what is a payment gateway - man holding a payment terminal

What is a payment gateway?

Sunday, December 07, 2014

Online payments and transactions for customer checkout can appear seamless and straightforward at first glance. However, in the world of ecommerce, there are many processes and tools that ensure card transactions function effectively and safely for customers and businesses alike. 

Payment gateways are a part of the bigger picture in credit card processing. Online payment gateways are essential when operating an online store, accepting mobile payments, or when developing secure payments on a variety of online platforms. Payment gateways are increasingly relied upon for security purposes during transactions, so it's important to understand what they are and how they work for effective and enhanced business operations. 

This article will discuss the definition and operation of a payment gateway, how payment gateways support payment processing, what your business needs when it comes to payment solutions, and the cost and pricing to consider when exploring options for adding a payment gateway at your business.

What is a payment gateway? 

A payment gateway service is a technology that facilitates credit card payments through the connection of payment processors and merchant account providers. In essence, the payment gateway is a bridge that connects the entire transaction process from your customer to your business. A payment gateway functions by capturing payment data from the customer (and the issuing bank) and then transferring the data securely to the acquirer (the acquiring bank or financial institution that represents and holds the funds belonging to the merchant). The gateway is able to authenticate payment information and gather card number and credit card information to either accept or decline the transaction (primarily through the validation that funds are available). 

Payment gateways typically charge a fee to the business for the service of processing payments. The payment fee amount depends on various factors such as the type of business, level of risk of the transaction (i.e., in-store versus online purchase), type of card used for the transaction (credit, debit, reward, corporate, etc.), and the amount being charged. In person card-present transactions at the point of sale (POS) typically have lower rates compared to card not-present (CNP) transactions (online, over the phone, invoices, or mail order).

The entire process of accepting payments with the help of a payment gateway happens within seconds. The speed and efficiency as well as the reduction of other software needs is one of the primary benefits of adding a payment gateway system to the transaction processes at your business.

Let’s now look at the difference between payment gateways and payment processors. 

Payment gateways vs. payment processors 

Whether using a credit card from Visa, Mastercard, or American Express, or a debit card during a business transaction, payment gateways and payment processors support the overall completion of the transaction. Payment gateways and payment processors are not the same technology, although they are often misinterpreted to mean the same thing. It’s important to understand the difference between the two so that you have a better understanding of the components you’ll need for real-time transactions at your small business. 

As discussed, a payment gateway connects various bank accounts together and secures the exchange of data so that funds move securely across different financial institutions. A payment processor supports the exchange of cardholder information to the issuing bank through the analyzing and transmission of data. Once authorized and approved, the payment processor follows up with the merchant bank account to transfer the funds. The primary difference between these two tools is that the payment processor alone does not secure a transaction. The payment gateway ensures that the transaction is secure. So, when considering POS systems or the use of a virtual terminal at your business, you’ll need to consider the benefits of adding a payment gateway service provider on top of the required need of a payment processor. 

Do you need a payment gateway? 

As mentioned above, integrating a payment gateway for your payment platforms will help support your business to be payment card industry (PCI) compliant and allow your business to take extra steps toward the security of sensitive transaction information. However, payment gateways do have their limitations. They don’t always function with all payment methods or payment types, there may be limitations for international shoppers, and with ever-changing technologies, the concerns with data breaches are always present. Still, despite potential limitations with payment gateways, they offer value for companies as ecommerce expands and online retailers, like Amazon, become the standard choice for consumers when purchasing products. 

If you do not operate with a payment gateway as part of your payment process, there is an increased risk for fraud because card data is easier to access when fraud detection software is lacking or absent. Payment gateways secure all payment types (one-time payments, recurring payments, etc.) and therefore if there are a large amount of transactions taking place at your business, online payment security should be of the highest importance. If fraud takes place and impacts your customers, your business may be more likely to receive a chargeback which is where the business has to return payment to a customer due to a fraud dispute resulting in the customer’s favor. 

Outside of the security in the transaction itself, payment gateways also assess the customer’s availability of funds, open or closed accounts, credit card limits, and card expiration dates. This way, merchants can be assured that the transaction will be approved (or denied, thereby preventing the transfer of unauthorized funds), and the funds secured in a timely manner. Without the security of a payment gateway, there is a greater chance that transactions are prematurely and inaccurately authorized, thus providing an inaccurate picture of your business’s cash flow and financial bottom line. 

What to look for in a payment gateway 

Not all payment gateways are the same or offer the same incentives, perks, and benefits. If your business would like to move forward with working with a payment gateway provider and adding a payment gateway to your online payment processing system, it is important to know your options and know what to look for. Here are some options for your consideration. 

  • Security. The first thing to look for when establishing business with a payment gateway provider is to check that their product is PCI compliant. Customers need to trust that their data and card details will be protected, and so this first step is the most critical. Review additional security features that the payment gateway offers as well so that you can be assured that this is the right technology for you. 
  • Host settings. Payment information can be collected and processed either through a separate hosted site (which is established and already PCI compliant) or through hosting on your own company website during the payment transaction. If self-hosting, it is necessary for you to ensure that the site is PCI compliant and will protect all data collected from all payment options provided online. If hosting through an alternative site, it is important to understand how this appears for the customer and that it still supports a secure and streamlined customer experience. 
  • Customer experience. While protecting customer data, it is necessary to understand how your users experience the checkout process. How is the data collected? How many 'clicks' are required with moving from the shopping cart to providing payment information? Can the customer complete the payment using a mobile device? These are just some of the questions that will help you understand how your customers move through the platform. Customers want a simplified, straightforward, secure, and customized experience. Just as important, they want to have the option to pay with the method of their choosing, and so this may be an important consideration when implementing a payment gateway. 
  • Ease of implementation. The payment gateway needs to connect the entire process from your website to your merchant account, and a payment gateway, along with other payment processors, can help make this happen. When choosing a payment gateway provider, it is useful to see if they can provide a service that integrates with other payment processors and technologies to bundle the entire experience together. When operating under a singular system, your implementation process is more streamlined and the setup fees can be consolidated in fewer accounts. 
  • Extras and features. Depending on the needs of your business, you may want your payment gateway processor to offer unique features at the time of payment. For example, if your business has a membership system, you might consider the gateway to transmit particular information for that specific enrollment. Additionally, you could offer a monthly service that customers can enroll in at the time of payment. Being able to offer various perks or services is something that can be customized by different payment gateway providers. Determine your needs and research the providers that meet your needs as a cohesive and comprehensive payment solution.  

How much do payment gateways cost?

Payment gateways are purchased with the understanding that part of the cost is built within established transaction fees. Transaction fees may be standardized per transaction or formulated from a percentage of the total transaction. Typically, the average charge is $.10 for every credit card transaction completed. 

Moreover, payment gateway service providers also charge monthly fees for their service, ranging anywhere from $0-$25. It is important to keep in mind that some providers have hidden fees that can drive up the cost for the payment gateway. Hidden fees include setup fees, international charges, the cancellation of a service contract, among others. When signing on with a payment gateway service, be sure to read through the contract and follow-up on specific contract specifications so that you are aware of all aspects of using this service. Once implemented, your business will be able to implement payment processing online with the assurance that transactions are safe, efficient, fast, and secure. 

Want to get a payment gateway integrated in your business? 

Heartland is the point of sale, payments and payroll solution of choice for entrepreneurs that need human-centered technology to sell more, keep customers coming back and spend less time in the back office. Nearly 1,000,000 businesses trust us to guide them through market changes and technology challenges, so they can stay competitive and focus on building remarkable businesses instead of managing the daily grind. Learn more at heartland.us.