Modern businesses such as e-commerce platforms, money transfer operators, billers, banks, and other types of online service providers, have had to deal with either a payment switch or payment gateway at some point.
In context, both terms are easily confused with each other or used interchangeably because they are thought to perform very similar functions in payment processing.
In reality, however, this is not the case.
A payment switch and a payment gateway are entirely two different things performing very distinct functions. While these two work together in processing payments, the best way to understand their respective functions is to think of a payment switch as the ‘control room’ and a payment gateway as the ‘messenger or doorway’ of the payment instruction.
To learn the difference, it is important to understand how each one works within the payment ecosystem.
Also read: International vs. Domestic Remittance
What is a Payment Switch?
In simple terms, a payment switch can be thought of as an independent entity that facilitates real payment communication among different payment service providers in a payment gateway. Switch takes care of the nuances of a transaction, validating accounts and granting or refusing a transaction.
This is a highly resilient, accessible, and flexible system sitting at the heart of the payment gateway. It is responsible for acquiring payment requests from a payment gateway then routing payments through BIN allotment or other routing techniques, switching, authenticating, and authorizing transactions across multiple channels.
A payment switch system performs the overall function of settling payments among providers connected to a transaction while ensuring each provider gets feedback. It identifies the provider to whom the transaction would be routed, formats, and ends the transaction, receives feedback, format, and sends the response back to the provider who initiated the transaction.
For this process to work efficiently, payment switches need to be connected to the back-end of various banking software.
Due to its flexibility, a payment switch network can easily be extended to accept new payment methods. This can be done by simply adding the payment method to the switch without huge integration costs or processes.
A switch can be simple (pass-through) or complex (omnichannel) depending on the structure. Its main goal remains to serve as the underlying fabric ‘switching’ or processing volumes of transaction information across a network of service providers all at the same time.
What is a Payment Gateway?
With payment gateways, the process is different. These are third-party software that provides a pathway between issuing banks (buyers’ accounts) and acquiring banks (merchants’ accounts). A payment gateway is simply designed to facilitate the safe passage of payment from a customer to a merchant.
In the complete cycle, a payment gateway captures customers’ card details, verifies that the card contains enough funds to complete the transactions the customer is initiating. The gateway communicates this information to the card company, gathers acceptance or declination feedback, and finally transfers funds to the merchant once payment is approved. It equally takes care of passing debit or rejection information back to the customer.
The ultimate importance of the payment gateway in a transaction process is to serve as a secured pathway for the transfer of funds from a customer to a merchant. The gateway manages the customer’s sensitive card information as it passes down to the acquiring bank. It protects the merchant from card issues such as exceeding card limits, insufficient funds, expired cards, etc.
Here’s a simplified brief on how a payment gateway works:
-A customer chooses a service he/she wants to purchase from the merchant and inputs his/her card details on the merchant’s checkout page for payment. Payment information is sent to the payment gateway.
-Once received, the gateway authenticates the card, encrypts payment information, and sends this to the acquiring bank
-The acquiring bank sends the information to the card company or scheme (Visa, Verve, MasterCard, etc.). Here, funds are checked and payment information sent to the issuing bank
-The issuing bank carries out fraud scrutiny and then approves or declines to pay the merchant. This data is transferred via the same route to the card company, the acquiring bank, and back to the payment gateway.
-The gateway alerts the merchant of the payment and once approved, the acquiring bank collects the payment from the issuing bank and holds it in the merchant’s account.
-Once the merchant has delivered value to the customer, the money is released to him.
Payment gateways are largely applicable to online transactions but are equally used offline between merchants and customers.
Understanding the difference
The difference between these two payment technologies lies in their core functions. A payment switch serves as a ‘control room’ that is spread across multiple payment channels, gateways, and banks — processing and settling payments accurately among providers.
A payment gateway performs the ‘window’ function, passing payment information from the customer’s card to the issuing bank and overseeing the safe transfer of funds safely to the acquiring bank (merchant’s account).
While payment gateways perform the secondary function of protecting both merchant and customer during a transaction, payment switches protect the various payments-processing service providers involved in different transactions at a time.
While buyers and merchants rely heavily on both payment gateways for providing secured payment pathways online, banks and payment service providers rely heavily on payment switches to handle the intricate profiling and settlement of transactions among parties involved in a transaction.
An Africa-Centric payment switch like Songhai Exchange controls the transfer of funds from thousands of money transfer operators, billers, and service providers around the world into Africa while at the same time processing payouts and settling payments across service providers within Africa.
Songhai Exchange brings together banks, billers, and service providers across Africa into one platform and offers businesses around the world access to this diverse services network through a SINGLE touchpoint.
Bottom Line
Modern businesses cannot operate without the functionalities of both payment switches and payment gateways. While they are different in terms of individual functionalities, they work in sync to provide payment infrastructure over the internet.