What is a Payment Gateway?

…So you’ve decided to start accepting credit cards from your customers or you’re ready to start selling your products and services online and one of the things you’ve been told you need to worry about is setting up a payment gateway. Ok, great, but what is a payment gateway and why does it matter? What are some of the questions you should be asking yourself or those who provide such services? Are there different types of gateways and, if so, what are the advantages and disadvantages of each? And, of course, what are the costs associated with setting up and maintaining a payment gateway?

Here we’ll look to answer all of these questions and more, to help you choose the best solution for the specific needs of your customers and the success of your business.

What is a payment gateway?

A payment gateway is technology which enables a business to accept credit card or debit card payments:

• Through an in-person payment processing terminal;
• A virtual terminal for accepting payments over the phone or via mail;
• Online via an e-commerce shopping cart.

The payment gateway then manages the back-and-forth transfer of account information, authorizations, approvals and funds between a merchant account and a payment processor.

What is a merchant account?

Any business accepting credit or debit card payments either in person or online must have a merchant account, which effectively establishes a relationship between your business and your bank. If you choose Clover as your payment processing terminal, you will need only one merchant ID for all types of transactions – in-store, online, virtual. With any other payment processing solution, separate merchant accounts are required to accept in person and online credit and debit card payments. Further, a separate merchant account is required for each type of card (i.e. Mastercard, Visa, American Express) you want to accept online.

In order to obtain a merchant account, you must apply for one at which point your business will be reviewed for risk and approval based on a number of criteria including:

• Type of business – does your business have a higher or lower risk of credit card fraud or chargebacks?
• Age of business
• Credit and debit processing volume
• Business credit/financial history
• Previous merchant account history
• Personal credit history of the business owner depending on the size of the business

To minimize their risk, banks may charge higher transaction fees for merchant accounts with higher risk. These fees can generally be negotiated once a business has been successfully operating for a reasonable period of time.

How much are merchant account fees?

The merchant account fees charged by financial institutions are tied to the risk associated with accepting credit or debit card payments. The higher the risk, the higher the fees. Online and virtual terminal credit and card payments, which are also referred to as “card not present” transactions, do carry more risk and therefore command higher fees.

What is a payment processor?

A payment processor is the financial institution/bank which issues a credit or debit card to a consumer to make in-store or online purchases. The payment processor receives credit approval requests from merchant accounts via a payment gateway and interacts with a specific credit card network (Visa, Mastercard, Amex, etc.) depending on which was used.

What is a payment switch?

A payment switch is part of the payment gateway, which routes incoming payment requests to the right payment processor. When a payment request or transaction enters the payment gateway via a payment terminal or e-commerce checkout it is sent to the payment switch, which analyzes and then sends the request to the proper financial institution for approval and processing.

The Full Payment Process

The steps in processing payments are the same whether a purchase is being made in-store, virtually, or online.

1. The customer provides their credit or debit card information by inserting, swiping, tapping a terminal with a card or mobile device or entering and submitting their personal and card details through an e-commerce checkout page. Note: In the case of payments made via a mobile device or online, no actual identifiable credit card information is transmitted. Rather, a process called tokenization has the credit card company providing a unique unrelated token for identification and authorization of online and digital wallet transactions. These tokens are used to protect the data against hackers and identity theft.
2. The payment gateway sends the transaction info to both the merchant account (your bank) and also sends a request for authorization and approval to the correct payment processor (financial institution) and credit card network via the payment switch based on which credit card was used.
3. The payment processor runs the transaction through a fraud check and determines if there is enough credit available in the purchaser’s account to complete the transaction.
4. The payment processor sends a transaction approval or rejection back through the credit card network to the merchant account and payment gateway.

While all of this processing happens in a relatively short period of time, its success is reliant on the quality of the networks through which each of these services communicates. When considering a payment gateway provider, be sure to inquire about the quality of their network, the reliability of their technology, their track record for availability and what, if any, service level agreements they offer in the event of an outage. Outages are sometimes unavoidable, but knowing the network and your business is well-supported will let you rest a little easier knowing any business effects will only be temporary.

What are the different types of payment gateways?

As mentioned, there are different types of payment processing and gateways geared to the needs and configurations of different businesses.

In-Store Gateways

The first type of payment gateway is the underlying technology built into a traditional in-store credit and debit card terminal. These secure PCI compliant devices enable payments made using all major credit and debit cards with EMV chip, swipe or contactless tap to pay options or via digital wallets and mobile apps like Apple Pay or Google Pay on mobile phones, watches and other IoT wearables.

Virtual Terminal Gateways

Virtual Terminals are web-based versions of in-store credit and debit machines. They enable businesses who accept orders over the phone, through traditional mail services or any other scenario where the credit or debit card is not physically present. Virtual terminals also allow businesses to easily set up scheduled and/or recurring payments, which are passed through payment gateways for processing automatically on their due dates.

E-commerce Gateways

When it comes to accepting online payments via an e-commerce website, there are a couple of options available in terms of how a payment gateway can be set up and configured.

1. A secure online payment gateway can be incorporated directly into an existing shopping cart if you’ve already chosen or developed an e-commerce system. In this case, the payment gateway simply manages, routes and reports on transactions at checkout.
2. A fully hosted online payment gateway can move the entire function of processing transactions away from your website and servers by simply adding a “Buy Now” button to your website. In this scenario, data can still be passed back to other business systems via an API to maintain its integrity. This option may be preferred by businesses not equipped with IT resources or those not wanting to interact with or store cardholder data.

If you maintain both a bricks-and-mortar business and an online business, you should consider working with a single provider who is able to coordinate the data managed by both payment gateways under one umbrella to save time and avoid the potential for duplication or errors.

How secure are payment gateways?

The protection of personal and business financial data is top of mind for everyone. All payment gateways, devices and software associated with credit and debit card payment processing are required to be compliant with PCI Security Standards Council standards. These protocols are monitored and updated on a regular basis in order to stay ahead of cyber criminals.

How does payment gateway pricing work?

Payment gateways are typically priced as a percentage of the sale and per transaction fees, based on the volume of transactions processed with lower transaction fees as volumes increase.

Depending on the type of online gateway needed and chosen, there may also be setup and configuration fees associated with connecting to your e-commerce system or customizing a fully hosted solution from a functional or branding perspective. Reputable payment processors will work with business owners to determine which solution will best fit their needs, budgets and growth plans.

You will naturally want to discuss and understand any and all fees regardless of the provider you choose.

Understanding Your Payment Gateway Needs

There is little doubt credit card, debit card, mobile device and online payments are here to stay with the latter two continuing to evolve and grow as consumers demand quicker, safer shopping experiences. With this in mind, business owners and managers should be aware of how critical business functions like payment processing work in order to maximize benefits and minimize costs.

Do you still have questions or are you ready to dive into setting up a new payment gateway? MONEXgroup offers the best solutions in Canada by partnering with some of the strongest payment gateway solutions across the world. Along with that, we provide best-in-class payment processing equipment, software and support for businesses of all sizes and across all industries. Our payment processing experts are available and happy to answer any questions you may have about how to get started with accepting credit, debit, mobile device or online payments. Contact us today!