What is A Payment Gateway And What is its Role in Ecommerce

If you run an ecommerce site, then you’re going to need a payment gateway, there’s no way around it. If you’re a newbie to the world of payments, this may seem extremely complicated and out of you league.

The truth is, payment gateways aren’t as nearly complex as you may have initially believed.

Here’s a closer look at what payment gateways are and why they’re important for eCommerce sites. You will also find out how you can get started with your payment gateways immediately.

What Is a Payment Gateway?

“A payment gateway is the service that sends all of your credit card transactions to your credit card processors,” writes Will Lipovsky in a  previous Due post. “It also sends you a message from your credit card processor that lets you know a transaction has been authorized. There are even some payment gateways that will automatically add tax and screen for fraud.”

In other words, a payment gateway is simply a software application. It’s basically a conduit between an eCommerce website and the bank that authorizes (or declines) a customer’s credit card payment.

Credit and debit cards, eCheck (ACH), and even cryptocurrencies like bitcoin are all processed through payment gateways.

Ultimately, a payment gateway is the final step of the sales process on an ecommerce website. Without it you won’t be able to securely charge your customers when they purchase items from your website.

What is the Role of a Payment Gateway?

Payment gateway services are required for all online credit card processing. It’s the same exact process as a point of service (POS) device does when you pay for your lunch at restaurant.

The Payment gateways works with your purchase items from a brick and mortar retailer. So, the main role of a payment gateway is to authorize transactions between you and your customers.

Remember, without a payment gateway approving the transaction process cannot go move forward and you won’t receive your money.

Do I Need a Payment Gateway?

If you run a strictly eCommerce site, which means that you’re processing payments online, then the answer is absolutely, yes. There’s no other way to accept credit cards through the internet without a payment gateway.

Keep in mind that since transactions are processed over a payment gateway they are processed as “card-not-present” transactions. This means that the merchant is simply relying on the credit card information that the customer enters. The merchant doesn’t actually see the customer’s credit card.

During the card-not-present sale, there is no way to run the data on the card’s magstripe or EMV chip. The result is that there’s potential for higher instances of fraud. As a result, you may be charged a higher rate than card-present transactions.

How Do Payment Gateways Work?

As a customer, a payment gateways seems simple and straightforward. You visit an eCommerce site, select the items you want, add them to your cart, and checkout.

You enter your payment information and confirm your order. Now you can sit back and relax until your item arrives at your doorstep. Behind the scenes, however, it’s a little more complex.

The gateway process follows these six steps.

Step 1: The customer places an order and enters their payment information. An online the transaction will be processed as a “card-not-present” transaction. Again, this may result in a higher processing rate. Once this info has been submitted, it’s encrypted, and then sent on it’s way.

Step 2: The encrypted data is first sent to the merchant’s processor, which is simply the company that actually processes the transaction.

Step 3: The processor routes the transaction data to the credit card association. Visa, MasterCard, Discover, or American Express are credit card associations. These card associations charge an  interchange fee for each transaction.

Step 4: The next step is where the transaction is approved or denied. The card will obviously need to be valid and have enough funds.

Also in the fourth step the authorized user must also not have any holds or freezes and the transaction will be authorized. What’s amazing is that these first four steps take place in a matter of seconds!

Step 5: The transaction becomes authorized. The issuing bank then transmits the authorization back to the parties in the payment processing network.

The authorization starts with the credit card association, then with the merchant’s business. Finally, back to the ecommerce site through the payment gateway.

Step 6: Although the transaction only takes seconds, it can take between 24 to 48 hours for the funds to be available in your account.

Setting Up a Payment Gateway

Before you can set up a payment gateway, you’ll need to legally set-up your business. You’ll want to obtain a tax ID number, called an EIN. You’ll open a business bank account, purchase a domain name, and have a working website.

Then select a third-party processor, such as Due or PayPal, so that you can accept payments online.

If you have a merchant account opened, find out if your bank is a merchant facility. This will allow a payment gateway to seamlessly connect directly to your bank account. Your funds are then deposited into your account from orders processed through your website.

You also want to speak with your payment gateway provider so that they can assist you in setting up your account correctly. They will help you by linking your bank accounts with their software and showing you how to use that software.

When these steps are completed you can integrate the payment gateway into your ecommerce website. This process may take a little technical knowledge. Hire or outsource an experienced developer to make sure that the payment gateway is properly running and is secure.

What’s the Difference Between Payment Gateways, Payment Processors, and Merchant Accounts?

If you’re new to online payments, you’ve probably heard people discuss payment gateways, payment processors and merchant accounts. It can get a little confusing, so let’s dive a little deeper.

A payment gateway is the mediator between eCommerce sites and the payment processor. This system securely authorizes payments for your eCommerce websites.

Payment Processor

A payment processor is typically a third-party company that’s been appointed by a merchant to handle payment transactions. The processor executes the transaction by transmitting data between you.

There is the bank that issued the customer’s credit card and your bank. A payment processor also provides credit card machines to accept credit card payments in-person.

As explained by Due, “It’s a fast and economical way to accept payments instead of creating your own merchant account. Just sign up with a third-party payment processor and you can start processing payments that day.”

Occasionally payment processors aren’t the most secure and you’re responsible for the per-transaction-percentage-fee. Check on these fees as they can end up higher than a dedicated merchant account.

Although payment gateways and payment processors are slightly different, many online services offer both features.

Merchant Accounts

Merchant accounts are special bank accounts that allow you to accept multiple forms of payments. The payments range from credit cards, debit cards, and ACH payments.

A merchant account can also be used to deposit funds and deduct processing fees. Basically, a merchant account is just a contract between a retailer and a credit card processing company. They allow a way for you to make fast, flexible, and secure payment options.

If you’re in eCommerce, you’ll need both a merchant account and a payment gateway in order to accept credit cards online.

Additional Payment Gateway Features

In addition to accepting online payments, payment gateways are also capable of helping you with the following:

• Payment Information Storage
• Storing payment information so that the customer doesn’t have to constantly re-renter their information. This information is encrypted so it ensure’s that the information is securely stored.
• Encryption
• All payment gateways encrypt sensitive payment information prior to them transmitting it to the processing bank.
• Recurring Billing
• Subscription-based pricing is becoming increasingly popular payment gateway. The subscription offers a recurring billing feature so that you can automate this process.
• Virtual Terminal
• A virtual terminal is a browser-based version of a physical credit card terminal. This terminal allows you to input a customer’s credit card information.
• The virtual terminal will then process the transaction directly through your computer’s web browser. It is even possible to use a mobile device through an online web form. Processing rates will always drop when the card is present.
• PCI Compliance
• Payment gateways must be PCI compliant so that you can accept payments securely, while avoiding costly fines.
• API Tools and Developer Information
• On the technical-side, most payment gateways give you the ability to customize it to fit your specific needs.
• Integration
• Payment gateways generally integrate with other tools, such as your accounting software like Quickbooks. You can also use your online shopping carts like Shopify.

How To Pick The Right Payment Gateway For Your Ecommerce Website

“When selecting payment gateways there are two options; hosted and integrated.

Hosted payments gateways, such as PayPal, redirect your customers to the payment platform’s processor to complete the transaction. The benefit of this gateway is that it’s responsible for all PCI compliance and data security.

The drawback with hosted gateways is that it could harm your conversion rates since customers are leaving your site. Many customers will not trust the gateway. Still, this may be your best option when just starting out.

Integrated gateways allow you to connect your eCommerce website through the gateway’s provided API. This means your customers aren’t redirected to another site so you aren’t harming your conversions.

However, you’re responsible for the security of your customer’s data. Most integrated gateways allow you to customize it’s features so you need to be familiar with some basic programming. You may even wish to hire a programmer.”

Now you know the difference between hosted and integrated payment gateways. You will also want to ask the following questions when selecting a gateway for your eCommerce site:

Is the payment gateway supported on your ecommerce platform?

For example, if you use Shopify, then you’ll need a gateway that integrates with that specific platform.

Do you want a payment gateway and merchant account or an all-in-one payment service provider?

PayPal and Stripe offer a combined payment gateway and merchant account. You may wish to combine gateways to make life easier when you’re just starting out.

What are the fees?

You will want to watch the fees. They can really add up. There can be Setup fees, Monthly fees, and Registration fees.

Be aware of the payment processing fees, transaction fees, refund fees, and chargeback fees. These often take people by surprise.

Here are a couple of fees that are a favorite to hate, like the limit fees (which can be a transaction value limit, or monthly transaction limits). You can really get stung by these on your bill.

Also beware the batch processing fee, fund transfer fee, and termination fees.

What are the terms of your contract?

Some payment providers can lock merchants up for at least two years. Don’t know much about this? Unless it’s really straight forward, get some help to read before signing.

What currencies does the gateway support?

Since you’re an online business, the more currencies you accept, the more business will drive-in.

What fraud prevention tools does the gateway offer?

Preventing fraud is a full time job. It provides Card Verification Value (CVV) and Address Verification System (AVS).

What support is available?

You may not need 24/7 support. Maybe it will be easy to set-up and manage the gateway. Still you may wish to be able to talk someone when needed.

Are you in a “high-risk” business? These are considered higher risk businesses: e-cigarettes, drug paraphernalia, pornography, alcohol and guns.

Even travel, debt collection, and diet program, are classified as high risk products. This means that most payment gateways will not support processing transactions related to these products.

Will the gateway grow with your business?

Does the gateway you choose have the features and ability to process larger amounts of transactions. Can you add features as you grow as a business?

All of the information in this article may be hard to digest. It is best to get help when setting up your payments system if you have never done this before.

It may be best for you to choose a company that has a “one-flat-fee” type account.

John Rampton is an entrepreneur, investor, and startup enthusiast. He is a founder of the calendar productivity tool Calendar. You can sign up for early access to Calendar here!