes

Knowing what merchant accounts and payment gateways are is only half the story. Gaining knowledge about their interactions during a real transaction may help identify potential areas where fees or delays could arise.

The Step-by-Step Payment Process

Here’s what happens behind the scenes when a customer makes a purchase on your website or at a POS terminal:

• Checkout Begins: The customer enters credit or debit card information at checkout.
• Payment Gateway Activates: This private information is encrypted by the gateway before being safely sent to the payment processor.
• Bank Communication: The payment processor communicates with the customer’s issuing bank to verify whether the funds are available and if the card is valid.
• Transaction Approval or Decline: The issuing bank sends a response of approval or decline through the gateway.
• Funds Settlement: Once approved, the payment processor routes the funds to your merchant account.
• Transfer to Business Account: The funds typically remain in the merchant account for 1–3 business days before being deposited into your primary business account.

Major Players in the Process

• Customer initiates the payment and provides their card details.
• Payment Gateway: Safeguards and securely transmits card data.
• Payment Processor: Handles communication between banks and ensures payment approval.
• Issuing Bank: The customer’s card was issued by the bank.
• Acquiring Bank: The bank responsible for managing your merchant account.

Settlement and Timing

• Instant Approval: The payment gateway verifies and approves or declines a payment within seconds.
• Delayed Settlement: The merchant account holds funds until all fraud checks are cleared, then releases them to your primary business bank account.

Security Measures at Each Step

• Gateway Level: Tokenization, SSL encryption, and PCI DSS compliance are employed to safeguard sensitive card information during transmission.
• Merchant Account Level: Monitors for suspicious transactions and handles chargebacks or refunds.

This cooperation between the two components ensures that payments are fast, secure, and reliable.

Key Takeaway:

The gateway enables authorization within seconds, while the merchant account handles the delayed but necessary settlement of funds, making them interdependent for reliable payment processing.

Comparing Fees, Features, and Security Measures

For many businesses, cost is a top concern. Consider the fee schedules, security specifications, and features of both merchant accounts and payment gateways.

Cost Breakdown

Merchant Account Fees:

• Set up or application fees (some providers waive this for new businesses)
• Monthly maintenance fees for account upkeep
• Per-transaction fees: a percentage of the sale plus a flat fee
• Chargeback and refund processing fees

Payment Gateway Fees:

• Typically, lower setup fees or sometimes none at all
• Per-transaction processing fee (percentage + flat amount)
• Optional premium fees for features like recurring billing or fraud screening

Features That Impact Your Choice

Feature	Merchant Account	Payment Gateway
Flexibility	Better suited for high-volume businesses	Convenient for startups or smaller operations
Chargeback Handling	Directly assists with disputes and refunds	May rely on the merchant account’s policies
Integration	Works closely with payment processors	Integrates with websites, POS systems, and apps
Customization	Can negotiate rates with providers	Often comes with standard pricing tiers

Security Factors to Consider

To protect sensitive data, both systems must adhere to PCI DSS (Payment Card Industry Data Security Standard).

• Merchant Accounts: Monitor suspicious activity and provide chargeback support to protect businesses from financial loss.
• Payment Gateways: Focus on securing cardholder data with encryption and tokenization during online transfers.

Balancing Cost and Performance

• Businesses with high sales volumes may save money by using a dedicated merchant account, as they can negotiate better rates.
• Smaller businesses or startups often prefer all-in-one solutions like Stripe or PayPal, which combine both services for simplicity but may have slightly higher transaction fees.

Key Takeaway:

While merchant accounts offer better control over fees and chargebacks, payment gateways prioritize security and user-friendly integration—choose based on your transaction volume and business priorities.

Choosing the Right Solution for Your Business Type

Every business has different needs, which means there’s no universal “best” payment setup. Your decision depends on factors like transaction volume, industry type, and growth plans.

Best for Small Startups and E-commerce Shops

Startups and small online stores often benefit from all-in-one solutions like , PayPal, or Square. These combine both the merchant account and payment gateway into one package for convenience.

Advantages:

• Faster setup with minimal paperwork
• Simple fee structures, often pay-as-you-go
• Great for businesses that don’t need custom payment features yet

Best for High-Volume Businesses

Mid-sized or enterprise-level companies that process large volumes of transactions often benefit from a dedicated merchant account, along with a separate payment gateway.

Advantages:

• Lower per-transaction fees negotiated directly with providers
• More control over chargebacks and dispute resolution
• Better scalability as transaction volumes grow

High-Risk Industries

Certain industries (like travel, gaming, or CBD) require specialized merchant accounts to handle higher chargeback risks and regulatory requirements.

Benefits of Specialized Merchant Accounts:

• Enhanced fraud detection tools
• Compliance with industry-specific regulations
• Access to dedicated support for dispute management

Brick-and-Mortar + Online Hybrid Businesses

Retailers that sell both in-store and online often need a hybrid solution with a single provider that offers both POS integration and online payment processing.

Key Takeaway:

Startups thrive on simplicity with all-in-one solutions, while growing or high-volume businesses benefit from dedicated merchant accounts for better control and cost savings.

Common Mistakes to Avoid When Setting Up Payments

Even the best tools won’t help if your setup isn’t optimized. Avoid these common mistakes to ensure smoother transactions and avoid future headaches.

Hidden Fees

Some providers advertise low transaction fees but have hidden costs, such as:

• Chargeback fees
• Refund fees
• PCI compliance or non-compliance penalties
• Early termination or contract cancellation fees

Choosing the Wrong Provider

Many new businesses sign up for the first provider they find without checking if it:

• Supports growth as the business scales
• Offers flexible contracts
• Integrates easily with existing e-commerce platforms

Skipping Compliance and Security

Failing to maintain PCI DSS compliance or using gateways without robust encryption exposes your business to data breaches and hefty fines.

Not Testing Integrations

Businesses often overlook testing whether their chosen payment gateway integrates seamlessly with their shopping cart or POS system. Integration issues can lead to failed transactions and lost sales.

Ignoring Fraud Prevention

Skipping tools like address verification systems (AVS), card verification value (CVV) checks, or fraud filters increases the risks of disputes and chargebacks.

Key Takeaway:

Avoiding hidden fees, prioritizing security, and testing integrations early will save you from costly mistakes in the long run.

Conclusion

Payment gateways and merchant accounts are both essential for handling online payments. While the merchant account holds your funds temporarily, the payment gateway facilitates secure and instant communication between banks and businesses.

By understanding their roles, comparing costs, and aligning your choice with your business needs, you’ll be equipped to set up a seamless payment system that supports growth and customer trust.

Frequently Asked Questions (FAQs)

Without a merchant account, is it possible to collect payments?

Yes, with providers like PayPal or , which combine both the gateway and merchant account in one service.

For in-store payments, do I require a payment gateway in addition to a merchant account?

If you’re using a POS system that includes both (like Square), you don’t need separate accounts. Otherwise, you typically need both.

Are payment gateways safe for online transactions?

Indeed, the majority of gateways utilize cutting-edge encryption and adhere to PCI compliance guidelines to ensure the secure transfer of private information.

How long does it take to get approved for a merchant account?

Depending on the provider and the nature of your company, approval can take a few hours to several days.

Can I switch providers later if I’m not satisfied?

Yes, but review your contract for termination fees or restrictions before switching.

Additional Resources

• – Popular all-in-one payment processing solution