payment gateway

What is a Payment Gateway and how does it work?

A payment gateway is an electronic service that authorizes credit card or direct payments processing for e-businesses, online retailers, bricks and clicks or traditional brick and mortar businesses. They are sometimes referred to as “shops”, “storefronts” or simply “checkouts”. A successful payment request will result in a MOCC (Merchant Order Confirmation) which the merchant must later confirm or decline.

Payment gateways are offered by financial institutions, such as banks and credit unions, along with payment processors like PayPal and WorldPay. Merchants provide payment information directly to the gateway service, then they receive back an encrypted keys that form a secure connection between them.

Financial institutions and payment processors like PayPal and WorldPay will enable the merchant to send and receive credit card and direct payment data on a dedicated application-to-application connection, this makes it very secure; however, the merchant is responsible for keeping track of their accounts payable and accounts receivable.

The Payment gateway supports both recurring billing as well as digital receipts. Each gateway is different, depending on the bank or processor it has agreements with. For example, PayPal supports Digital receipts by email while Worldpay supports digital receipts via SMS to mobile devices.

What are the core components of payment gateway?

The 5 core components of payment gateways are:

  1. Customer Information
  2. Merchant Information
  3. Credit/Debit Card or Direct Payment Processing Network
  4. Account Authorization and Settlements, including Approved Amounts & Digital Receipts.
  5. Fraud Management Analysis & Prevention.

As you can see in the diagram above, Merchant is an entity that requests a quote, a service or a product from the Vendor. The Merchant then requests payment information from the Customer and passes it through to the Payment Gateway. Once this data is processed by the Payment Gateway it returns an approval code to the Merchant which must be later confirmed.

If your business will be selling both online and offline, you should consider implementing two separate payment gateways. To maintain consistency on the surface of the website, you should use one form for collecting credit card information and another form on the merchant site to collect customer’s physical address, which is needed for shipping purposes.

The first step would be to create a new website that can be linked with your current business website. This website will only be used for credit card transactions. This way you can have a unique website for your online sales and offline sales, but they both lead back to the same business site.

In addition, ensure that the products offered have the same prices on each website so as not to confuse customers with different product names or pricing on each page of your website.

There are two main types of payment gateways: online and offline. It is important to understand the difference between them before you select a payment gateway for your business.

  • Online Payments – With an online payment system, credit card data is transmitted through a direct socket connection or HTTP secure connection on a real-time transaction basis through the internet. This form of payment meets PCI Compliance standards that are required by some merchants who have to meet specific control objectives, including the need to protect cardholder data.
  • Offline Payments – With an offline payment system, credit card information is stored on a merchant’s server for batch processing at some point in time outside normal business hours. Offline payments are not generally PCI compliant unless they are processed through a gateway that provides real-time transaction processing.

An offline payment system is the most common payment method for prepaid cards, non-reloadable credit cards and non reloadable debit cards. The consumer enters their card information into an online form on your website or into your ecommerce application. You then submit this data to a payment gateway and they store the card information on their servers, and your merchant account is billed at some later date. A good example of this would be if you were selling prepaid phone cards or gift certificates on your website.

What does it cost to use a Payment Gateway?

The fees involved with payment gateways vary based on the pricing model your merchant account provider has established for you, however there are several fees associated with any type of payment gateway service.

The following list outlines some common fees involved in using a payment gateway:

  • Setup Fee – A one-time fee charged to establish the relationship between your business and the selected payment gateways.
  • Annual Fee – A fee charged on a yearly basis to maintain the relationship between your business and the payment gateway.
  • Transaction Fee – A sliding percentage fee that is charged for each transaction processed through the service. This fee can vary depending upon the pricing model of the payment gateway, but is generally a small percentage of the total transaction amount.
  • Decline Fee – A fee charged for transactions that are declined by the payment gateway as a result of insufficient or unverified funds, expired credit cards or other error conditions. This fee is generally minimal and may be waived by the merchant account provider if the transaction had been attempted on a weekend, holiday or late at night when declines are lower.
  • Chargeback Fee – A fee charged for each chargeback processed through the service, including fees incurred as a result of customer disputes and processing errors. This fee is generally minimal and may be waived by the merchant account provider if the transaction had been attempted on a weekend, holiday or late at night when declines are lower.
  • Early Termination Fee – A fee charged by the payment gateway if you decide to cancel your relationship with them before your contracted term expires. This can happen if you change merchant account providers, but want to continue using their service until the end of your contract.
  • Card Brand Fees – The credit card brands (Visa, Mastercard etc.) charge fees directly to the merchant account providers, which are then passed on to you. These fees vary depending on the type of card processed (credit or debit) and whether or not recurring billing is used (if there is service level agreement in place with your provider).