There’s no way around the fact that if you run an ecommerce, website, you’re going to need a payment gateway. If you’re new to the world of payments, it might seem a bit complicated to get your way around it. But the truth is, payment gateways are not as complex as you might think. In this post, we’ll take a closer look at payment gateways and uncover everything you need to know about them.
What is a Payment Gateway?
Payment gateways are ideally the services that send all card transactions to the card processors. Payment gateways facilitate credit card transactions by relaying vital information between payment portals like websites or mobile devices and the front-end bank or institution.
The payment gateways will also send a notification to you from the card processor to let you know if a transaction has successfully been authorized. Many gateways will even screen for fraudulent activity and automatically add tax. As such, they fulfil a vital role in the transaction process within ecommerce, by authorizing payment transactions between the merchant and the customer.
Payment gateways serve as the final step of the sales process in an ecommerce platform. Without the service, you’ll be unable to charge your customers securely whenever they purchase products or services from your website. Some of the most popular payment gateways include Square, Stripe, and PayPal/Braintree.
What’s the Purpose of a Payment Gateway?
All online credit card processing will require payment gateways services. It’s essentially the same process that a POS (point of service) device will perform when you’re say paying for your lunch or coffee at a restaurant.
Payment gateways usually work with your purchase items from a retailer with a brick and mortar store. As such, the main purpose of having a payment gateway is to facilitate the authorization of transactions between your store and your customers. Keep in mind that without a payment gateway, it’s almost impossible for the transactions to be approved, meaning you won’t receive your money.
Does Your Store Need a Payment Gateway?
If you’re running a strictly ecommerce focused website, meaning that you’re processing online transactions, then you absolutely need a payment gateway. You won’t find any other convenient way to accept credit card payments online without payment gateway services.
Remember that because transactions are processed via the payment gateways, they are typically processed as ‘card-not-present’ transactions. As such, the merchant simply transfers the credit card information entered by the customer. The merchant therefore doesn’t view the credit card of the customer.
With card-not-present sales, there’s absolutely no way that data can be run on the EMV chip or the magstripe on the card. Due to this, there’s a potential for instances of fraud, which typically results into higher charges compared to the ‘card-present transactions.
How a Payment Gateway Works
On the customer’s side, a payment gateway seems quite simple to follow and straightforward. All you need is to visit an ecommerce website, choose the items you want to purchase, add them to a cart, and then check out with your payment details.
You only have to enter some payment information or log into an account, and confirm the order. You can then sit back, relax, and wait for your item to arrive at your doorstep. However, behind the scenes, things are a bit more complicated than this.
A payment gateway generally follows the following steps:
- The client places an order for a certain product, and then enters relevant payment information. As an online transaction, this is processed as a card-not-present transaction, which might result into a higher processing fee. When the information has been entered and submitted, it’s encrypted and relayed to the processor.
- The encrypted information is transmitted to the merchant’s processor – the company that processes these transactions.
- The transaction data is then routed by the processor to the credit card association such as MasterCard, Visa, American Express, and Discover. Each transaction is charged an interchange fee by the card associations.
- This is the step where the transaction is either approved or denied. Obviously, the card has to have enough funds and be valid for the transaction to continue. If the authorized user doesn’t have any freezes or holds, the transaction will be authorized. The amazing part is the four steps occur in a matter of seconds.
- This is the step where the transaction is authorized. The issuing bank will then rely the authorization back to the relevant parties in the payment processing network. The authorization usually starts with the credit card association, proceeds to the merchants, and then back to the ecommerce site via the payment gateway.
- Even if the transaction generally takes seconds to complete, it might take between 24 to 48 hours for the funds to be available in your account.
How to Set Up a Payment Gateway
You need to first set up your business legally before you can set up a payment gateway account. You need to obtain a tax ID number referred to as an EIN. You’ll also have to buy a domain name, have a website up and running, and open a business bank or merchant account.
You then want to choose a third-party processor like GAM Payments, so that you are able to accept online payments.
If you’ve already opened a merchant account, enquire if your bank has a merchant facility. This allows the payment gateway to connect seamlessly to your bank account. Your funds will then be deposited into your business account from the transactions processed through your website.
Make sure you contact your payment gateway service provider to assist you to set up your account correctly, link your bank account with the software, and show you how to make best use of their software.
Once you complete these steps, you’re now ready to integrate your payment gateway into your ecommerce site. Since the process might require a little more than average technical knowledge, it’s best to outsource or hire an experience developer to ensure that the payment gateway is running properly and is secure.
Differences Between Payment Gateways and Payment Processors
If you’re new to online payments, you’ve probably gotten a bit confused when you heard people talking about or came across the terms payment processors and payment gateways. To help you get a clear picture of the difference between the two, let’s delve deeper. A payment gateway is ideally a mediator between the payment processor and the ecommerce sites. The system authorizes transactions securely for your ecommerce website.
What’s a Payment Processor?
A payment processor is the third-party company usually appointed by a merchant to handle various payment transactions. The payment processor executes a transaction by relaying the data between you. Keep in mind that there are two banks involved in the process: you bank and the bank that issued a credit card to your customer.
Payment processors also enable the credit card machines to accept different card payments in person. This way, they offer a quick, convenient, and economical way to accept credit card payments instead of creating a merchant account for your business. You just need to sign up with a third-party payment processor and you can then start processing payments within that day.
Payment processors aren’t the most secure, meaning that sometimes, you may be responsible for the percentage fee charged per transaction. Be sure to scrutinize these fees because they can end up being higher than having a dedicated merchant account. While payment processors and payment gateways are relatively different, many online services offer both features.
Differences Between Payment Gateways and Merchant Accounts
A merchant account is a special form of bank account that allows you to accept multiple types of payments, ranging from debit and credit cards to ACH payments. Essentially, a merchant account can be used for depositing funds and deducting processing fees.
In simple terms, a merchant account is a contract between the retailer and a credit card processing company, allowing for quick, flexible, and secure payment options. If you want to accept credit cards on your ecommerce website, you need to have both a merchant account and a payment gateway.
Additional Features of Payment Gateways
Aside from allowing you to accept online payments, payment gateways also offer a number of other features, including:
1. Storage of Payment Information
Nowadays, it’s vey important to store payment information so that the customer won’t have to constantly reenter their payment information. You don’t have to worry as the stored information is encrypted to make sure that it’s secured.
2. Recurring Billing
One features that is becoming increasingly popular among ecommerce sites is subscription-based pricing. Payment gateways offer a recurring billing feature to automate the entire billing process.
Before any sensitive data is transmitted to the processing bank, it’s properly encrypted by all payment processors, to make the process much more secure.
4. PCI Compliance
All the payment gateways must be PCI compliant to not only allow the clients to accept payments securely, but also avoid costly fines.
5. Virtual Terminal
A virtual terminal is essentially a web based version of the physical credit card terminal. It lets you input the credit card information of a customer, and it then processes the transaction directly via your web browser. You can even use the online web form on your mobile phone/tablet. If the card is present, the processing rates drop significantly.
In general, payment gateways integrate with other tools like accounting software such as Quickbooks. They also integrate into the popular online shopping carts like Shopify.
7. Developer Information and API Tools
On a technical level, most payment gateways will let you customize them to suit your specific needs.
How to Choose the Perfect Payment Gateway for Your Ecommerce Site
When choosing payment gateways, you generally have two options: Integrated and hosted. The hosted payments, like PayPal, typically redirect your customers to their platform’s payment processor to complete the transaction. The key advantage with this is that it remains responsible for data security and PCI compliance details.
However, hosted gateways come with a major drawback: it could harm your conversion rates because your customers will be leaving your site to complete the transaction, and many of them might not trust the gateway. Still, hosted gateways are still the best way to go when starting out.
On the other hand, integrated gateways let you connect your ecommerce website via the API provided by the gateway. As such, your customers won’t be redirected to a different site, and it won’t have an impact on your conversions.
Nonetheless, you’ll be responsible for the security of your customers data. Most of the integrated gateways will let you customize the features you get, but you need to be familiar with basic programming skills to make the most out of them. If you aren’t it doesn’t hurt to hire a programmer.
Security Standards of Payment Gateways
• Encryption: Payment gateways typically encrypt all data using SSL before it’s sent to the credit card network with the aim of protecting the sensitive account information of the buyer. This makes it almost impossible for fraudsters to access the data as it’s shuttled between the different parties in the payment chain.
• PCI Compliance: The Payment Card Industry Data Security Standard (PCI DSS) is a security checklist developed to prevent and reduce fraud. Any organization that processes debit and credit card payments, as well as merchants that accept card payments are responsible for their own PCI compliance.
How Much Do Payment Gateways Cost?
Keep a close eye on the fees because they can really add up. Expect setup fees, registration fees, and monthly fees. Payment processing fees, refund fees, transaction fees, and chargeback fees are also common, don’t be taken by surprise.
Payment gateways have different tiers of charges and fees per transaction, based on amount and volume. The tiers typically consist of a flat per transaction fee, and a monthly service fee. There might also be variable fees based on a percentage of the amount per transaction, and extra charges for things like payments from international cards, chargebacks, termination, batch processing, fund transfer, and more.