How you accept online payments is vital to the success of your online business. There are two ways to process transactions: payment aggregators and payment processors. Fortunately, you can open multiple accounts, like having one aggregator and one merchant account (which connects you with a payment processor). Or multiple merchant accounts. Or multiple payment aggregator accounts.
Let’s take a step back—what even is a payment aggregator? How is it different from a processor? Don’t they both process payments? Your confusion is understandable. We’ll enlighten you on the difference and lead you towards using one or the other based on your business.
Payment Processors vs. Merchant Accounts vs. Payment Aggregators vs. Payment Gateways
These are the four main terms regarding payment processing, excluding shopping carts and acquiring banks since those are fairly self-explanatory in comparison to the above. Let’s uncover what each is.
What is a payment processor?
A payment processor is the mediator between a merchant and acquiring bank that authorizes a credit card transaction and facilitates the transfer of funds. If the customer’s card is the starting line and your merchant bank is the finish line, the payment processor is the path that connects the two.
What is a merchant account?
A merchant account is a contract between the merchant (you), an acquiring bank, and a payment gateway that allows you to accept debit card and credit card payments. Merchant account providers like DirectPayNet use their connections with banks to give you merchant account options that suit your needs best, as not all merchant accounts are the same. You need a merchant account to, essentially, be a merchant.
What is a payment aggregator?
A payment aggregator is a 3rd-party payment service provider (PSP) that allows merchants to process payments without having a merchant account. It works by using one umbrella merchant account that allows every merchant to open as a sub-account underneath it. Popular 3rd-party merchant aggregators include PayPal, Stripe, Shopify Payments, and Square. That should give you a clearer picture of what an aggregator is.
What is a payment gateway?
Finally, a payment gateway is what reads a customer’s credit card (Visa, MasterCard) information and submits that information to be processed. It transmits the transaction amount from the issuing bank (the cardholder’s bank account linked to the card they’re using) to the acquiring bank. Payment gateways can be digital, like what you see at an online checkout when it asks for card details, or a physical POS (point of sale) device where customers can swipe their cards.
How does all of this connect?
The issuing bank provides a card for the customer to use when they want to buy something. The customer takes that card (or card info) and uses it with a payment gateway. Your merchant account or payment aggregator account allows you to accept that transaction and deposit the funds into the acquiring bank account through the payment processor which handles the credit card processing.
The issuing bank is Point A. The credit card is the traveler. The card goes through the payment gateway like passport control. The payment processor is the vehicle that carries it to Point B, the acquiring bank. The journey cannot happen without an existing infrastructure, which is your merchant account or aggregator account.
How Merchant Accounts Differ from Payment Aggregators
Merchants who obtain a merchant account have their own contract with their own merchant account. Merchants using a payment aggregator work under a joint merchant account, sharing it with every other merchant who uses that PSP. This is the major difference between the two types but doesn’t necessarily mean that one is better than the other. Here are the pros and cons of each.
Pros for Payment Aggregators
Signing up is FAST. You can get an account in minutes, which means you can open a store almost instantly. There’s no talk, no negotiating, no immediate background checks. 3rd-party PSPs want to get your account ready as soon as possible so you can start processing transactions and they can start making money from you.
Payment aggregators are licensed with the PCI-DSS, which makes using them safe for both you and the customer. They also have predictable settlements, which is a comfort to most merchants.
Many people are familiar with the payment gateway used by 3rd-party PSPs, like PayPal. So in this light, familiarity can lead to higher sales and better customer satisfaction.
Cons for Payment Aggregators
There’s a processing volume limit that, if reached, can freeze your funds and possibly result in account termination. Aggregators are playing the safe game and want low-risk merchants with low-risk transactions. When a merchant is processing too much in a given month, it can be a red flag for fraud or incoming chargebacks.
Payment aggregators use a fixed fee structure and pricing, which isn’t inherently bad. However, those fixed rates are usually pretty high and there’s nothing you can do about it.
Thirdly, 3rd-party PSPs will not allow high-risk merchants to process transactions. It is stated in the terms and conditions, but most merchants usually don’t find that out until their store is getting shut down. While the instant sign-up process is great, it can lead to trouble if you don’t fit into their accepted merchant categories.
As a bonus disadvantage, payment aggregators eventually do ask for personal info and business info that’s required for a merchant account. Basically, you go through the merchant account registration process without getting the benefits of a merchant account.
Who Should Use a Payment Aggregator
While the list of pros might seem short in comparison to the cons, payment aggregators aren’t all bad. In fact, they’re a great way to get started immediately, no matter your e-commerce business model.
Aggregators are perfect for small business owners who need to start processing fast, startups with no prior processing history, and low-risk merchants who just want to get set up and ignore the rest.
Pros for Payment Processors
Merchants can have their own, dedicated merchant account. You’ll operate independently with your own MID, not as a sub-merchant account. Rates, processing fees, and monthly fees for merchant account processing are negotiable, as well, so you can craft the contract to your needs.
Merchant accounts are available to all types of merchants, not restricted to low-risk sellers. Providers like DirectPayNet specialize in high-risk merchant accounts, and there are others available like us. What we’re getting at is that with a merchant account, you have options that work for your business.
Processing limits can be much higher when using a merchant account, which is perfect for sellers of high-ticket items or direct response merchants.
Possibly the best part of using a payment processor instead of an aggregator is the ability for the processor to scale with your business. If you’re starting out as a small business and you want to grow into an enterprise, the merchant terms you start with won’t necessarily apply as you reach the next stage of growth. With merchant accounts, those terms can be adjusted accordingly, whether you’re growing or shrinking.
Cons for Payment Processors
The application process is lengthy. It takes about a week to apply for a merchant account, not including the time it takes to gather all of the necessary documentation. It takes even longer when negotiating terms. Suffice it to say, you won’t be processing transactions instantly as you would with an aggregator.
Some acquiring banks and payment processors might not work with you depending on your business type, so shopping around for the right provider can be a pain. Though working with us is a surefire way to get the merchant account you need. If you’re a higher risk merchant, then you might be subjected to harsher terms like higher rates or processing caps or rolling reserves.
Who Should Use a Payment Processor
Ideally, every merchant should get their own merchant account and negotiate their own terms with payment processors. There are merchant accounts for every type of business, and while they take time to finalize, it’s worth it in the long run. Merchant accounts are the one true solution for any business who wants to grow. Having that contract with a payment provider who understands your business is invaluable to those who process large transaction volumes.
The Verdict on Aggregators and Processors
The choice is still yours. Aggregators have their place for those who want immediate processing and fixed terms. Processors are great for those who want to grow and negotiate, whether you need a high-risk or traditional merchant account. Both accept a wide range of payment methods, especially from the major card networks like Visa and MasterCard, and even bank transfers. Accepting payments from customers is essential for any online business, and both options provide the means to do so. However, payment processors provide more flexibility.