Payment Gateway – What Is It and Should You Consider One?
A Complete Guide to Payment Gateways
The expansion of global merchants has opened new doors for business evolution. A payment gateway is a merchant service that authorizes credit card or direct payment processing for businesses. Payment gateways can help build a better relationship between a customer and the merchant because it gives customers a variety of payment options for their transactions.
Essentially, a payment gateway provides customers with a hassle-free service of payment. Generally, the payment gateway method is provided by banks to their customers. However, it can also be offered by specialized financial service providers as a separate service.
The online transaction process occurs via three major steps:
- Payment gateway
- Virtual terminal
- Merchant’s account
In this post, we’ll go over what a payment gateway is and how it works. Plus, we’ll take a look at its advantages and drawbacks, as well as key types.
What is a Payment Gateway?
The global payment market is expected to touch new heights in 2020 with approximately 1.06 billion people likely to make mobile payments. A recent study forecasts that by 2023 this figure will grow to 1.31 billion people worldwide using mobile payments apps over a period of six months.
The rapid growth of mobile phone consumers and hand-held devices has provided an incentive to the thriving online payment techniques. This trend has also given rise to the payment gateway.
A payment gateway is generally a service that enables a business domain to accept transaction payment via a secured channel using a customer’s private data (i.e. credit card or debit card). The goal is to ensure maximum convenience and 100% safe transaction to customers for online procurement.
When choosing a payment gateway technology, here’s what you should keep in mind:
- Secured network: You want to provide a secured network that ensures customers all the safety they need while they share their information for transactions. Remember, whenever you accept credit cards, whether online or in-person, you need to be payment card industry (PCI)-compliant.
- Customer convenience: Along with security, customers expect a pleasant experience. Make sure to build an environment requiring minimal time and effort to process and purchase.
- Global payment acceptance: When you design a payment method, it is important to make the system globally accepted. It must not limit itself to a local sector.
- Service charges: It is feasible to adopt technology that fits your company’s budget. Make sure to opt for a payment gateway solution that is affordable yet efficient.
Payment Gateway vs. Payment Processor
Many people confuse payment gateways with payment processors. However, the two are somewhat different.
A payment processor is responsible for analyzing and transmitting transaction data. The relevant information is exchanged between the servers of issuing bank and merchant accounts. This includes transmitting relevant information to an issuing bank, such as the credit card or debit card number that links to a bank account.
On the other hand, the payment gateway performs similar actions in addition to authorizing the transfer of funds between the buyer and the seller.
When creating this system, it is important to research the payment gateway technology that is most suitable for your needs.
Types of Payment Gateways
The following are the main types of payment gateways:
This option includes a third-party software as the payment gateway. The merchant gateway redirects the session to a software engine, like PayPal, for transaction.
This option is advantageous to the retailer, as it provides maximum convenience and security to the customers. That’s why small business ventures prefer this type of payment gateway.
Online checkout, offline payment
If your organization wants to adopt this payment method, it is simpler in terms of dealing with the customers.
This method allows customers to make the payment, then be notified later after the transaction is successful.
Large-scale businesses usually opt for this payment method. The entire system is handled by the payment gateway only, without any third party involved.
In this case, you will be able to have full control, but at the same time, you’ll bear more responsibility. Plus, as all payments are handled at your end, it can overload your local servers.
How Payment Gateways Work
A payment gateway serves the purpose of securely passing sensitive cardholder info to the credit card processor from the point of sale (POS), then to the payment processor, and then back to the POS. In this process, it performs three basic steps:
- Encryption or cipher: The procedure of payment gateway is initiated by encoding the data exchange between the user’s browser and the server of the retailer, providing a safe communication way once the process begins.
- Approval: The service then generates an authorization request to the financing source in order to get an approval for transaction proceeding.
- Accomplishment: Once the permission is granted and payment gateway fulfills the transaction, it orients the interface to perform further action.
The payment gateway also performs a few other simultaneous activities. These include evaluating and re-checking transaction procedures to identify fraudulent ventures, calculating tax costs, and using geolocation for location-specific actions.
The key elements of the payment gateway workflow are:
- Customer: The cardholder who intends to make payment.
- Payment Gateway: Establishes a link between issuing bank and merchant’s account.
- Issuing Bank: The associated bank of the cardholder prompts the transaction on behalf of the holder’s credit or debit card.
- Merchant Account: The financial institution associated with the merchant receives the payment and generates a receipt recapping the transaction’s success.
Online Credit Card Payment Gateway
An online credit card payment gateway allows users to encrypt sensitive card details to ensure the information is passed securely between customer, merchant, and the acquiring bank.
When a customer places an order, it is directed to the payment page. If the merchant is fully compliant with necessary security standards, the payment page is generated at the merchant’s server which fetches all the cart information. The card and transaction details are gathered and stored on a secure site of payment gateway.
From there, the transaction is processed and all information is sent to the issuing bank for approval via a middle card scheme like Visa or MasterCard. Once the transaction is successfully conducted, the card scheme and gateway send an approval notification to the merchant’s website. The customer is then directed to the end of the session page.
A merchant gateway allows the retailer to hold a merchant account that facilitates the accepted payment methods, like credit cards, debit cards, or ACH payments.
If you choose to install a classic payment gateway, you need to ensure the associated banks offer merchant accounts with required policies. As merchant accounts are not offered by all banks, it may take almost 4 to 6 weeks for process setup, depending on the variation of approval time.
Advantages of Payment Gateways
The following are the main advantages of payment gateways:
Smooth User Experience
When you use a payment gateway, you are not simply using it as a channel to transact money. You are also providing your customer with a smooth and flawless experience. This helps you to please your customers and grab their attention, encouraging them to shop more via your website.
The PCI compliance makes it highly secure for the customers to save their payment details. Moreover, it provides an adequate room for fraudulent-free merchandising.
It provides a secure environment for your business and customer’s data by meeting PCI standards.
The online payment method easily handles additional features like return or exchange policy and/or money-back guarantee.
Disadvantages of Payment Gateways
The main limitations of payment gateways are as follows:
Gateways don’t always accept all types of cards or payments
Many payment gateways are capable of accepting cards universally. But some of them fail to offer such diversity at their portals. For example, Adyen limits its users to certain regions like North America and Europe.
Global customers may not have a payment option
International customers become reluctant to shop via those retailers that do not have a convenient payment option for them. Merchants looking to capture a broad worldwide audience need to make sure their payment gateway can handle it.
Did you know that more than one-third of consumers hesitate to place an order online due to security fears? Data breach and security violation are the two biggest fears of these customers. Keeping that in mind, even a high-quality payment method could be prone to maintain a check over server pool once the information is stacked.
Although TLS encryption helps most payment gateways handle the processing of privileged data like card information, once the data is on a server, that server remains a risk. Moreover, you can control much of the security at the transaction end, but it’s not possible to control who has access to your customer’s mobile device.
Malware that reads passwords and intrudes user accounts can still send seemingly-genuine transactions via secure payment gateways, even while the transaction itself is a scam.
Accept Payments With Revel
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