What is a Payment Processing Gateway? What Merchants Need to Know

eCommerce is continuing to boom in popularity, with estimated consumers increasingly expected to shop online in 2023. But as online payment volumes go up, so do security concerns.

According to Nilson, U.S. losses from credit card fraud are forecast to reach $165.1 billion over the next decade. So, how do you prevent your business from adding to these statistics? By finding a robust payment gateway solution to safeguard the payment process.

We’ll dive into what a payment gateway is, how it works, and what businesses should look for to find the right payment gateway provider for their needs.

TL;DR

  • A payment gateway is an intermediary between a sales platform and a financial institution to process payments.
  • Payment gateways ensure that merchants have a secure way to process and authorize transactions online and accept different payment options.
  • To select the right payment gateway, merchants should check PCI DSS compliance, fee structures, and what sorts of payments a gateway solution accepts.

What is a Payment Gateway?

A payment gateway is a software application that acts as an intermediary between a sales platform and a financial institution to process payments. This merchant service can take place on an eCommerce website or using a point-of-sale (POS) system for in-person payments.

Payment gateway providers enable customers to make secure debit or credit card payments by encrypting sensitive payment information, such as credit card numbers, to ensure that transactions are conducted safely. Popular payment gateways include Stripe, PayPal, and authorize.net.

Subscribing to a reliable payment gateway means merchants can manage credit card processing with minimal risk to cardholders. This is why it’s important for small businesses to do their research and find the right provider for themselves and their customers.

How Does a Payment Gateway Work?

Put simply, your payment gateway is in charge of sending a customer’s payment information to the necessary parties once the payment is accepted by the merchant.

First, the payment gateway encrypts the customer’s credit card information and sends it to the payment processor. Once the transaction has been authorized, the payment gateway sends a notification back to the application where the payment was made. This could be a card reader, a mobile device, or a virtual terminal. This end-to-end process happens in real time and lasts only a few seconds before the customer or merchant is presented with an ‘accepted’ or ‘declined’ message.

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Why Do Merchants Need a Payment Gateway?

Protecting against fraud

The primary purpose of having a payment gateway is to make sure that merchants have a secure way to process and authorize transactions, whether online or in-store. A payment gateway encrypts sensitive customer information, such as credit card or bank account numbers, reducing liability when accepting payments. Many payment gateways also have the tools to handle chargebacks and disputes, which can be a complex and expensive process for merchants.

Making it easier to accept multiple payment options

Payment gateways help to streamline payment management by enabling merchants to accept a variety of payment types. Most payment gateway solutions are pre-built to offer payment options beyond Visa and Mastercard, such as ACH, digital wallets like PayPal, Buy Now, Pay Later, and even cryptocurrency. This gives customers more flexibility when shopping and avoids merchants having to manage each of these payment methods independently. If your business has an international customer base, a payment gateway also makes it easier to accept multiple currencies.

Detailed reporting and analytics

In addition to just processing payments, a wraparound payment gateway service also gives merchants powerful capabilities to help run their businesses more effectively. As your payment server, your gateway is a source of valuable information on how many payments are processed, how many repeat purchases, and when your peak sales periods are. This helps brands to understand their customers’ purchasing habits and make informed decisions about how to scale their business.

What Other Players/Entities Are Involved in Payment Processing?

The customer/cardholder. This person uses their credit or debit card to make an online or in-store purchase. They initiate the transaction by providing their payment information at checkout.

The merchant. The business sells goods and services via an eCommerce platform or physical storefront. They are the party that subscribes to the payment gateway service.

The issuing bank. This is the bank that the customer belongs to and who is responsible for issuing their credit card on behalf of card networks like Visa or Mastercard. Once the transaction has been approved, the issuing bank will move funds from the customer’s account to the merchant account.

The acquiring bank. This financial institution sets up the business’s merchant account and allows them to securely accept credit card payments. Whenever a customer purchases, the acquiring bank reroutes funds from the issuing bank to the merchant account.

The payment processor. The payment processor is a separate service from the gateway that sends payment information to the issuing bank for approval, before facilitating the transfer of funds between the customer’s bank account and a merchant’s bank account.

The card network. Card networks sit between the merchant and the issuing/acquiring banks to facilitate transactions made by the cardholder. Card networks charge a fee to financial institutions to use their electronic networks to process payments, which are usually passed on to cardholders.

Different Types of Payment Gateways

Hosted payment gateway

A hosted gateway redirects your customers to a secure payment page hosted by your payment gateway provider. This means the transaction doesn’t take place on your website or app. The customer selects their preferred payment option and enters their payment information, and the payment gateway processes the transaction. Once the payment is complete, the customer is sent back to the merchant’s website and receives confirmation.

Hosted online payment gateways work best for business owners who don’t want to worry about maintaining their gateway. However, redirecting customers away from your website can cause security concerns.

Self-hosted payment gateway

Instead of directing your customers on-site, a self-hosted payment gateway sees payment information collected directly from your website. Shoppers enter their payment information into a form embedded at the checkout. The payment gateway then encrypts it and sends it to the issuing bank to process the transaction.

One of the biggest benefits of self-hosted gateways is that customers stay on your website or app the entire time. This helps to reduce shopping cart abandonment and speed up the checkout process.

API Payment gateway

Also known as an integrated payment gateway, this payment solution allows merchants to integrate their payment service provider directly into their own website or eCommerce platform. By communicating with the gateway server using a series of predefined APIs, the merchant can set up their gateway according to their preferences.

API gateways are usually quick to set up and involve minimal coding due to the pre-built nature of the integration. However, merchants are responsible for maintaining their own PCI DSS (Payment Card Industry Data Security Standards) compliance for security.

Local bank integration

Some financial institutions do offer their own payment gateway services, where the customers are directed to the bank’s own portal or website to complete payment. These gateways function exactly like a regular payment gateway, but may not accept as many payment options or offer services like split or recurring billing.

Local bank payment gateways offer a great option for merchants just getting started, but may not meet business needs as transaction volumes grow.

How To Select the Right Payment Gateway

Payment types. Some payment gateways allow merchants to accept various payment methods, while others are more limited in scope. You should always explore a potential gateway to see what it does or doesn’t accept, including specific credit cards (like American Express), ACH, or digital wallets. Compare this to your most commonly-used payment types to check it meets your customers’ needs.

Security. Make sure that any payment gateway has full PCI compliance and uses fraud prevention methods such as tokenization to keep credit card transactions encrypted. This ensures your customers feel safe and comfortable using your gateway, instead of defecting to another business.

Integrations. Your payment gateway must integrate seamlessly with your eCommerce platform and other business management platforms for successful payment processing and accurate reporting.

Fees. Payment gateway services can involve various fees, such as setup fees, transaction fees, chargeback fees, and fees for processing payments made in foreign currencies. It’s important to check a provider’s pricing list to understand what is covered as part of your monthly fees. This will help determine which solution is best for your business’s needs.

Customization. Some payment gateways offer extensive customization regarding branding, checkout workflow, or billing intervals, while others do not allow these aspects to be changed or require upgrading to a higher plan. If you want custom elements, ensure your chosen provider has these capabilities.

Final Words

Selecting a reliable payment gateway is essential for any in-store or online business. Payment gateways enable customers to make seamless, secure transactions, which in turn increases customer satisfaction and boosts the likelihood of repeat purchases. With so many payment solutions available on the market, businesses can choose a payment gateway tailored to their precise needs and customer profile, ensuring it doesn’t add friction to the payment process while maximizing revenue opportunities.

With our complete suite of payment processing solutions, Stax can support your payment gateway needs, and so much more. Get in touch with our payment experts to learn more

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