The difference between payment gateways merchant acquirers and processors
In this Article
Dr Jane Nweike
Dr Jane Nweike harbours significant experience advising on a variety of corporate finance (including M&A, private equity, and venture capital), capital markets and FinTech matters. Her work includes advising the likes of Citibank and MasterCard as well as FinTech startups. In this article, Dr Nweike explains the differences between payment gateways, merchant acquirers and processors and their roles within eCommerce transactions, as well as why Malta is the ideal location in order to provide such services throughout Europe.
Payment gateway VS. Processor VS. Merchant Acquirer
ECOMMERCE TRANSACTIONS
Payment gateways, payment processors and merchant acquirers all play very important and distinct roles in fulfilling ecommerce transactions. Each of these operators is licensable under the Financial Institutions Act, Cap. 376 Laws of Malta.
In order to understand the licensing framework for each of them, it is helpful to first outline what the activities of each entail and how they differ from one another.
Payment Gateway
ECOMMERCE TRANSACTIONS
This is the user-facing component of the payment process. A payment gateway is software that collects a payer’s credit or debit card details (card number, PIN, CVV) and transmits them to the payment processor for back-office processing.
After this step, the payment gateway also provides the payer with feedback on whether the payment was successful or not. Payment gateways include online interfaces for entering card details, as well as point of sales terminals.
Payment Processor
ECOMMERCE TRANSACTIONS
A payment processor is the technical solution within the back-office that accepts a payer’s card details from the payment gateway and processes it.
Processing involves communicating the card information to the following:
(i) the appropriate card scheme (e.g. MasterCard, Visa) network.
(ii) the issuing bank (the bank that issued the credit or debit card) to confirm whether the transaction meets the criteria to be fulfilled, e.g. that there is sufficient funds for the transaction in the payer’s account.
(iii) the acquiring bank.
Finally, the payment processor provides feedback to the gateway, namely that the transaction is either successful or unsuccessful.
Merchant Acquirer/Acquiring Bank
ECOMMERCE TRANSACTIONS
Now, to the merchant acquirer. Basically, it is a financial institution that maintains an account for the merchant (i.e. the entity or person that provides the service for which the payment is being made). The merchant acquirer handles settlement with the issuing bank, credits the merchant’s account with the payment (after disbursing the applicable fees to the card network), processes chargebacks, and in general deals directly with the funds on behalf of the merchant. Consequently, the merchant acquirer could be either a traditional bank or an electronic money institution.
In summary, the payment gateway collects payment information, the processor processes it, and the acquirer executes the payment.
Licensing Framework
A company that intends to provide any of the above services in Malta will qualify as a payment service provider under the Financial Institutions Act and will be required to obtain a Payment Institution Licence or an Electronic Money Institution Licence (as appropriate) from the MFSA. For more information, please read our licensing guides.
Why Malta?
For companies looking to provide services across the European Union, especially companies in the United Kingdom that have lost their passporting rights as a result of Brexit, Malta is an excellent jurisdiction to establish a presence.
Malta’s rapidly blossoming Fintech sector, solid legal framework for payment institutions and payment service providers, and innovation-friendly regulator set it apart as a choice jurisdiction for all kinds of Fintech business.
Further, the Financial Institutions Act incorporates the terms of the European Union’s Payment Services Directive and Electronic Money Directive (PSD2). In effect, this means that PISPs registered in Malta are free to passport their services to other EU/EEA countries either by establishing a branch or engaging an agent, provided they meet certain notification criteria.
Malta also has an effective corporate tax rate of 5%, (one of the lowest tax rates in the world) and a strong network of double tax treaties.
More about MK Fintech Partners Ltd.
Michael Kyprianou Fintech Partners Ltd is a Maltese licensed VFA Agent (virtual financial assets agent). It comprises a team of dedicated experts who provide services such as advisory, licensing and registrations of activities related to Fintech, Crypto, Blockchain, Investment, company incorporations and banking. and other ancillary services. MK Fintech Partners forms part of the Michael Kyprianou Group, a top tier international legal and advisory firm. It has established an enviable reputation as a broad-based legal practice over the years. Mainly by keeping at heart its principle to always exceed its clients’ expectations. MK has grown to become one of the largest law firms in Cyprus with offices in Nicosia, Limassol and Paphos. The MK Group’s international presence also includes fully-fledged offices in Greece (Athens and Thessaloniki), Malta (Birkirkara), Ukraine (Kiev), the United Arab Emirates (Dubai), United Kingdom (London), Israel (Tel Aviv), and Germany (Frankfurt).
The content of this article is valid as at the date of its first publication. It intendeds to provide a general guide to the subject matter and does not constitute legal advice. We recommend that you seek professional advice on a specific matter before acting on any information provided. For further information, contact us at MK Fintech Partners via email at contactmkfintech@kyprianou.com or by telephone +356 2016 1010.
