What Is a Payment Gateway?
We love shopping and selling online today, but with this new form of shopping comes a new form of payment. The payment gateway is the answer to this complicated e-commerce boom.
A payment gatewayis essentially an application that serves as a middle-man between the buyer and the seller. It takes care of processing sensitive financial information. This facilitates the process for both buyers and sellers, and makes sure that the information is treated with all the care needed.
When it comes to payment gateways, merchant service providers can be independent financial services such as PayPal and 2Checkout, or banks.
Typically, payment gateways are used in e-commerce, although an increasing number of brick-and-mortar stores have started using payment gateways due to the transition from cash towards virtual currency and online wallets that are the trend in today’s economy.
How Do Payment Gateways Work?
As we’ve already discussed, payment gateways are the best way to shop and receive money as a seller online. When you think about the traditional exchange of money, that’s quite impossible for an e-commerce store, so payment gateways automate the process.
They do this through certain steps:
1. A customer orders from your online shop and/or enters their payment information
2. If you have SSL encryption, the customer’s information is encrypted and transferred to the payment gateway. Additionally, the gateway can also receive the information without the business having to store the data and transfer it through your website. This is beneficial both for the customer and you as the merchant, as you don’t have the responsibility of complying with data security rules and regulations.
3. The payment gateway next converts the message from XML format to a different message format, and forwards the information to the merchant’s bank.
4. The gateway gathers information from the customer’s card company (or a different payment processor) to see whether the payment will be approved or declined.
5. Once the bank gets the authorization request, they’ll send a response back to the processor, which will send a response to the payment gateway.
6. If the payment was approved, you and your payment gateway will receive a notification that the payment was authorized.
7. Merchants typically submit all authorizations at the end of the day, and the acquiring bank (the merchant’s bank) makes a batch settlement request from the buyer’s bank.
8. The customer’s bank makes a settlement payment and the acquiring bank deposits the total amount into your account.
Even though the entire process seems very time-consuming, the initial order to payment through the gateway process lasts about 2-3 seconds, while the process of receiving funds can take up to 3 days.
In order to make sure that the payment information is stored securely, and that the payment is received, payment gateways also use a variety of other tools to detect fraud.
The entire process is actually a lifesaver if you want to sell online, and setting it up as a merchant isn’t complicated.
Payment Gateway e-Commerce Integration:
If you want to accept payments on an e-commerce platform, you’ll need a payment gateway. Fortunately, there’s a plethora of options to pick from, and they all use the process described above to receive and forward the money to you as the merchant.
Some e-commerce platforms have their own payment processors, so it’s worth noting that you may not necessarily need a 3rdparty payment gateway to safely transfer payment information and receive payment.
There are a few key terms you’ll encounter as soon as you decide to integrate a payment gateway with your e-commerce site or your store.
Merchant account vs payment gateway
You can use merchant accounts and payment gateways to receive orders from their customers.
However, merchant accounts are typically used for brick-and-mortar stores. They allow you to accept different forms of payment. A merchant and a credit card processing company sign a contract, so you’re directly doing business with that company.
If you have an e-commerce store, a payment gateway is a much better solution.They work similarly to merchant accounts and credit card machines. However, they process payment information digitally, as opposed to physically.
Issuing bank and acquiring bank
Issuing and acquiring bank are common terms when it comes to payment gateways and processing payment digitally.
The issuing bank is your customer’s bank. It’s the bank responsible for forwarding the funds for the purchase to you and your bank.
On the other side is the acquiring bank. It is the merchant’s bank. This is the bank which requests and receives funds on your behalf and deposits them into your account.
A validation set is code executed at different processing points. They determine whether the payment entity passes applied rules. If all of the required rules aren’t satisfied, the build payments program will mark the payment as failed.
Types of Payment Gateways
Since different customers and merchants have different needs, it’s not surprising that there are multiple types of payment gateways. Depending on you and your customers’ needs, you may find that one type serves the purpose much better than the others.
However, when we talk about types of payment gateways, we commonly make a distinction between the following three:
1. Manual Payment System
Manual Payment System is the oldest system around. This is a great choice if you’re doing business with people from countries where manual payment is a common form of payment and where they may be reluctant to do business with credit cards and/or online payments in general.
Manual payment systems are typically:
- Cash on Delivery (CoD)
- Bank transfers/Direct deposits
- Mail orders
You receive the information as an encrypted PDF, and you can process it at your premises.
Many systems today now support manual payment, even though it may seem counterintuitive in e-commerce.
2. Non-Seamless Payment Gateways
Non-seamless payment gateway is one form of payment gateway integration where thepayment gateway handles all the financial details. The gateway offers payment options, and the customers are then redirected to their bank’s secure page (if applicable).
This is a great option if you don’t want to comply with different regulations of storing financial information, as the payment gateway will handle everything.
3. Seamless Payment Gateway Examples
Unlike the non-seamless payment gateway integration, seamless integration means that your customers will choose the payment option at your site instead of being redirected.
Good examples of seamless payment gateways include PayPal’s Payflow and SecurePay.
Both PayPal and SecurePay (as well as other, lesser-known options) will process the payments on your website without redirecting the customer to a different website.
This means that the payment will be much faster than with non-seamless payment gateways. However, you should check whether you’re required to comply with any laws.
Key Features of Payment Gateway Software
When choosing a payment gateway software for your store, there are the main features you should consider:
1. Seamless or non-seamless
Traditional gateways like Authorize.net redirect your customer to a different site, which can reduce conversions. Modern ones like PayPal’s Payflow keep the customer on your site, which can be more beneficial for your business.
2. Encryption standards
Pay special attention to encryption standards and integrations provided. You want to minimize all the possible risks, and make sure that your payment gateway is up to the current standards of data encryption.
3. Compatibility and speed
If you’re using an e-commerce platform, make sure that your payment gateway is compatible. Additionally, speed is a big factor because a slow payment gateway may result in customers’ confusion and reluctance to buy from you.
4. Review and report
Select a payment gateway that suits your reviewing and reporting needs. Each gateway charges a fee (which depends on a number of transactions, or can be a flat fee, or a commission per sale), and it’s good to keep an eye on that. Additionally, you may also want to review the number of failed payments.
A good payment gateway can help you understand the payment side of your business at a glance.
5. Fraud protection
Some fraud protection protocols are industry standard, but a payment gateway that offers additional tools to protect you and your customers is a good choice, especially if you have a high volume of sales.
6. Card-not-present transactions
Card-not-present transactions are a big security risk, especially when it comes to processing payments online. During these transactions, the credit card is not physically present, nor is the person making the purchase, so it opens up the possibility of fraud.
The latest trends in payment gateway software primarily focus on the areas of safety and simplicity, especially with the rise of DDoS attacks and online payment.
Benefits of Payment Gateways
If you want to seamlessly receive payment online, payment gateways are the perfect tool for you. With security and speed in mind, many payment gateways mean less time spent on payment processing and more time increasing competitive advantage in an oversaturated market.
Payment gateways are beneficial both for customers and merchants, as they open up new possibilities of shopping online safely.
So if you’re ready to start receiving payments online, here’s what you need to know to pick the perfect payment gateway for your business:
How to Choose a Payment Gateway
1. Assess the cost of the payment gateway
One of the main things to keep an eye on is the cost of the payment gateway. As we’ve previously discussed, some payment gateways charge monthly fees, while others chargetransaction fees. Others charge both, but offer more.
For example, Authorize.net has a minimum monthly fee of $25, with 2.9%+30c transaction fee.
2. Check compatibility with platform for e-commerce site
If you’re using e-commerce sites like Shopify or WooCommerce, double-check whether the payment gateway is compatible with your site of choice.
Keep in mind that some sites offer their own in-house payment gateways, so it may not be necessary for you to get a third-party payment gateway.
3. How will customers send their payment methods?
Not only do you have to keep track of compatibility and fees, but it’s also good to pay attention to how the customers will send their payment methods.
For example, with seamless integrations, they’ll be sending them through your site, while non-seamless tend to redirect them to the payment gateway or a different site. This may result in a decreased conversion rate.
4. Mobile usability
The current trend in online shopping is mobile. People have started using their smartphones more and more, and as a merchant, you should make sure that you’re staying in the loop.
The best payment gateways (if you have customers which love mobile shopping) have mobile usability and allow mobile payments, so you’re not losing customers by making them switch to desktop.
5. Digital security and support
Financial information is the most sensitive information, so whichever payment gateway you choose, make sure that it’s up to standard and proactively protects both you and your customers’ data.
Additionally, you also want to get the best customer service so you can get in touch with the payment gateway in case of any issues or doubts.
Examples of Payment Gateways
When it comes to payment gateways, the most popular three are PayPal, Stripe and Authorize.Net.
Authorize.net is a great example of a payment gateway that allows you as the merchant to receive payment. It’s a US-based company and was acquired by Visa, so it holds itself up to the highest security standards when it comes to accepting credit cards and electronic check payments.
There are a plethora of other payment gateways, so make sure you cross-reference all the information and find the perfect solution for you and your customers.
Online shopping has transformed the face of the modern economy – and in a large part, we’ve got payment gateways to thank for that.