What Are Payment Gateways and How Do They Work?
As the world becomes increasingly digitized, more and more companies are moving away from traditional payment methods (such as bank transfers) and opting for payment gateways that provide instant payments, encrypted security and peace of mind for customers and businesses alike.
Put simply, payment gateways are the glue between the merchant and the customer. Without a payment gateway, you would be unable to take online payments by credit or debit card or third-party gateways such as PayPal, Stripe, and Worldpay. These services provide a secure portal through which customers can make fast and convenient payments for goods and services from their computer or mobile device. The more payment methods and flexibility you offer your customers, the more chance you have of them doing business with you.
How Do Payment Gateways Work?
While the online payment process appears to be quick and seamless to the customer, there is a lot happening behind the scenes. Let’s take a look at the process in more detail:
Collection: A customer places an order on your website. They usually do this by pressing the ‘Submit Order’ (or equivalent) button.
Authentication: The information is encrypted by the web browser and sent to the merchant’s web server. The details are then sent by the merchant to their payment gateway. All information is still encrypted to protect its integrity in transit. The information is then passed to the payment processor used by the merchant’s acquiring bank and then onto the card issuing bank that the customer used, such as Visa or Mastercard.
Authorization and Settlement: The card issuing bank receives the authorization request and sends a response back to the processor with a response code. This response code determines whether the payment is approved or declined. The response is then forwarded to the payment gateway and onto the website where it is relayed to the customer in wording they can understand. This entire process takes 2-3 seconds. Authorization and settlement of funds will typically take 2 days.
Why Your Business Needs a Payment Gateway
Using a payment gateway not only makes for quick, convenient and secure payments for your customers but also helps to reduce the severity and frequency of credit card fraud. They are not only good for business; they are essential for business. A payment gateway also allows merchants to control and customize checkout pages and allows customers to stay on the merchant’s website without dealing with annoying popup windows or being taken to a new page.
Choosing and Setting Up the Right Payment Gateway
Before you can set up a payment gateway, you will need to set up your business legally and acquire a tax ID known as an EIN. If you already have a website, you can simply select a payment gateway provider and start accepting online payments. Otherwise, you will need to purchase a domain name and set up a website. In addition to a payment gateway that works through your website, many providers can also supply a card machine that allows you to take payments on the road or from a physical location such as a brick and mortar stall.
Security is paramount when selecting a payment gateway. Look for a provider that offers level 1 compliance with the Payment Card Industry Data Security Standard (PCI DSS) and that offers other security provisions, such as tokenization to ensure true end-to-end encryption.
Of course, all of these benefits don’t come for free so before setting up your payment gateway it would be wise to do some research on fee structures. Fees can vary significantly. For example, Paypal charges a merchant fee of 2.9% plus 30 cents before payments are deposited in your business bank account. Most payment gateway services take around 3-4 weeks to set up. However, Stripe and PayPal allow you to start taking payments right away.
There is no perfect payment gateway out there, and most eCommerce businesses select the platform that is the best fit for their needs. For some merchants, security may be a top priority. For others, their biggest priority may be cost. Before you choose the payment gateway that is best for your business and customers, make sure to review all options. The most important thing is that you make the payment process a pleasant and convenient experience for your users.