Payment Gateways vs. Payment Aggregators: Which Is Right for Your Business?

However, as soon as you start developing your fintech solution, online marketplace, or even the simplest D2C store in India, there is one question that is likely to be raised, namely whether you require a payment gateway, or a payment aggregator in India. In most cases, the confusion between these two concepts stems from the assumption that they are one and the same. Actually, they are not and can cause additional difficulties related to RBI compliance procedures.

As for their features, both options allow your customers to pay you using the online service. Among the methods of payment supported by both services, we can mention UPI payments, cards, e-wallets, and net banking. Both services offer "seamless checkout" for your customer. But beyond the marketing rhetoric, these are two different things that should be used in different situations.

Get this decision wrong and you might find yourself migrating providers six months in, redoing onboarding, or worse, running into an RBI compliance gap you didn't see coming. Knowing the difference between these solutions will help you to build your checkout experience, settle with the payment process and get your compliance requirements in order from the very beginning.

This guide tells you what each solution is and how RBI regulations apply to them differently. Here's what I'll be talking about:

1. What does payment gateway do and how?
2. What does payment aggregator do and why it's treated differently according to RBI regulations?
3. Real differences between them
4. Most overlooked RBI regulations for founders
5. Which one is more suitable for your business stage and size?
6. Common mistakes that businesses make while choosing a payment solution
7. Straight answers to common questions that founders ask us

Payment Gateway vs Payment Aggregator in India

In a hurry? Read below for the gist in one table

Imagine it like this: the payment gateway is basically the highway along which the payments travel. The payment aggregator, on the other hand, is the company that creates the highway for you, controls the toll booths and lets you drive on it without having to build a road yourselves.

Why Does it Matter in Indian Context?

The Indian payments landscape developed at a pace that is unparalleled in the world due to UPI, affordable data and an army of digitally native companies. The development of such a large-scale online payments market means that payment infrastructure is no longer "just another tech integration". Nowadays, it is also a matter of compliance.

The model you select affects:

1. User experience in checkout process
2. Transaction success rates
3. The speed of settlements to your account
4. Merchant onboarding speed
5. Fees you have to pay to the regulator and when
6. Scalability of your business

A beginner in business who is launching an online shop will benefit more from the plug-and-play solutions offered by the payment aggregators. A large organization with a huge number of monthly transactions and existing connections with banks will prefer to go for a gateway solution that they could customize and manage directly.

However, neither solution is irrevocable. Changing providers further down the road is possible, yet it is costly. Therefore, it would be wise to plan for at least two years ahead, taking into account future requirements.

What Is a Payment Gateway, exactly?

Once you click on 'pay now' button on your site, a whole range of events happen. Card details or UPI details get encrypted and validated, and then get sent through the right financial organizations and receive an answer within a few seconds. This system is the payment gateway.

A payment gateway is a secure connection between your business, your customer's bank and the payment processor. It makes sure that the payment data transfer happens securely and the transaction is either accepted or declined by the bank.

One detail to remember is that a payment gateway does not store the money of your customers nor onboard the merchants. 

How a Payment Gateway Actually Works

It looks instant from the outside, but a handful of systems are talking to each other behind the scenes:

1. The consumer chooses an item and proceeds to checkout.
2. The user enters the payment details, which can be credit/debit card, UPI, net banking or any other accepted method.
3. This data gets encrypted by the gateway before it travels further.
4. This request goes to the acquiring bank/payment processor.
5. This acquiring bank forwards it to the card network, who then includes the issuing bank of the consumer.
6. The issuing bank verifies the account, confirms funds, and responds with an approval/decline status.
7. The response comes back through the same path.
8. The consumer sees the message of success or failure on your website/mobile app.

The entire process takes just a few seconds, and that's precisely why consumers hardly give it a second thought.

Why Your Businesses Really Needs One

If you offer products or services online, checkout efficiency and security are not something to do just because; they are what will make you a customer or lose one. The importance of a payment gateway is illustrated by the following points.

1. It encrypts your data end to end
2. Lowers chances of fraud and unauthorized access
3. Handles cards, UPI, wallets, and net banking within one integration
4. Provides fast authorization
5. Builds customer trust at the checkout stage
6. Ensures that transactions are secure through web and mobile platforms

As transactions increase, the effectiveness of a gateway will become more noticeable.

An Example

Consider that you want to purchase a pair of headphones via the Internet. You place the item into your shopping cart, enter the card data, and click "Make Payment."

Meanwhile, the payment gateway encrypts the information and forwards it to the required financial institutions. The bank processes the payment and then sends its approval to the merchant before you even change tabs.

Take note of one thing about the payment gateway in this example: it did not retain any of your money, nor was it involved in determining when the merchant is actually paid.

Common Payment Gateway Features

1. End-to-end data encryption
2. Card tokenization for added security
3. Multi-currency support
4. Recurring and subscription billing
5. Mobile-optimized checkout
6. Fraud detection and risk scoring
7. API access for web and app integration
8. Transaction reporting and analytics

Not every provider offers all of these feature sets vary quite a bit depending on who you go with.

When a Standalone Payment Gateway is a Good Choice

The standalone gateway usually suits organizations who have sorted out all the issues related to the banks, and who value flexibility and control over ease of use. These are:

1. Big corporations who deal with large transactions
2. Banks and financial institutions
3. Mature companies in e-commerce
4. Companies that operate on their own merchant accounts
5. Organizations who require customization in their payment process
6. Organizations operating across several countries

Such organizations care more about flexibility and control than about convenience, which is the exact opposite approach for a rapidly growing business.

A Couple of Myths Worth Clearing Up

The biggest one: people assume a payment gateway and a payment aggregator are interchangeable. They collaborate regularly, yet their responsibilities differ.

Second, there is the misconception that a gateway will store or hold your funds. It does not; payment settlement and transfer take place via banks, payment processors, or aggregators. This misconception is the reason why many companies think that using a gateway will be sufficient for their business, when, in fact, they will have to implement additional solutions to start accepting payments.

The Takeaway on Gateways

Thus, a payment gateway is the technology that makes the process of payments possible in the first place, focusing on providing secure transactions, fast processing, and authorization. However, accepting payments means much more than just transferring the information. In this case, you will have to take care of onboarding, collections, settlements, and compliance. And that is precisely what a payment aggregator helps with.

Explaining Payment Aggregators

The payment aggregator is positioned above the gateway. Rather than having each individual merchant form a relationship with a bank individually, the aggregator signs up the merchants under the umbrella of their master merchant accounts. The aggregator then performs collections, settlements, and the regulatory work involved.

This can often make all the difference for a small business in accepting payments in just a few weeks rather than spending months negotiating with the banks individually.

Things the Payment Aggregator is Responsible For

1. Onboarding and KYC of merchants
2. Connecting to a payment gateway
3. Collecting payments on behalf of merchants
4. Sending payments to the merchants' bank accounts
5. Compliance and reporting to RBI
6. Risk management, refund processing and chargeback handling

Due to the significant amount of responsibility carried by aggregators, RBI regulations are stricter and more direct in the case of aggregators compared to the regulations placed on gateways.

Regulations by RBI for All Businesses to Note

While payment aggregators fall under RBI regulations, not merely software vendors, it implies that:

1. Payment Aggregators are required to be RBI authorised depending on the eligibility criteria like net worth and operational readiness of the firm.
2. Payment Aggregators are bound by certain regulations concerning merchant onboarding process, KYC and money management – specifically, the customer money will be kept in an escrow account and not mixed with the firm's money.
3. Payment settlement process and requirements will be governed by the RBI guidelines in terms of payment system rather than those provided by the payment provider in its contract.
4. Payment gateways, although not licensed according to these regulations, should comply with the overall payment system policy of RBI when dealing with payment data.

That is where most startups get wrong. When choosing a payment partner solely based on its fast integration and pricing, one can miss out on RBI compliance issue  and become potentially at risk themselves.

So Which One Should You Actually Pick?

No universal solution is applicable here as everything will depend on the current condition and future prospects of your company.

Use Payment Aggregator when: you are a startup, SME or marketplace, aiming at rapid payment integration and don’t want to go into negotiations with banks, outsourcing compliance issues to a professional partner.

Use Payment Gateway when: you have existing bank acquisition relationships, handle high amounts of transactions and want granular control over your payment flow and customizations.

Consider combining both solutions if: you need the fast onboarding functionality offered by the aggregator but intend to switch to a gateway in the future.

Mistakes Made by Businesses with Payment Solutions

1. Believing that a payment solution is an entirely technical choice and ignoring the compliance aspect until it is too late
2. Sourcing a payment gateway simply based on the cost and not confirming RBI authorization status
3. Lack of scalability planning, resulting in the costly process of migration when the volume of transactions increases
4. Ignoring different settlement cycles of various service providers that can impact cash flow
5. Thinking that marketplace payments are similar to those of a merchant

Corpzo: Making it Easier for Businesses to Stay Compliant with Payment and Fintech Regulation

Selecting the right payment structure is just one side of the coin; businesses running into digital payments are also faced with licensing, paperwork, and compliance in relation to RBI regulations, which makes things rather complex in most cases.

At Corpzo, we help startups, fintech firms, marketplaces, and other business entities to handle such matters in an easier way. Be it selecting a payment gateway, running your business as a payment aggregator or engaging in other forms of fintech activities – we will help you stay compliant from the very beginning.

Our Services

1. License for Payment Aggregators and RBI Guidelines relating thereto
2. RBI Compliance advisory for fintech companies
3. Business structuring and documentation
4. Corporate registration services
5. FEMA, GST & General Corporate Compliance
6. Documentation of Contracts
7. Advisory on regulatory and secretarial compliances

We do not just facilitate paper movement rather we guide you to navigate the maze of regulations, identify any potential compliance issues before they turn into costly mistakes and create a foundation which helps you to grow.

If you plan to establish or scale a payments company, contact us to understand the regulatory framework which applies to your payment system.

Frequently Asked Questions

What is the major distinction between payment gateway and payment aggregator?

A payment gateway ensures secure transmission of the payment information from the customer through banks to the merchant. In contrast, a payment aggregator takes care of all aspects, including merchant onboarding, settlements, and the entire operation necessary to accept the payments.

Is it possible to have payment gateway as well as a payment aggregator for your business?

Surely, and many companies do that. Most commonly, an aggregator uses some payment gateways under the hood. Enterprises may use direct gateway solutions depending on the structure of their banking systems.

Is RBI approval necessary for operating as a payment aggregator in India?

Indeed, every business willing to become a payment aggregator should have all necessary approvals from the RBI.

Is payment gateway regulated by the RBI?

In order to operate in India, a payment service provider should comply with the requirements of the RBI regarding payment systems and guidelines.

Which one will be better for startups?

Aggregators provide easier integration process and lesser banking formalities for startups and SMEs. However, it is best to decide based on the growth plans and willingness for compliance.

Will it be possible for marketplaces to collect payments without using payment aggregators?

Since marketplaces involve payment facilitation between buyers and sellers, there will be more regulatory issues attached to it. Based on the structure of the marketplace, use of aggregators is a better solution.

Will there be uniform settlement times by all providers?

No. It is dependent on the provider, the banking facility, nature of transaction, and contract terms.

What time will it take to integrate the payment gateway?

It will depend on the provider and the requirements. Integrations may take less than a week in some cases.

How will Corpzo help?

Corpzo assists companies in following guidelines of RBI for regulation, fintech compliances, legalities, incorporation, licensing, and ongoing compliances in the field of digital payments in India.

Ready to Build a Compliant Digital Payments Business?

If you are opening up an online shop, fintech product development or are planning to work as a payment aggregator, selecting appropriate infrastructure is only the first part of the process. It is equally important to comprehend the legal and regulatory landscape surrounding it.

With our help, you will be able to avoid unnecessary compliance headaches, run smoothly without interruptions and direct your efforts towards scaling up your operations.

Contact us at Corpzo for assistance with discussing your business model and developing an appropriate compliance strategy.