A payment gateway is a technology that allows merchants to accept online customer payments. It encrypts the data, sends the successful or declined message, and acts as a fraud prevention tool.
A payment processor is a service that receives the data/information from the payment gateway and communicates between the merchant, acquiring bank, and the issuing bank. Where a payment gateway accepts the payment, a payment processor helps move the funds from the customer to the merchant's account.
Lastly, a payment orchestrator is a software layer or a platform that offers the above services and a lot more. A payment orchestration platform helps you integrate and manage your entire payment process from beginning to end, including authorization, routing, and settlement.
It consolidates multiple acquirers, banks, and payment service providers in a single software layer helping you achieve a more flexible and efficient payment stack.
Now that you know the difference between a payment gateway, processor, and orchestrator, let's dive deeper into how they function.
What is a Payment Gateway?
Here's how a typical transaction takes place in a payment gateway:
Purchase: The customer selects the product/service and adds it to their cart.
Initiation: The customer then chooses the payment method and enters the information.
Submission: After entering the payment information, the data is encrypted by the gateway and sent to the respective payment processor for authorization.
Authorization: If everything checks out, the merchant will inform the customers about the same, and the product will be shipped. However, if the payment is declined, the customer gets a "declined" message, post which they can try other payment methods and pay.
Settlement: If the payment is successful, the funds will be transferred from the issuer's account to the acquirer's account, post which the payment will be settled.
Features and Functionalities of Payment Gateways
If you consider the high-level overview, payment gateways have one purpose. And that is helping merchants accept online payments via different payment methods, from debit/credit cards to digital wallets and other alternative payment methods.
However, various payment gateways have different features and, thus, different functionalities.
For instance, some payment gateways have fraud prevention tools that keep fraudulent transactions in check. Or some gateways support hundreds of payment methods, currencies, and geographies, enabling businesses to operate globally. Moreover, some payment gateways have in-build data analytics and payment links for data analysis and quick payments.
Different types of Payment Gateways
1. Hosted Payment Gateway:
A hosted payment gateway is one that redirects your customers to their website to enter payment details.
For instance, PayPal is a hosted payment gateway. When the customer clicks on "Pay or Buy Now," they're redirected to PayPal's gateway website. Upon entering the payment information, the customers are redirected to your/merchant's website.
2. Self-Hosted Payment Gateway:
Self-hosted payment gateways require no redirection. The customer comes to your website, hits the "Pay Now" button, and can enter the payment information right on your website. While this means the merchant has more skin in the game, it makes the checkout process faster. A typical example is Stripe.
3. API-Hosted Payment Gateway:
This payment gateway gives you maximum control. You can customize the checkout experience for customers based on different devices. However, there's also a higher responsibility as you securely accept and process the payment.
4. Local Bank Integration Gateway:
As the name says, a local bank integration gateway is integrated with your bank. The gateway redirects the customers to the bank's website, where the customer enters the payment information. After the payment is made, the customer is sent back to the merchant's website, where they're shown the transaction status.
Here are some popular payment gateways:
What is a Payment Processor?
Let's learn now about payment processors:
Here's how the payment processor comes into the picture and plays its role:
Transmission of Data: After the customer enters the payment information, the gateway encrypts it and sends it to the payment processor.
Authorization: The payment processor then connects to the issuing bank via card networks to authorize the transaction. To which the issuer sends a response.
Response: The payment processor then sends the "approved" or "declined" response to the payment gateway, which is displayed to the customer.
Transfer of Funds: If the transaction is approved, the processor will go back to the issuer to finalize the transaction and initiate the funds transfer. The funds are then transferred to the acquirer's bank.
Settlement: Based on the payment service provider's cycle, the funds are then settled to the customer's account, completing the payment cycle.
Types of Payment Processors
Based on their use cases and other factors such as transaction volume, scalability, and industry volume, processors can be of these three types:
Traditional: These vendors or organizations offer general payment processing services.
Aggregators: These are payment service providers or payment facilitators and act as intermediaries between the card networks and the merchants.
Modern: These companies combine technology and better infrastructure to offer seamless end-to-end payment solutions.
What is a Payment Orchestration?
Here's how things work when a payment orchestrator is in play:
- Purchase: The customer chooses a product or service, adds them to their cart, and hits the "Pay" button.
- API Call: The merchant makes an API call to the payment orchestration platform based on different parameters.
- Payment Methods Appear: The payment orchestrator will check which payment methods the merchant has signed up for and display them to the customer.
- Enters the Data: The customer chooses from the available payment methods and enters the required data.
- Applying Additional Rules: After the customer enters the payment data, the orchestrator applies additional rules, such as sending the transaction for 3DS authentication.
- Payment Routing: Ideally, the transaction will be sent through the default payment gateway the merchant has selected. However, if the primary payment route is not functional, the transaction will be routed to the next best option.
- Settlement: The transactions that are authorized are sent for settlement. And the payment service providers or the PSPs settle the funds in the merchant's account.
Key Features and Benefits of Payment Orchestration Solutions
1. Promotes Expansion and A Better Checkout Experience
With a payment orchestrator, you can enable multiple payment gateways and offer hundreds of payment methods. For instance, inai integrates with 30+ payment gateways and provides 300+ payment methods. This makes it easy for businesses to expand and sell their products/services globally.
In addition, merchants can offer a personalized checkout experience to customers. For instance, payment methods can be added or removed based on the customer's location, which increases convenience.
2. Routing and Payment Analytics
You need not depend on a single gateway for all your transactions with an orchestration platform. Suppose the primary gateway fails or hikes its prices. In that case, you can route the transaction through a better gateway based on parameters such as authorization rate, transaction fee, etc., and keep your business running.
Also, you can access and analyze all the payment data using payment orchestration tools, enabling you to draw valuable insights and improve your services.
3. Risk and Fraud Protection
Orchestration platforms have security features such as tokenization, fingerprinting, 3DS 2.0 authentication, and more. By leveraging these features, merchants can offer better security to customers while keeping fraud at bay.
4. Low Overall Cost
Integrating multiple payment gateways one by one can be extremely costly and time-consuming, requiring dedicated resources. However, with a single payment orchestrator integration, you can enable various payment gateways and save money.
Moreover, you can route transactions through the payment gateway with a lower transaction fee, saving you money again.
Example of Successful Implementation of Payment Orchestration
Take inai's payment orchestration platform, for example. It comes with intelligent payment routing, fraud protection, payment analytics, personalized checkout experience, chargeback protection, codeless integration, automated invoicing, and whatnot. All these features have helped businesses:
- Enhance their customer conversion and transaction success rate by up to 60%.
- Reduce operational costs by up to 75%.
The Blurred Line between Payment Gateway, Payment Processor, and Payment Orchestration!
While the payment gateway, processor, and orchestrator can be different entities or services, they're often integrated into a single solution. For instance, a payment orchestrator like inai can offer the services of a gateway and a processor along with orchestration benefits, all in a single solution.
This convergence or consolidation of multiple payment solutions brings several benefits, such as:
- Unified Payment Platforms: Unified payment platforms help seamlessly manage and process transactions from multiple channels. When everything is in one place, there's less confusion and more efficiency.
- Omni-Channel Capabilities: This allows merchants to sell products/services from all channels, in-store, online, mobile payments, etc.
- API-Driven Integration: Such solutions offer API integration which reduces the time required to set up the entire payment ecosystem
- Open Banking Initiatives: Integrated solutions also help securely share confidential data with 3rd parties to improve the overall customer experience and business offerings.
- Value-Added Services: integrated solutions also offer value-added services in addition to the core functionalities such as fraud prevention, subscription management, invoicing, and more.
How Payment Orchestration Solutions Incorporate Gateway and Processor Functionalities
Gateways act as the primary interface for accepting payments while processors process the payments and move funds. Payment orchestration solutions like inai consolidate the functionalities of the payment gateways and processors and offer businesses the tool they need to process payments efficiently.
For instance, with inai, you can accept payments (gateway) from a range of customers in different locations through different gateways and payment methods. inai also handles the payment processing and settling of funds (payment processor). And lastly, inai offer added functionalities such as:
- Payment Routing
- Automated Billing
- Chargeback Protection
- Fraud Prevention
- Payment Analytics
Differentiating Factors and Use Cases
One of the most significant differentiating factors among payment gateway, processor, and orchestrator is the role they play:
- Payment Gateway: Accepting online and offline payments from the customer securely.
- Payment Processor: Acting as an intermediary between acquirers, issuers, and merchants. Processing the payments and moving the money from the customer to the merchant's account.
- Payment Orchestrator: Consolidating multiple acquirers, issuers, and payment gateways to offer an end-to-end-payments solution. It also has analytical features, invoicing, subscription management, and more.
Use Cases of Payment Gateways, Processors, and Orchestrators
Different businesses need different payment solutions based on their offerings and needs.
For instance, a business needs a payment gateway to accept online or offline card payments securely. And a payment gateway cannot function without a payment processor. So, such as a business would also need a payment processor.
However, a payment orchestration can help if a business:
- Requires multiple payment gateways to meet the needs of different types of customers
- Offers recurring payments or subscription-based services
- Need data analytics, fraud detection, and automated billing management tools
- Wants to streamline its payments ecosystem and deliver a better customer experience
- Wishes to save money and gain a competitive advantage
Industry Trends and Future Outlook
Here are some popular trends in the payments industry that are expected to revolutionize the way customers make payments:
- The rising popularity of alternative payment methods, such as BNPL
- Adoption of contactless payments and use of digital wallets.
- Customers are expecting an even more seamless checkout experience with minimum steps.
- AI and ML-based fraud prevention methods for added security.
- Rise of real-time payments.
- Multiple local payment methods for a personalized checkout experience.
- Open banking is gaining popularity.
The above is a non-exhaustive list, as future trends in the payment industry appear every few months. However, merchants should know the need to keep up with industry trends to stay relevant and competitive. The faster you implement new technologies or integrate better solutions, the longer you can survive and flourish.
And the best part, you can start by integrating a payment orchestration solution. This will give you a decent competitive edge over other players in the market, and you can manage your payments in the best way possible.
A payment gateway accepts payments, the processor authorizes it, and moves the money, while a payment orchestrator does it all and offers numerous other functionalities. With this difference clear in mind, you can decide which service or technology you need to deliver a better customer experience and grow your business. So, analyze your needs, integrate the best possible solution, and take your business to new heights now!