Payment Gateway

As an entrepreneur doing business online, providing your customers with a safe and efficient payment process is essential. The solution you offer should be functional and safe, providing for your business and clients’ needs. These should be the principal features to look for:

  • Anti-fraud technology
  • Support for diverse payment options
  • Highly convenient
  • Good compatibility with your management software tools. 

This brings us to payment gateways. It is one of the modern methods for accepting and processing debit and credit card payments and other electronic options. With the right payment gateway platform, you can choose what currencies to support, payment methods, and processing time. Besides, as the merchant, transaction fees are negotiable. 

This article will focus on online payment gateways – what they are, and examples to further explain them. As a business owner, understanding the basics of this critical payment infrastructure will help you make the right choice when setting up a system for your business.

What Is a Payment Gateway?

A payment gateway is a structure that receives and transfers payment requests and information from the customer’s to the merchant’s financial provider. Its function is to grab and send the data to the financial institution. If there is money available and the customer’s bank authorizes it, the payment gateway transfers the funds to the merchant’s account. 

It works whether a customer makes payments in person or via the internet. This includes the physical card readers you will find at brick-and-mortar stores to the payment processing online portals many e-commerce stores use.  

How do Payment Gateways Work?

The setup for a payment gateway differs depending on the nature of the store. Since it makes up a principal part of the frontend component that customer information for payment, all transactions follow this route. 

For payment gateway services to work, various parties must play their part. They include:

  • The customer or cardholder
  • Issuing bank (customer’s bank)
  • Acquiring bank (merchant’s bank)
  • Card network
  • Merchant
  • Payment processor. 

The payment processing gateway works by executing the following types of transactions:

  • Authorization: this is the first part of the payment processing. The issuing bank carries out this process to confirm if the cardholder has enough funds to pay. Such requests are only possible by sending through the gateway. You’ll usually find these transaction types for purchases involving long-time orders. 
  • Capture: this is the actual processing of funds for transactions that got authorization. The end occurs with the merchant receiving the funds. 
  • Sales: a combination of capture and authorization transactions. The payment processor sends a request to the issuing bank and receives the funds. Sales are transactions that usually happen for recurring payments, like a subscription. 
  • Refund: also known as cashback, occurs when the merchant returns the funds to the issuing bank with the charges.
  • Void: similar to a refund transaction, but only occurs when the funds are not captured. 

For online payment gateways, processing is more complicated. A customer may only see a small interface or window or be redirected to a different website, where they can complete checkout. However, on the backend, the processing involves all the stakeholders and financial institutions we’ve mentioned. This is how the online payments gateway works:

  1. The customer inputs the necessary information the website requires and clicks on purchase. All the information passes through the gateway with high-end encryption. 
  2. Depending on which payment gateway is in use, the merchant receives it and sends it to the payment processor, or the payment processor receives it directly. All information that passes through a payment gateway is stored in tokens for a higher level of protection. 
  3. The payment processor receives the information (payment processors are third-party players that connect the merchant to other stakeholders that clear transactions). This processor transmits the transaction request to the card network for swift processing.
  4. This company verifies the information at the card network and sends it to the issuing bank. 
  5. The issuing bank either authorizes or declines the transaction, sending back a code that contains details of the transaction status. 
  6. This information is sent back to the payment terminal via the payment gateway. In return, the customer gets the message on whether it was successful.
  7. Within two to three days, the merchant receives the funds via the acquiring bank (if authorized). 

Payment Processor vs. Payment Gateway

Often, merchants confuse the term “payment gateway” with a “payment processor” and “payment service provider.” 

The payment processor usually acts as a middleman between the issuing and acquiring financial institutions. They help you get approval and make the funds available to your merchant account immediately. To accomplish their objective, they utilize a payment gateway to communicate with the different stakeholders and access the funds to their partners, the merchants. 

A payment service provider combines the payment processor and payment gateway. The services also include offering a merchant account and other essential features that handle all aspects of the transaction. 

Businesses use reputable payment service providers like PaymentUSA since they can save on fees or charges and still enjoy many services. A merchant payment gateway often comes with other utilities that ensure a business has all it needs to offer its customers the best and safest payment processing options.  

Payment Gateways with Examples

Currently, an estimated 96% of Americans shop online, making the e-commerce payment gateway more common than a physical card-reader terminal. Hence, making things easy for people to carry out online payments is essential. 

To make this possible, integrating a payment gateway with a store’s website and management tools should be the key feature for every businessperson. When it comes to integration, there are four key options. Selecting the one that meets your needs depends on two factors:

  • Compliance with PCI-DSS financial regulations
  • The user experience with checkouts and payment processing. 

What's PCI-DSS regulation?

You may not need this section if your business does not require a payment gateway that processes or stores credit card details. That’s because this obligation rests on your payment processor or gateway. 

However, complying with industry guidelines is essential if your business thrives on recurring payments and credit card use. The PCI (payment card industry data security standard) guideline is an important piece of card payment processing. 

It concerns all the procedures a business must go through to ensure that customers’ financial details are safe from unauthorized access. This includes answering some basic questions for self-assessment for PCI standards, completing the attestation of compliance, carrying out scans to test for vulnerability, and submitting the relevant documentation to your acquiring bank and card network association. 

Now we will consider the types of payment gateways and how they differ based on integration and their advantages and disadvantages. Furthermore, for each option, we reveal if complying with PCI DSS regulations depends on the merchant or payment processor. 

Hosted payment gateway

A hosted payment gateway is outside the boundaries of an e-commerce website. Customers are redirected to a payment gateway interface to complete checkout to enter their financial information. Once the transaction is sent, the customer returns back to the e-commerce page. It is here they know the transaction status. 

Examples of businesses that use this payment gateway are small or local outlets that are okay with having an external payment processor. 

Pros: 

The top advantage of this payment gateway type is that the payment service provider accepts all payment processing types. There is also an option for the customer to save their card details on the platform without repeating the process. Since customers have to redirect to an external payment gateway page, the merchant has no need to pass through PCI regulations when using a hosted payment gateway. Integration is also accessible here.

Cons: 

For the cons: merchants may not completely control a hosted gateway. Also, the idea of visiting an external website to complete checkout does not sit right with some customers. This leads to a low conversion rate and does not help merchants that want to improve their branding. 

Direct post-payment gateway

The direct post-payment gateway is another critical method with continuous integration on the merchant’s website. Customers do not have to complete checkout on an external or third-party website. 

With the direct post-payment gateway type, the transaction goes directly to the channel once the customer clicks on “purchase” or “submit.” Merchants also don’t need PCI compliance here since no sensitive information is stored on the servers. Businesses of all sizes and industries can use this option. 

Pros:

This method helps to build a merchant’s branding image. Since transactions start and checkouts end on the same platform, it helps to create trust for the customer. It’s easy to customize the business logo on the checkout page, even without needing PCI compliance. 

Con:

While it makes your customers have faith in your website, a direct post-payment gateway does not have complete security. 

Non-hosted (integrated) payment gateway

The non-hosted or integrated payment gateway means that no payment processor receives the information at the other end. Companies that employ this method as part of their payment processing are directly in charge of safely storing all customers’ payment information. Hence, they must acquire a PCI DSS Compliance clearance. 

Companies that use this option make use of a white-label payment gateway as part of their non-hosted solutions. White-label payment gateways are pre-built applications that are sold as is. Merchants can then customize and brand the page as they wish. 

This type of payment gateway is common with medium and large-scale businesses that prioritize customer experience and branding as key features for their companies. 

Pros:

With this method, you have complete control over the entire payment gateway. It’s a great way to build customers’ confidence and trust in your brand, as you can claim the white-label solution as yours. 

Cons:

While this is a genius attempt at boosting a business’s image to the public, the cost of purchase and maintenance is usually high. Besides, using an integrated online payment gateway means the business must pass through all the requirements to get a PCI clearance. In addition, integrating this payment gateway type can be tricky, especially if trying to add customization settings. 

Why Do You Need a Payment Gateway?

Since an increasing number of Americans settle for online payments, particularly credit cards, payment gateways are necessary. This important technology enables you to receive payments in a secure form while providing convenience to your customers. 

If your business has complex needs, settling for a payment service provider is essential. To scale up your business, you’ll need a merchant account and the necessary components, including software and hardware. 

Allow PaymentUSA to be your Payment Service Provider

PaymentUSA is a top provider that provides end-to-end intelligent solutions for merchants of all industries. This includes payment gateway services that are secure, fast, and reliable. With our years of experience, partnership with international banks, and support for multiple currencies, let us help you scale your business to the next level. Book a free consultation today to speak with our representatives about our options. 

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