A Payment Gateway is an e-commerce software application that allows online transactions to take place and offers a means to accept online payments. It is a pass-through mechanism through which cards, net banking and e-wallet payments are done.
Payment aggregators are service providers through which e-commerce merchants process payments. Payment Aggregator is the inclusion of all these payment gateways. They allow merchants to accept bank transfers without setting up a merchant account that is associated with a bank. With payment gateway aggregators, one merchant account is used to represent a number of merchants opposed to the traditional model which disburses a merchant account to each merchant.
A payment aggregator need not act as a payment gateway, but a payment gateway will need an aggregator. Payment gateways allow the merchants to deal in a specific payment option put on the portal, whereas payment aggregators offer multiple options for payment, from bank transfers, credit/debit cards, e-wallet transactions, and recently UPI (unified payment interface).
Payment gateways use payment aggregators to be able to cater to small businesses. This is due to the fact that small businesses generally find the transaction fees provided by payment gateways too high and complex. Payment gateways play the role of an intermediary with merchants and customers who want to pay for any goods or services they are purchasing from the site. A payment aggregator is more an interface through which said intermediaries accept payments and make settlements. Payment gateways can quickly access small businesses once they integrate with payment aggregators. Payment aggregators are cost-effective for micro-transactions. The payment aggregator model tends to provide a platform for online transaction processing, with minimal or no startup fees and fixed costs.
It is a common misunderstanding that payment gateways alone are enough to process payments. This would work for a brick and mortar store (a POS machine for example) but not online. An online payment gateway is just the technological side of the transaction. It mostly takes care of the data in the payment messages. The payment gateway has a bank working behind the scenes to issue merchant accounts. When there are too many merchants applying for merchant accounts, willing to process payments, the authorizing banks will have to organize both the underwriting and fund transfer process for multiple merchants, which could become too much. This is where payment aggregators came in. Payment aggregators went through the underwriting process with the acquiring bank and processed payments for many smaller sub-merchants
In the debate of payment aggregator vs. payment gateway, you cannot choose one or the other. While you must have (the gateway), the other is a payment processing choice. A payment aggregator might offer a payment gateway, but a payment gateway cannot offer a payment aggregator.