A payment gateway captures and securely sends a customer’s payment details. A payment processor routes transaction messages between banks and card networks and coordinates transfers to the merchant.
Online card payments require both functions. Stores can arrange them separately or get both through a provider such as Shopify Payments. Your setup decides which services you need to integrate and which fees you pay.
This guide explains what gateways and processors do, how they work together, and how their services and costs differ.
What is a payment processor?
A payment processor routes payment requests and responses between the merchant, card network, and banks involved in a transaction. It also coordinates settlement, when funds move from the customer’s issuing bank to the merchant’s acquiring bank.
A typical online card payment, or ecommerce checkout flow, involves seven parties, although one company can perform several roles:
- The customer. Makes the purchase.
- The merchant. Sells the product or service.
- The payment gateway. Captures and securely transmits card details at checkout.
- The payment processor. Routes transaction messages.
- The merchant’s acquiring bank. Receives card payments on the merchant’s behalf.
- The card network. Exchanges transaction messages between acquiring and issuing banks.
- The issuing bank. Issues the customer’s card and approves or declines the payment.
When a customer submits a payment, the processor routes the authorization request through the card network to the issuing bank.
The bank’s response travels back to checkout. For approved payments, settlement follows after the merchant submits the charge for collection. Payout timing depends on the provider’s schedule, so approval doesn’t mean the funds are immediately available.
Stores can arrange processing through a dedicated merchant account or an all-in-one provider such as Shopify Payments.
Advantages of using payment processors
Payment processors let businesses accept credit and debit cards. Depending on the payment provider and location, businesses can also accept digital wallets, mobile wallets, and other payment methods, such as bank payments.
Digital wallets accounted for 40% of US online transaction value in 2025, ahead of credit cards used directly at 32%, according to Worldpay’s 2026 Global Payments Report.
What is a payment gateway?
A payment gateway captures payment information at checkout and securely transmits it to a payment processing company. It also returns the transaction result to the store so the customer knows whether the payment was approved.
Payment gateways use encryption to protect payment information during transmission. Transport Layer Security (TLS), often called SSL, encrypts the connection. Many providers also use tokenization, which replaces card details with a substitute value and reduces the sensitive data a merchant needs to store.
A payment provider can reduce a merchant’s PCI DSS workload, but outsourcing payment processing doesn’t remove all merchant responsibilities. Stores must verify their provider’s compliance, understand which security tasks they retain, and confirm their validation requirements with their acquiring bank or payment brand.
Shopify Payments combines gateway and processing functions within Shopify checkout, including strong customer authentication through PSD2 SCA compliance. Shopify has two types of third-party payment providers:
- Direct providers. Customers complete payment within your online store.
- External providers. Customers complete payment on a checkout page hosted outside your online store.
Payment gateway vs. payment processor: 5 key differences
The table below shows the comparisons between a payment gateway and a payment processor:
| Key difference | Payment gateway | Payment processor |
|---|---|---|
| Primary role | Captures and securely transmits payment details. | Routes authorization messages and coordinates settlement. |
| Where each operates | Between the checkout or payment interface and the processor. | Between the merchant’s payment system, acquiring bank, card network, and issuing bank. |
| Usage scope | Commonly used for online and other card-not-present payments. Some gateways also work with in-person payment systems. | Processes both in-person and card-not-present transactions. |
| Extra services | Can offer tokenization, fraud screening, stored payment details, and recurring billing. | Can offer payout reporting, dispute management, fraud tools, and additional payment methods. |
| Typical fees | Standalone services often charge monthly and per-transaction fees. Bundled services can include the gateway in their processing rate. | Often charges a percentage plus a fixed transaction fee, or interchange and network costs plus a processor markup. |
Extra merchant services overlap, and pricing depends on the provider and plan. A standalone gateway’s fees are generally in addition to payment processing costs.
When you use Shopify Payments, orders processed through Shopify Payments, Shop Pay, Shop Pay Installments, and PayPal Express are exempt from Shopify’s third-party transaction fees. Applicable payment processing fees still apply.
How payment providers fit into the picture
A payment service provider can bundle gateway, processing, and merchant-account services. The product you sign up for determines which functions you get.
| Provider | Payment setup |
|---|---|
| Shopify Payments | Combines gateway and processing functions in Shopify checkout, with payout management in Shopify and no separate merchant-account setup. |
| Stripe | Has gateway and processing functions through Stripe Payments, with prebuilt checkout tools or custom integrations. |
| PayPal | Provides payment acceptance and processing. Its separate Payflow gateway works with compatible processors and merchant accounts. |
| Square | Blends gateway and processing functions for online and in-person payments through Square’s software, hardware, or APIs. |
| Authorize.net | Offers a gateway-only plan for existing compatible merchant accounts and an all-in-one plan with gateway and merchant-account services. |
Which setup does your business need?
Online card payments require both gateway and processing functions. Check what your current provider supplies before adding another service.
Use the following criteria to decide:
- For a bundled setup: Shopify Payments provides both functions through Shopify checkout, with no separate merchant-account setup.
- For an existing processing arrangement: A standalone gateway lets you retain a compatible processor or merchant account. Confirm compatibility with your ecommerce platform and compare the combined gateway and processing fees.
Read more
- What Are Current Assets? How To Calculate Current Assets
- What Does Small Business Insurance Cost?
- Trial Balances Explained- What To Include in a Trial Balance
- 7 Ways Small Businesses Can Save Money in Their First Year
- 8 Eco-Friendly Packaging Ideas for Your Store
- What is Profit Margin? Definition and Guide
- How Recurring Payments Work for Small Business Owners
- What Every Small Business Needs to Know About Accrued Liabilities
- How to Create an Operational Plan You’ll Actually Use
Payment gateway vs. payment processor FAQ
What are the top 5 best payment gateways?
The top five best payment gateway providers are Shopify Payments, Stripe, PayPal, Square, and Authorize.net. For Shopify merchants, Shopify Payments has built-in payment processing and payout tracking through the Shopify admin. Compare payment gateways based on fees, availability in your country, and compatibility with your ecommerce platform.
What are the downsides of using a payment gateway?
Payment gateways can add transaction fees, monthly charges, and setup work. Some restrict the payment options or currencies you can accept. A standalone gateway also requires a compatible payment processor and merchant account, adding services to manage.
Do you need both a payment gateway and a payment processor?
Yes, accepting online card payments generally needs both functions. The gateway securely sends electronic payment details, while the processor communicates with banks and card networks to request approval and arrange settlement.
What is the difference between a payment gateway and a merchant account?
A payment gateway securely transmits payment details for processing. A merchant account receives funds from card transactions before they’re paid into your business bank account. The gateway manages payment information, and the merchant account holds the proceeds from your sales.
What is the difference between a payment gateway and a payment service provider?
A payment gateway securely transmits payment information. A payment service provider (PSP) typically bundles gateway functionality with payment processing, merchant account services, and payment management tools.
