Payment Gateways – What Are They and What Do They Do?
Payment gateways are secure technologies that process credit cards and direct payments for merchants. The gateway is like a cash register that handles electronic transactions. In physical stores, they are the Point of Sale terminals used to swipe cards. In an online store, the gateway is the payment processing portal you use at checkout.
The main difference with online payments is that instead of swiping a card, you will use the card details to make the transaction. The payment gateway is the front-end technology that handles the steps in the payment process. It safely communicates the customer’s details to the acquiring bank. The bank will then validate the transaction. Finally, it transfers the funds to the merchant’s account if everything is in order. Think of the payment gateways as the middleman between the customer and the merchant.
Payment Gateways – How do they work?
A payment gateway typically validates a payment within a few seconds. However, several things are happening under the hood during that time. The process begins when the customer proceeds to the checkout page. Most stores will have several payment options for the customer to choose from. Once the customer decides which payment option to use, the payment gateways take over. The steps depend on whether the online merchant stores the cardholder data. A web browser encrypts the customer data and sends it to the merchant’s server.
The merchant server then forwards it to their gateway. Alternatively, the data may go directly to the gateway, bypassing the merchant’s server. This reduces the merchant’s PCI compliance obligations. Next, the payment gateway will send the transaction details to the payment processor used by the merchant’s bank. The payment processor will then communicate with the customer’s card company. They will in turn send the transaction to the customer’s card-issuing bank. After some fraud checks, they verify if there are enough funds for the transaction.
The issuing bank approves or denies the transaction and notifies the payment processor. They relay the response to the payment gateway, which then informs the store’s website. Finally, both customer and merchant receive the result and the transaction is complete. The entire process only takes seconds to perform. And if successful, the funds arrive in the merchant’s account within a few days.
The Difference between Payment Gateways and Payment Processors
If you are selling goods online, or have a Point of Sale terminal in your store, you will need a merchant account. This is a specialized bank account that can deal with electronic payments. With this in place, your business can then handle credit card payments. Brick and mortar stores take payments using a Point of Sale terminal or a virtual terminal. The terminal reads the magnetic strip on the customer’s card.
Once it verifies the transaction, the terminal prints a receipt or sends an email to the customer. When selling online, the payment gateways replace the terminal. This is the checkout page where a customer confirms their payment details. The gateway is what obtains the customer’s details and starts the transaction. You can think of it as the cash register for your business. The payment gateway will then pass on the transaction details to the processor.
A payment processor is like a payment provider. The processor is the one that liaises with the customer’s card-issuing bank. It ensures that they have enough funds for the transaction. The processor then connects the issuing bank with your merchant account to transfer the funds. It is the payment gateway that securely authorizes the transaction. You need both a gateway and a processor to handle online payments.
Payment Gateways Types
There are three main types of payment gateways. If you are going to accept online payments you want to offer your customers a secure and easy process. If a customer has difficulty using your payment system, they may not complete the transaction. Many sales fail because of poor website experiences and technical issues at checkout. With any sale, a customer needs to feel secure with the payment process. Your store also needs to offer adequate payment methods. So choosing the right type of gateway is essential for your business.
Redirects
Redirects are the easiest type of checkout experience to put in place. When a customer is ready to check out, they are taken to another site to provide their details. This makes life easy for e-commerce merchants as their servers do not store credit card data. Once the transaction is complete, the customer returns to your website. The downside to this type of payment gateway is that it redirects the customer to another site. This can affect their user experience since there are extra steps in the process. But it also can add credibility to your store since the customer will use an established platform for payment.
Checkout on site, payment off-site
With this payment method, customers go to another site to complete the transaction. However, the site it redirects them to can look exactly like your website. This offers a good solution as the customer will not notice they are being redirected. They will enter their details on a hosted payment page, so you will not have to store their details on your servers. Once the transaction is complete, they return to your website, and will not be aware that they ever left. This offers a perfect blend of security and user experience. Since you are not storing the customer’s credit card details, you do not have to worry as much about security or a data breach.
On-site payments
With on-site checkout and payments, you give the best possible experience to your customers. They fill out their details on your site and there are no redirects. While this is the best experience for your customer, it increases the workload for the seller. Since everything happens on your servers, you are in charge of handling the security of the credit card data.
Storing customer’s data requires technical expertise and the costs can be higher for your business. The upside is that you are in complete control of the user’s shopping experience. Cart abandonment is less likely when you make checkout an easy process for your customer. But the major downside to on-site payments is that you must understand your extra responsibilities.
Payment Gateways – What to Consider When Choosing an Operator
If you wish to sell goods online, you will need to offer several payment options to your customers. So, the first step is to decide on what type of checkout experience you would like to offer. While being able to process payments on-site offers a great user experience, the setup fee may be higher than for a redirect system. You also need to consider the extra responsibility that you have when you process payments on-site. The next step is to ensure that your payment gateway provider offers a wide range of payment options.
The easier you make the checkout process for a customer, the less likely they are to abandon a cart. You also need to make sure that your gateway provider maintains PCI compliance. One of the greatest concerns for a customer using a credit card is security. They want to use brands they know they can trust. Most e-commerce merchants choose reputable payment providers to put their customers at ease.
Cost
When starting any business, it is important to analyze your startup costs. Payment Gateways have a wide range of fees depending on your needs. There is usually a monthly fee for their services and transaction fees for each payment. The monthly fee will vary depending on what checkout features you require. Gateway fees are charged per credit card transaction, with international payments costing more.
Bear in mind that you get what you pay for. It may be possible to find a cheaper monthly fee or cheaper payment gateway fees, but remember that fraud protection security is paramount. All banks take fraud detection seriously and so should online stores. Gateway providers are the most important step in securing your customer’s credit card details. So paying a higher monthly fee may be worth it for peace of mind. Remember, a customer will only complete a transaction if they feel secure on your website.
Accepted Payment Methods
By making it easy for your customer to pay, you increase the likelihood of them returning to your store. Having a payment gateway that accepts major credit companies such as Visa and MasterCard is a good start. But there are many more options worth considering. The more options you offer your customer, the better their experience will be. Being able to accept credit cards from other banks will offer a better solution for some customers.
Many online shoppers enjoy the convenience of using PayPal, Square, and Stripe for purchases. By offering your customer a choice of payment methods, you are one step closer to completing the sale. Remember that many sales fail because of poor checkout options. You do not want your customer to arrive at the checkout page, only to discover that their preferred payment method is unavailable.
Security
Your customers should always feel safe when using their credit cards. Credit card processing is integral to running a store online. People accept extra transaction fees for making card payments because they want the added security that it brings. If your website does not make them feel secure, people will be less likely to complete a transaction. And people will not use their credit cards if they don’t feel safe doing so.
Also, having many brands on your checkout page gives extra credibility to your website. Being able to accept payments in a secure way, helps your customers to trust your store. But, while most payment gateways are secure, you still need to consider data breaches. Any time that you store data on a server, there is a risk of a data leak. So paying a higher transaction fee to a gateway provider might be worth it if you increase your security.
Compatibility
The payment processing methods you use in your business may need to change as your business grows. Many online stores begin as small e-commerce stores but later become brick and mortar stores too. You need to choose a payment gateway provider that can grow with you. While a store may only need to deal with card payments at first, later you might need a virtual terminal. And what if customers wish to pay in person, or using a mobile phone? Your payment gateway provider should be able to handle this growth.
Payment gateways also need to be compatible with any software platforms or apps that your business may use. Additionally, having an online store means you are not limited to only local customers. Most online stores sell to multiple countries. So your chosen provider should be able to handle payment processing in multiple languages. These are all things you should consider when deciding on a payment gateway.
Constraints of Payment Gateways
While payment gateways are necessary for payment processing, they do have some constraints. Just like Point of Sale terminals, they do not accept every type of credit card. However, one of the main benefits of a gateway is that it can be expanded with a software update. Compatibility can also be an issue if your existing apps and software are not compatible with your gateway. Not every country uses the same authentication protocols, so international transactions can sometimes be difficult.
Popular payment methods also differ from country to country. While VISA and Mastercard are familiar to most people, other countries have their own cards and payment methods. And international shopping can bring higher fees per transaction because of currency changes. The good news is that most of these constraints are easily fixed by software updates. As online shopping increases in popularity, payment gateways are also improving.
Conclusion
A payment gateway is one of the most important tools an online business can use. Customers need to feel safe when making online purchases and businesses need to provide that security. You also need a payment solution that can grow as your business grows. Your gateway needs to connect your website with your merchant account and other payment processors. For customers, it needs to provide them with several payment options. Above all, payment gateways need to be convenient to use, reliable, and completely secure.