A payment gateway is a service for merchants processing card-not-present transactions for customers, typically on e-commerce websites with online ordering systems. They also might be used for purchases made through a telephone ordering system.
Even modern brick-and-mortar stores usually use POS systems and payment gateways connected to the internet. They are a great resource for customers who want to pay with a credit card. Once the card is physically swiped, the POS system communicates with a server managed by the POS provider, and with the processor or bank on the front end that transfers the money to a merchant account. Online payment gateways, on the other hand, conduct the entire process remotely.
In short, the payment gateway provides a way for you to accept payments online from customers using credit or debit cards. Every time a customer submits payment information, the payment gateway either approves or denies each transaction based on the information inputted. Think of it as a digital version of a physical point-of-sale system. It not only includes all the functions of a brick-and-mortar POS, it allows the merchant and customer to use it from anywhere in the world.
How Do Payment Gateways Work?
For a payment gateway to work, the customer needs to input his or her payment information into an online ordering system. In the case of e-commerce websites, this information is usually entered by the customer by hand, and includes details like their credit card number and billing address.
Once information is entered and submitted, a validation set verifies that the customer has inputted information correctly and that the payment details match information on a customer’s account. For example, the system will validate that the card number and name the customer enters is a match for the name listed on the credit card account.
From the customer’s side, entering accurate information, confirming it, and clicking a button to submit their payment is just about all that needs to happen for merchants to receive payments on an e-commerce platform. All the other steps occur on the merchant’s end of the transaction.
Once the validity of the payment information is confirmed, the e-commerce website uses a secured connection to communicate the information through the payment gateway. This gateway transmits the information securely to a payment processor held by the issuing bank. The issuing bank can then accept or deny the transaction.
One of those two responses is sent back to the payment gateway, and if a transaction is denied, a code is included that gives the reason for the denial. The denial or acceptance of the transaction is then displayed on the e-commerce website for the customer to see, so they can try a different payment method or re-enter their information.
At this point, if the transaction is accepted, merchants send it along with other approved transactions all at once to the acquiring bank. The bank’s processing system settles the transactions, finally depositing the funds for each approved transaction into the appropriate merchant accounts.
Encryption is used at every step, so that every time the system passes information along, it remains secure from hackers. Despite the numerous steps involved, each new connection occurs invisibly and seamlessly. It completes the entire transaction just a few seconds after the customer submits their payment information. Once the merchant sends out a batch of approved transactions for settlement, the process is completed and the item can be shipped to the customer.
Types of Payment Gateways
There are several types of payment gateways merchants with e-commerce stores can choose from. They include manual payment systems, and seamless and non-seamless payment gateways.
Manual Payment System
A manual payment system won’t automate the processing of payment cards electronically, so they are less convenient. Manual payment systems use any number of methods to send money for an order outside of the online payment system. These can include bank transfers and money orders.
Manual payment systems are less popular today than in times past because they require more time and effort to process orders. For the same reason, they’re rare as an e-commerce payment method.
However, there is one advantage to manual payment systems: merchants won’t be charged per-transaction credit card fees on every sale.
Non-Seamless Payment Gateways
Non-seamless payment gateways are gateways that, rather than containing the entire checkout process within your e-commerce site, direct the customer to a website managed by your payment processor when the customer is ready to check out.
Seamless Payment Gateway Examples
Seamless payment gateways allow customers to complete transactions without ever leaving your website. These provide a more seamless experience, as customers can finish the checkout process without ever being redirected to external websites. Seamless payment gateways often offer additional tools, such as data tracking abilities, to help e-commerce business owners refine their offerings and processes.
Seamless payment gateways usually include the use of an API, or Application Programming Interface. An API is a system that allows for the integration of new features and applications into your e-commerce website. Popular APIs for e-commerce platforms integrate features like online shopping carts and customer service chat windows that allow visitors to engage in a live chat with a service representative.
One example of a seamless payment gateway is Payflow Pro, which is offered by PayPal. It integrates with your merchant PayPal account to allow for a seamless ordering experience directly from your e-commerce store.
Another example is Stripe. Stripe integrates with websites and apps to allow merchants to accept payments, and is used by everyone from small business owners to large businesses like Lyft. It enables mobile payments as well, which gives you a versatile suite of options depending on your particular business.
Authorize Net, or Authorize.net, is another popular option. A service of Visa, Authorize.net offers a full suite of features and allows for a diverse array of payment methods.
Typically, seamless payment gateways charge per-transaction costs as well as monthly fees. In exchange for these costs, merchants get an easy-to-use system that is feature-rich, inexpensive to set up initially, and in most cases, comes with easily-accessible technical support.
Key Features of Payment Gateway Software
Payment Trends & Payment Gateway Features
Payment gateway software features are always changing and improving. In addition to traditional POS functions for processing card-not-present transactions, software stays competitive by adapting to the latest trends in e-commerce retail.
One of these trends is mobile payments. Customers pay using their cell phones, which are connected to digital wallets such as those offered by PayPal or Apple Pay. More and more payment gateways offer the ability to accept payments from these digital wallet apps.
Cryptocurrencies are an emerging technology that many payment gateway providers are looking at as well. However, because cryptocurrency technologies are still in their infancy, and come with unresolved questions with regard to taxation and regulation, cryptocurrency integration features are still comparatively hard to find payment gateway options for. As the technology matures and regulatory details become clearer in the coming years, merchants should expect to hear more about how and why to accept cryptocurrencies.
Another trend is allowing for multiple customers to participate in a single payment. This facilitates sharing, which is an important feature of social life for Millennial consumers. Splitting the cost of items, or allowing for “community payments,” is a trend that payment gateways are responding to by offering more complex options for breaking down and dividing the cost among multiple people.
Another focus for payment gateways is intuitive user interfaces. Since the shopping experience has mostly moved online for many consumers, it’s important that the process is easy, the visuals are appealing and on-brand, and that customers come away from the experience with a positive impression. This will make them more likely to become a return buyer.
No system or piece of software is perfect, and payment gateway applications come with potential issues despite their convenience and technological prowess. For one, technical problems such as server outages, data loss, or simply the loss of Internet service at the physical location of the business could cause delays, missed orders, compromised data, or other issues.
On that same note, compromised customer data isn’t only an immediate financial issue for merchants and their customers. It’s also a public relations issue for companies, as they have to work to regain the trust of customers. This is a difficult task, but the best policy is always one where the company is fully transparent about the nature and scope of the breach, and releases a clear plan for avoiding similar issues in the future.
Card-not-present transactions, such as thoseperformed by e-commerce payment gateways, always come with their own potential risks. From data breaches to chargeback fraud, the convenience of card-not-present transactions is accompanied by the tradeoff of providing additional opportunities for data thieves and scammers.
This is where fraud protection comes in. Fraud protection services are helpful, and encryption is critical. However, the best line of defense is always general due diligence and best practices on the part of merchants. You can’t eliminate 100% of fraud, but with good habits, you can drastically reduce its frequency and resolve it more quickly when it does occur.
Benefits of Payment Gateways
Online payment gateways make it easier than ever to open an e-commerce business and start selling online with card-not-present transactions. They have lowered the barrier to entry so that all you need is a website and a subscription to a gateway provider to get started.
Another benefit is the ability to sell 24/7, and in countries other than your own. This was never possible with the old point-of-sale systems in brick-and-mortar retail establishments. Now that you can use gateways to accept international payments, you can drastically expand your customer base.
Customization also allows payment gateways to have an appearance that matches your brand and appears seamless with the rest of your website. A customizable appearance is important for online customers who expect a visually-appealing online buying experience
Security is also built-in, so you don’t have to worry about knowing how to encrypt connections or enable fraud protection. It’s all there already as part of the software. Lastly, additional tools allow users to track their businesses 24/7 from an app that lets them log in from any location with an internet connection. The flexibility is a boon for customers as well: they can pay from any location where they can connect to the web, even if they’re on a mobile device.
How to Choose a Payment Gateway
Payment gateways come with a wide array of features, and those with more extensive feature sets will come at a higher cost. Usually, gateway providers offer several tiers depending on the needs of your business. Regardless of the tier, you will be paying a monthly subscription fee and a per-transaction fee. Make sure you factor in both when you look at pricing.
The features that are necessary will be different for every business. However, it’s important that you select a payment gateway that will be compatible with whatever platform you used to build your e-commerce site. Platforms like WordPress, SquareSpace, and Wix are all popular for small businesses and artisans, and not all payment gateways are guaranteed to work seamlessly with each.
Another important factor is how customers send their payment method. Entering a credit card number is a likely avenue for many customers, but others may want to pay with platforms like PayPal or Apple Pay. If you don’t know your customer well enough to determine if these payment methods will be popular, you might not know how much business you’d miss out on by selecting a gateway that doesn’t offer them.
Lastly, since more and more online customers are shopping via mobile phones, ensuring your payment gateway is easy to use on mobile phones is very important. Mobile payments are increasingly popular, and the better the buying experience is on mobile, the more likely these customers will be to come back and buy again. Make sure the mobile shopping process is simple, clear, visually appealing, and speedy.
The final aspects you should consider are security and support. Choose a gateway with strong security and a good history of addressing support issues fast. Since everything breaks at some point, make sure you pick a payment gateway known for reliability and excellent customer service.
With these factors in mind, you can begin finding the payment gateway that’s a good fit for you. Find one that has all the features you need at a cost you can afford—and always check if the subscription is month-to-month or requires a yearlong contract. If the payment gateway you choose offers flexible plans, you can start with a more affordable one and then upgrade later if you realize you need more features.
Good luck, and happy shopping!