Virtual terminal vs payment gateway Which one’s better for your business

As a business owner, you’ve probably realized by now that there’s an entire world inside payment processing. There’s so much terminology to understand that it’s easy to get lost in the sea of definitions. With so many overlapping concepts, merchants often confuse multiple meanings and mistakenly use words interchangeably. Two of those oft-confused concepts? Payment gateways and virtual terminals.

Payment gateways and virtual terminals are two essential tools in the world of online and in store transactions. While both facilitate electronic and remote payments, they serve distinct purposes and are suited for different scenarios.

Let’s get into the nitty gritty of payment processing and take a deep dive into payment gateways and virtual terminals, how they work and the different use cases for each.

Payment processing and main stakeholders

Before getting into the differences between a payment gateway and a virtual terminal, it’s important to know how payment processing works and who’s involved. There are a lot of moving pieces when it comes to payment transactions. The main players or stakeholders involved in the process are as follows:

• Customers
• Merchants
• Card networks
• Customer’s bank (also known as issuing bank)
• Merchant’s bank (acquiring bank)

Now that we know who’s involved, it’s important to understand some of the steps taken to complete the transaction.

1. Initiation: The process begins when a customer initiates a transaction by making a purchase.
2. Data entry: The customer provides their payment details.
3. Authorization request: Next, the payment gateway sends an authorization request to the customer’s bank (issuing bank) to verify the availability of funds and check for fraud.
4. Approval: Now, the issuing bank reviews the request and approves or declines the transaction.
5. Transaction capture: If the authorization is approved, the transaction is captured, and the funds are set aside for the payment.
6. Settlement: The issuing banks transfer the funds to the merchant’s account, completing the settlement process.
7. Confirmation: The merchant receives confirmation of the completed transaction.
8. Receipt: Finally, a receipt is generated and sent to the customer, confirming the successful payment.

These steps may vary slightly depending on the payment method used (credit card, debit card, digital wallets, etc) and the specific payment processor, digital payment service or gateway employed by the merchant. However, this sequence provides a general overview of the key stages in payment processing.

What is a virtual terminal?

A virtual terminal is a web-based application that allows businesses to accept credit card payments when the cardholder is not physically present. It’s essentially a merchant-facing device where merchants can input card information for Card-Not-Present (CNP) transactions. Merchants use virtual terminals when taking orders by phone, fax, mail, email or even in person.

What are Card-Not-Present (CNP) transactions? 

As the name states, CNP transactions take place when payment is being made remotely, the merchant does not have the physical card and cannot process the card in their payment terminal. Given the nature of a CNP transaction these are considered high risk types of payments. Virtual terminals are used to be able to process CNP transactions.

What are Card-Present transactions? 

On the other hand, Card-Present transactions take place when the card is physically present at the point of sale. These transitions often take place at a brick-and-order store or a point of business, allowing swiping or inserting on the payment terminal, or contactless payments like tapping. These transactions are considered more secure and have lower processing fees than CNP transactions and sometimes even require PIN codes to be input.

Features and benefits of virtual terminal

There are alot of benefits to having a virtual terminal in hand. One of the main ones? Ensuring continued service if a payment terminal stops working, or your online store isn’t able to accept payments. Through a virtual terminal, merchants are able to take advantage of the following features:

• Card-Not-Present transactions: The main purpose of virtual terminals is to be able to take CNP transactions.
• Phone and mail orders: Customer service representatives can input card details into the virtual terminal, processing payments efficiently.
• Manual transactions: They give merchants the possibility of inputting in orders manually when a physical terminal isn’t available or functioning.
• Flexibility: Virtual terminals are versatile, making them suitable for a wide range of businesses, including service providers, mail-order companies, and nonprofits.
• Recurring billing: You can easily set up and schedule recurring payments.
• Invoicing: Virtual terminals can produce invoices to send to customers by printing, email or mail.
• Convenience: You can use a virtual terminal anywhere where there’s an internet connection. This means you can use your laptop, tablet or phone to serve as a virtual terminal.

Examples of businesses that benefit from a virtual terminal

While most businesses can benefit from a virtual terminal, these are some of examples of businesses that use it on the regular:

• Retail stores that accept orders by phone or mail.
• Restaurants that take orders for delivery or even pickup by phone or online.
• Professional services (think doctor’s offices).
• Wellness businesses like spas and salons that want to take payment without a card reader.
• Freelancers and consultants

What is a payment gateway?

Often referred to as the “backbone” of payment processing transactions, payment gateways play a pivotal role in accepting payments online and in store. When a customer initiates a transaction, the payment gateway is responsible for gathering, transmitting and authorizing the customer data to the merchant (or acquiring) bank, all in real-time. The payment gateway essentially lets the merchant know whether the transaction was approved or declined. Due to increasing mobile adoption for payments and shopping, payment gateways are a fast growing market, with a market size of 26.79 billion in 2022 and a projected compound annual growth rate of 22.2% by 2030.

Features and benefits of payment gateway

The benefits of having a payment gateway are wide ranging, but will depend entirely on what type of business you run and how you take payments. Here are some example of features and advantages:

• Online and in-store transactions: Payment gateways are an essential step for facilitating payments. They serve as intermediaries between your eCommerce platform and physical store and the customer’s financial institution.
• Security: Payment gateways are equipped with encryption to protect customer data.
• Tokenization: Tokenization is an additional security measure employed by payment gateways to safeguard users’ payment card information. In the payment procedure, the confidential bank card details are substituted with a distinctive identifier, commonly known as a token.
• Payment processing: Payment gateways are at the core of processing payments. They are responsible for transmitting information safely between the customer and the payment processor, helping verify the transaction and transfer of funds to the merchant.
• Real-time authorization: Payment gateways provide real-time authorization, allowing customers to know instantly whether their payment is approved or declined.
• Expanding market reach: Payment gateways simplify the process of establishing an online counterpart to a physical store, allowing businesses to tap into worldwide markets effectively.

Examples of businesses that use a payment gateway

For many businesses, including eCommerce businesses, payment gateways are a must-have. These are some of businesses that benefit from using a payment gateway:

• eCommerce retailers: Online stores selling products.
• Subscription services: Streaming platforms, subscription boxes, and software-as-a-service (SaaS).
• Online publishers: Such as news websites and content creators.
• Travel and hospitality: Airlines, hotels, and travel agencies.
• Food delivery and restaurants: Online food delivery services and restaurants with online ordering capabilities rely on payment gateways.
• Fitness and wellness: Gyms, yoga studios, and wellness centers use payment gateways for membership fees and class bookings.

Main differences between a payment gateway and virtual POS

While there’s definitely a lot of overlap between the two, there are some clear differences.

Accessibility: Customer facing vs merchant facing

• Payment gateways: Payment gateways are customer-facing.  They are accessible through websites and mobile apps, making it convenient for customers.
• Virtual terminals: Unlike payment gateways, virtual terminals can only be accessed by the merchant to manually enter payment card information.

Online vs in store

• Payment gateway: Can be used for online and in-store purchase. When purchasing online, customers are able to input their payment information directly. In store, they would be able to use their card to make a payment.
• Virtual terminal: While a virtual terminal technically works for both brick-and-mortar and online sales, the merchant would have to key in all the information. For an online sale, for example, the customer would have to call, email, or fax the merchant and give them their payment information.

Use cases

• Payment gateway: Suited for e-commerce, online marketplaces, and subscription-based models.
• Virtual terminal: Useful for businesses with phone order sales, mail orders, and invoicing needs.

Do I need a payment gateway or a virtual POS?

The answer to this is: it depends! A payment gateway will not necessarily replace a virtual terminal and vice versa. In many cases you might even need both to ensure a smoother service for customers.

If you have an eCommerce store, for example, you’ll absolutely need a payment gateway, since this is the customer-facing process to accept online payments. You might also want to add a virtual terminal in case customers are having issues shopping through your online store. If a customer contacts you saying they’re payment isn’t working  on your website, you could use your virtual terminal to input the payment information on the backend and complete the transaction.

Whether or not you need a payment gateway or a virtual terminal will depend entirely on the type of business you run, your customers and the types of payments you want to take and where.

Whatever your payment processing needs are, one thing is certain: finding the right payment processor and POS system will make your life as a business owner or manager infinitely easier (and your transactions safer). Sekure Payment Experts can help you find the right partner for your processing needs.  We’re not payment processors, and this means that we can provide you with honest expert advice on transaction fees and a range of credit card payment services and POS companies. Schedule a demo today to get started on your payment processing journey.