Many people are confused about the difference between companies such as Authorize.net, PayPal, CCnow, 2CO, Google Checkout and 2checkout.com.   They all allow the same basic functionality - the transfer of money from the customer to the merchant but the details are important.

Merchant Accounts And Gateways Vs. Third Party Processors - the basic difference

Authorize.net is a payment gateway.  It provides the interface between your website / computer program and your Merchant Account Provider.  There are quite a few payment gateways, some of which are independent and some of which are specific to certain groups of merchant account providers (see "Payment Gateways" and "Merchant Account Supply Chain").

PayPal, 2CO, CCNow, Google Checkout, 2Checkout, etc. are 3rd party processors, which means that it is their name that shows up on the customer's credit card bill and they who are ultimately responsible for fraudulent transactions.

Price Differences

Usually the 3rd party processors are cheaper for very small businesses (<$5000 revenue / month) because they have lower setup fees and fixed monthly costs.   They also usually charge a higher discount rate (as much as 5.5%).

The Merchant Account providers have more monthly and up-front costs but a lower discount and per-transaction rate (see "Merchant Account Costs", "Getting a Good Deal on Merchant Accounts", "Explaining the Fees")

There are several economic reasons for the price difference. 

• The 3rd party processors have developed systems that allow them to add new low-volume merchants to their systems in a very automated and cost-efficient manner. In contrast, the Merchant Account Providers require paper documentation, an assessment of the merchant's fraud risk, connections to your gateway (remember, most merchant account providers can work with almost any gateway), etc.  They benefit from investing in such systems
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• Familiarity with online business models - a big cost for the payment processor is the risk that a fraudulent transaction will be processed by the merchant (one that is disputed by the customer) and the merchant will not be able to make good on the resulting obligation.  Many of the merchant account providers are used to dealing with physical businesses, where a signature is required at the POS and the merchant may have a more personal connection with their customers (i.e. the shopkeeper who owns the corner convenience store isn't likely to sell 100 cartons of cigarettes to the punk looking kid who usually makes small purchsaes in cash but now suddenly shows up with a Platinum card).  The 3rd party processors have made evaluating and bearing the risk of online fraud a competence of theirs, so they are able to take on smaller merchants at lower cost.

Competition - there are only a few 3rd party processors, while there are thousands of merchant account providers.  The resulting competition among merchant account providers means that merchant accounts are usually cheaper unless you are a very small business or are doing business in a very high-risk category.

Interface Difference

Third party processors always require the shopper to leave your website and go to theirs to enter their credit card information.  There are a few reasons for that:

1. Security - if an API is used to communicate, theoretically the merchant could capture the credit card number of the customer for later fraudulent use before passing it on to the processor.

2. Lasting relationship with the customer - Google and Paypal hope to one day work their way up the value chain and become an alternate payment system that competes with credit cards.   The first step in doing that is to gain a critical mass of people who have accounts with them.  At the beginning of both PayPal and Google Payments each company actually paid shoppers to use PayPal or Google Payments for transactions.  

3. Reduced communications cost, standard interface - by not allowing connections from multiple gateways they reduce their IT costs.

Most merchants do not like sending customers to another company's page as part of the purchase transaction.  This is why once merchants have a real business they usually switch to a traditional merchant account provider rather than a 3rd party processor.

Special - High Risk Merchants

If you sell porn or gambling, most merchant account providers won't do business with you and you have to use a 3rd Party Processor.  Fortunately for you, your audience is more willing to accept this inconvenience.

Useful Links

How To Accept Credit Cards On Your Website - an article from MerchantAccountBlog