Payment Aggregator vs Payment Gateway - A Quick Explainer.
Learn the difference between payment aggregators and payment gateways and which between them offers your business the best payment and cost efficiency.
Accepting customer payments on your e-commerce website or application instantly expands your total addressable market. This includes people outside your local town and even those beyond your national borders that you would not otherwise be able to reach.
Taking customer payments online, however, requires you to have the right infrastructure in place. This infrastructure brings different payment methods under one interface and communicates with the issuing and acquiring banks to enable payment authorisation.
Kenyan consumers are increasingly gravitating to cashless and online payments. So, all business owners need to know the technology necessary to accept customer payments online.
This article is a quick explainer of the difference between a payment aggregator and a payment gateway. After reading, you will know whether a payment aggregator or a payment gateway is right for your business.
What is a payment gateway?
A payment gateway is software that authenticates and transmits payment information between the players involved in the payment process.
Payment gateways enable communication between online merchants and customers’ banks to authorise card-not-present payments.
In this way, a payment gateway acts as a payment intermediary that helps establish whether customers have enough funds in their chosen payment method to pay for their purchases. It provides the technology that enables card payments online.
Not only does a payment gateway authenticate card payments online, but it also ensures the secure transmission of payment information. By encrypting or tokenising payment data before transmitting it to the acquiring bank, payment gateways prevent interception of the data by fraudsters and thieves.
How payment gateways work.
Payment gateways allow consumers to pay for goods and services online without exposing their payment information. They act as a fortified channel through which communications between merchants and the acquiring bank can be safely relayed.
Even though processing an online payment takes mere seconds, there is a lot that will happens in the background. Here is how a payment gateway processes a payment:
1. Customer checks out.
When customers check out on your e-commerce website, they are directed to a page where they must complete their payment. They do this by entering their card details, namely their:
card number,
card expiry date, and
card verification value (CVV) number.
2. Payment gateway verifies payment information.
It’s essential to verify this information by checking with the card issuing bank, a task of the payment gateway.
To do that and in a way that does not expose the card information to malware bots, the payment gateway encrypts the data before transmitting it to the acquiring bank, which is the one that processes the payment.
3. Acquiring bank checks with issuing bank.
The acquiring bank sends the payment request to the card issuing bank through the card network that supplies the card and provides the technology that makes it work. Visa and Mastercard are the most familiar card networks in Kenya.
The issuing bank is where the funds in the account that the debit card draws from are held. The bank will verify the supplied card data and check if there is a sufficient balance to complete the requested payment. If all is in order, the bank will communicate to the acquiring bank that authorisation has been given.
4. Acquiring bank processes payment.
The acquiring bank will then forward the authorisation message to the payment gateway, which will then trigger payment approval.
If the card details are wrong or there aren't sufficient funds in the card, the acquiring bank will decline the payment request. The payment gateway will communicate the rejection to the customer on the front end and ask that the customer supply new or correct payment information.
So, where do payment aggregators fit in?
What are payment aggregators?
A payment aggregator is a third-party player that facilitates online payments by allowing merchants to accept different payment methods, like debit and credit cards, cryptocurrency, digital wallets, and mobile money wallets like M-Pesa.
A payment aggregator is an intermediary between online businesses and customers' banks during the payment process. It consolidates different payment methods for the convenience of both customers and merchants.
Before payment aggregators arrived, merchants needed multiple bank accounts and Merchant Identification Numbers (MID). The process for obtaining these meant you could wait months and go through many credit checks before accepting online payments.
With a payment aggregator, also known as a Payment Service Provider (PSP), you don’t need to maintain accounts with individual banks. The payment aggregator supplies you with a master MID that you will use for all online payments, meaning they sign you up to operate under their merchant account. This streamlines the process for you.
Payment aggregators, therefore, act as the main merchant, saving you all the grunt work of obtaining MIDs with individual banks. You can start accepting online payments faster and take your hands off the entire process, allowing you to concentrate on your core business.
On the main, though, payment aggregators combine multiple payment methods under the same checkout interface. As well as credit and debit cards, they can add other payment methods like digital wallets, mobile money wallets, bank transfers, and Bitcoin, giving customers a wide choice and greater ability to complete payments.
Payment aggregator vs payment gateway - What is the difference?
Payment aggregators and payment gateways differ in that the latter is a piece of software that allows you to accept customer payments on your website or app. At the same time, the former is a third-party financial organisation that provides merchant account services and the technology you need to accept, verify, process, settle, and manage customer payments online.
Payment aggregators act as a facilitator that provides both a merchant account and a payment gateway that you need to accept, authenticate, and settle customer payments.
Payment gateways typically don’t provide merchant account services. They are the technology that lets you take customer payments online.
So, what sets payment aggregators and payment gateways apart is that with a payment aggregator, you get a payment gateway as an accompanying tool. In contrast, a payment gateway does not come with a payment gateway included.
Who needs a payment aggregator?
Merchants who need to accept online payments quickly and without going through complex processes and rigorous credit checks required when signing up for a merchant ID will find payment aggregators as the best solution.
These include small ecommerce stores, SaaS businesses, and other internet-based businesses. These are businesses whose volumes are too small to establish individual integrations with different financial institutions.
Payment aggregators assume the payment security risk that merchants would otherwise face if they held merchant accounts with banks and processed payments on their own. These risks include fraud-related chargebacks and payment has.
In that regard, it is critical to know what you are signing up for when you accept online payments through a payment aggregator, as they charge for the risk they assume by settling and securing payments from your customers.
Common disadvantages you have to contend with when you use payment aggregators are higher fees and longer payment settlement times.
Payment aggregators also have the authority to impose holds on your accounts and freeze your funds if they suspect fraud or discover improprieties with your business. In extreme cases, they can also arbitrarily terminate your account, leaving your business in a precarious position.
With that said:
When should you not use a payment aggregator?
Payment aggregators are not a perfect payment solution for every business. If you process a high volume of payments, you will soon find their high fees unsustainable.
In that case, you are better off negotiating merchant accounts with individual financial institutions. Especially if you are not in a hurry to start accepting online payments from customers.
High transaction volumes will often translate into higher transaction costs for your business. Payment aggregators may look to hedge the elevated risk that higher transaction volumes bring by charging a higher fee beyond a certain threshold.
Before signing up with a payment aggregator, find out if they have a transaction volume limit after which higher fees kick in. if they have such a limit, decide if the payment efficiency is worth dealing with the reduced cost efficiency.
What is an example of a payment aggregator?
Payment aggregators integrate with various payment methods, combining them into a unified platform. This simplifies onboarding for merchants and makes payment acceptance easier.
In the same way, they aggregate payment methods on the merchant side, payment aggregators also aggregate merchants to act as one master merchant. That’s why they are also known as merchant aggregators.
Most payment aggregators have an integrated payment gateway to which they add verification, payment settlement, and reporting tools to form an all-in-one payment solution. In essence, a payment aggregator cannot operate without the capabilities of a payment gateway.
Common examples of payment aggregators include PayPal, which has its own payment gateway, Payflow, Amazon Pay, Google Pay, and Stripe. In Kenya, the best example of a payment aggregator will be Intasend.
Accept online payments from customers with Intasend and instantly expand your market.
Intasend consolidates different payment methods on one online payment platform to offer your customers different ways to pay. If their bank account is overdrawn and they can’t use their debit card, the customer can use their M-Pesa mobile money wallet or their Bitcoin wallet.
Not just that, your Intasend business account also includes a digital wallet into which your customer payments settle. Through the same business account, you can also request virtual Mastercard and Visa debit cards that you can use to make business payments online.
Recently, at Intasend we have added subscription billing capabilities to our online payments tools. We have added the capability to create subscription plans and process recurring payments on your website or app.
Take advantage of Intasend high transaction success rates and low fees when accepting customer payments online with Intasend. Whether you follow the traditional one-time purchase or subscription business model, our payment aggregation tools will open up your business to more customers.
Sign up here and start accepting customer payments on your online store or app.