Merchant Accounts, E-Commerce Platforms, Fundraising Platforms: What’s The Difference?

Payment Processing Gets More Complicated Every Day

As recently as 10 years ago, the vast majority of merchants could get by just fine with a dial-up credit card terminal and a merchant account through their local bank. Today, though, the world of merchant services is developing at an unprecedented rate, and it can be difficult to keep up with emerging technologies and terms. What is a payment gateway? What is an e-commerce platform? What does Stripe do? What is a fundraising platform? And how are all of these things connected to each other?

If you're looking for these answers, you've come to the right place. This article lays out the relationships and differences between the following merchant services:

Common Merchant Services

• Traditional merchant accounts
• POS systems
• Mobile payments
• Payment gateways
• E-commerce platforms
• Fundraising platforms
• Marketplace processors

These sections will provide a general overview of each service and a brief explanation of how each service integrates with the others. For a quick set of rules for how these different services fit together, click here. For a more in-depth understanding of merchant account pricing and hidden payment processing fees, see “Fee Sweep” or search for a specific company in the search bar above this review.

Merchant accounts may have changed over the years, but the definition of a merchant account is still the same. A merchant account is simply a line of credit account that enables merchants to accept credit cards. When a customer makes a purchase with a debit or credit card, that payment takes a day or two to transfer from the customer's bank account to the merchant's bank account. To ensure that the merchant has instant access to that payment, the merchant account provider deposits the payment amount into the merchant's bank account (minus transaction fees) and then collects the full payment amount on the backend once the transfer goes through. Merchant accounts are the dominant method for transacting non-cash payments, although alternatives exist in the form of ACH transfers and cryptocurrencies like bitcoin. A merchant account provider is broadly defined as any company that sells merchant accounts, although many merchant account providers today also sell proprietary software or hardware to differentiate themselves from competitors.

No matter how high-tech a payment processing service may be, it still needs to transfer payments through a merchant account. Most payment processors open a unique account for each new merchant through a major bank on that merchant's behalf and in that merchant's name. Some high-profile merchant account providers like Square and PayPal are merchant account aggregators, meaning that they allow merchants to use Square or PayPal's merchant account rather than opening a unique merchant account in the merchant's name. Aggregators typically have very easy signup processes because they do not need to perform underwriting for a brand new, unique merchant account for each business. However, they also have stricter account termination policies because they can be held liable for fraudulent merchant conduct.

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A point-of-sale system, or POS system, is any combination of hardware and software that enables a merchant to accept card payments in a physical, face-to-face setting. Every POS system is connected to a merchant account and functions as a physical interface for that merchant account. Many POS systems are designed for specific sales environments, such as restaurants or flea markets, while others are intended for general use. The classic combination of a cash register, credit card swiper, and receipt printer is a very common form of POS system, but an iPad running the Square Register app and issuing receipts by email also counts as a POS system. POS systems can be incredibly expensive and complex, or they can consist of a mobile phone and an attached card reader.

Merchants who exclusively conduct sales over the internet (e-commerce) typically do not require POS systems. However, it is possible for some e-commerce platforms (such as Shopify) to offer integrated POS products in case their merchants wish to make sales both online and in person. In these cases, the POS products typically connect to the internet so that merchants can track both online and in-store sales within a single service. Some merchants who sell their products over the phone, by mail, or in very slow-paced physical settings may utilize virtual terminals to accept payments. A virtual terminal combines most of the features of a POS system into a single desktop computer program, so it technically could be considered a POS system. However, most virtual terminals are intended for merchants who are not conducting face-to-face transactions.

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The concept of mobile payments is still relatively new within the credit card processing industry, so its definition is constantly evolving. That having been said, mobile payments can generally be defined as payments made using internet-connected mobile devices, whether in a face-to-face setting (or inside a mobile device's apps. When merchant account providers refer to mobile payments, they are most often describing software or hardware that enables merchants to accept payments from customers using the merchant's mobile phone or tablet, like Square. This can be classified as a form of POS system. As more consumers purchase products on websites using their phone's internet browser or inside apps like Uber or Instacart, the term “mobile payments” is increasingly being used to describe the checkout process that occurs in these completely digital settings. Despite the fact that these payments involve mobile devices, they are sometimes categorized as “e-commerce” or “m-commerce” instead of mobile payments.

It is possible for merchants to purchase conventional credit card terminals that can be carried by hand and used to collect payments in a “mobile” fashion. However, the term “mobile payments” almost always describes payments involving a personal mobile device connected to a local internet connection. Since most phones today are wirelessly connected to the internet, there are also a growing number of instances in which the lines between e-commerce and mobile payments are blurred. For instance, the e-commerce company Stripe offers mobile app developers the option to embed Stripe in their smartphone apps and enable payment via fingerprint scanning or manual card number entry. In this case, Stripe might market this service as “mobile payments,” but the actual service does not resemble the face-to-face phone swiping pioneered by Square.

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A payment gateway is a piece of software that acts as a middleman between the point of sale and the banks that process the transaction. Think of it as a secure route for the swiped or keyed transaction information to travel from the point that it is captured to the payment processing networks and then back to the merchant's systems. Payment gateways are the foundation of e-commerce, and each payment gateway must be connected to a merchant account in order to deliver payment to the merchant. The best-known payment gateway is Authorize.net, but it has become increasingly rare for merchants or customers to shop for or interact directly with a payment gateway. Instead, payment gateway providers like Stripe, WePay, or 2Checkout offer gateways that act as a kind of backend delivery system for websites and apps. This takes security concerns off of a merchant's plate and minimizes web development costs for e-commerce businesses.

If you conduct any sales over an internet connection, chances are your payment processing solution includes a payment gateway. Payment gateways themselves can be built without integrated merchant accounts, but many payment gateway providers offer their payment gateways with exclusive or recommended merchant accounts linked to them. For instance, Stripe's payment gateway service is exclusively linked to Stripe's merchant account service. You cannot attach another merchant account to Stripe's payment gateway. In this sense, Stripe is a competitor of traditional merchant account providers like First Data or Elavon. However, Stripe's services are generally targeted at tech-centric merchants, and its products may be insufficient for the classic retail environments served by conventional merchant account providers.

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E-commerce platforms, also referred to as online marketplaces or digital storefronts, are web development companies that provide software to help merchants sell products online. Typically, their services include domain registration, website templates, integrated business solutions (such as inventory and shipping management), and online payment processing. E-commerce platforms often market themselves as “all-in-one” e-commerce solutions due to the fact that they pack all of an merchant's e-commerce needs into a single service. Shopify and Squarespace are two prominent examples of e-commerce platforms. For a monthly fee and various optional add-on fees, these companies help merchants set up websites for their businesses, integrate necessary services with those websites, and manage customer interactions online.

One specific type of e-commerce platform is a marketplace platform, which enables merchants to create a listing, or “storefront,” within a payment processor's larger online directory of sellers. These storefronts operate in a similar fashion to Shopify stores, but they are not fully managed by the merchant, resulting in fewer customization options. Amazon and Etsy are two marketplace platforms, although they differ in the degree of control that they provide for sellers. In almost all cases, e-commerce platforms provide integrated merchant accounts, and many require merchants to use the platform's preferred payment processing partner. Merchants who use e-commerce platforms will therefore not typically need to open a separate merchant account or shop for a payment gateway, as these services will be included in the e-commerce platform. Stripe is a very common backend payment processor for many e-commerce platforms due to its popularity among developers.

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Fundraising platforms, also known as crowdfunding platforms, are e-commerce platforms designed specifically for non-profits, charities, and individuals who need to raise money from large numbers of individuals. Instead of providing online inventory and shipping tools, fundraising platforms offer donation pages and donor management services for non-profits. Most fundraising platforms partner with one or two payment processors (such as Stripe or WePay) on the backend and then require their users to process donations through those partners. Like e-commerce platforms, fundraising platforms are intended as “all-in-one” solutions for donation-based entities.

Some fundraising platforms, such as BlackBaud and DonorPerfect, are geared toward large non-profit organizations with large donor bases and complex organizational demands. Others, such as Fundly, are primarily intended for local organizations and individual fundraising efforts. Non-profits can use traditional merchant accounts, e-commerce platforms, or fundraising platforms to collect payments, or they can mix and match. The best option for each NPO or individual depends on their specific needs.

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A new trend among web-oriented payment processors is to sell their services directly to e-commerce platforms and marketplace platforms. There is no established term for these companies, so let's call them “marketplace processors.” A marketplace processor is a web development company that sells payment processing services to e-commerce platforms, online marketplaces, and fundraising platforms. For instance, WePay is the primary credit card processor for Fundly and Crowdrise. WePay advertises its payment processing service to platforms like Fundly and Crowdrise in the hope that the developers at those companies will integrate WePay into their system. This ensures that WePay will become either the only payment processing option or one of a few payment processing options for all Fundly and Crowdrise users. In this respect, WePay can be thought of as a marketplace processor.

Marketplace processors may advertise directly to merchants who open stores in online marketplaces, to users of crowdfunding platforms, or to the marketplace platform itself. Typically, though, they focus their marketing to the highest rung on the ladder: the marketplace. For this reason, people often aren't even aware that WePay, Stripe, or Braintree is processing their payments until they need to ask questions about their account. As e-commerce platforms and online marketplaces become more popular among businesses and consumers, it seems likely that marketplace processors will start commanding larger sectors of the credit card processing industry.

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A Simple Breakdown

In summary, here are some quick rules to help you understand all of these services and how they relate to each other:

• A merchant account is a special type of bank account required for the processing of all debit and credit card transactions. All payment processing services must connect to a merchant account.
• A POS system (example: Clover POS) is the hardware and software used to process payments through a merchant account in a face-to-face environment. Some e-commerce platforms and fundraising platforms offer POS systems for e-commerce merchants who also have physical storefronts. POS systems sometimes use a built-in payment gateway to process payments.
• Mobile payments (example: Square) can be payments transacted in-person using a mobile device, or they can be payments made within an app on a mobile device. Some POS systems consist entirely of mobile payment software and hardware. Many e-commerce platforms and fundraising platforms offer mobile payment POS systems.
• A payment gateway (example: Authorize.net) is a piece of software that securely connects a merchant account to the banking networks that process payments. E-commerce platforms and fundraising platforms usually come with a built-in payment gateway, and some POS systems use a payment gateway to transmit manually entered payments.
• An e-commerce platform (example: Shopify) is a web development company that enables merchants to sell products online. E-commerce platforms usually come with pre-integrated merchant accounts and payment gateways, which occasionally are sold to e-commerce platforms by marketplace processors. Fundraising platforms are e-commerce platforms that have been specialized for non-profit organizations.
• Fundraising platforms (example: Blackbaud) are e-commerce platforms that have been designed for donation-based organizations. Fundraising platforms usually come with pre-integrated merchant accounts and payment gateways, which occasionally are sold to fundraising platforms by marketplace processors. Non-profit organizations are free to choose from conventional merchant accounts, e-commerce platforms, or fundraising platforms to process their payments.
• Marketplace processors (example: WePay) sell merchant accounts and payment gateways to e-commerce platforms and fundraising platforms. Some marketplace processors sell their services to merchants as well as online platforms, while others specifically focus on platforms.

Do you have more questions about the differences between payment processing services? Share your thoughts in the comment section below!