How To Use A Payment Gateway To Process Credit Card Payments
Payment gateways have made the eCommerce revolution possible. Over the last 25 years, eCommerce has radically transformed how we shop for and buy things. Today, we can buy things online from the comfort of our own homes, and using credit cards to pay for those things is usually both convenient and secure.
Of the numerous software applications that make this possible, none is more important than the payment gateway. In this article, we’re going to explain what a payment gateway is, how it works, where you can get one, what features to look for, and how much you can expect to pay for one.
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What Is A Payment Gateway?
What is a payment gateway exactly? A payment gateway is an application that connects an eCommerce merchant’s website and the bank that will authorize or decline a customer’s credit card payment. Payment gateways can also process direct transactions using alternate payment methods, including echeck payments or bank-issued debit cards.
Regardless of the payment method used, the primary function of an online payment gateway is to a) securely transmit payment information from the customer to the customer’s issuing bank and all other parties to the transaction and b) securely transmit the acceptance or denial of the payment back to the merchant and customer.
Here’s a visual representation of the payment gateway process.
Payment Gateway VS Merchant Account
When it comes to a payment gateway vs. a merchant account, you might be wondering what the difference is and if you need both or just one of them.
A merchant account is an account that accepts payments from your customers after the payments have been processed. Your merchant account allows payment card funds to be sent by the acquiring bank and processing charges to be deducted by the processor before sending the funds to your checking account.
On the other hand, a payment gateway is simply a web service that allows credit card transactions to be processed over the internet. If you’re in eCommerce, you’ll need both a merchant account and a payment gateway to accept credit cards online. On the other hand, if you run a physical store and are just using a credit card terminal to accept credit cards, you can have a merchant account without needing a payment gateway. However, you need one if you want to use a virtual terminal to process keyed-in (or card-not-present) credit card transactions. What’s more, some POS software requires a payment gateway to function.
Here’s a list that shows the parties involved in payment processing and the roles each party plays.
- Payment Gateway: The conduit that transmits funds between your merchant account and your customer’s card account.
- Payment Processor: The financial institution that processes your payments.
- Acquirer: The financial institution that manages your merchant account.
- Merchant Account: The intermediary between your business and your customer’s card-issuing bank.
Another thing to note in the payment gateway vs. payment processor discussion is that because not all merchants need a payment gateway, they usually aren’t a standard feature of a merchant account (although some services do bundle the two together). Instead, merchant account providers will offer them as an optional feature when setting up your account.
Alternately, with third-party processors (such as PayPal or Square), a gateway is a core part of the product offerings. While you might pay a separate monthly gateway fee and a per-transaction fee with a merchant account, the cost of a gateway is built into the processing fees if you use a service such as Square or PayPal.
How Does A Payment Gateway Process Credit Cards?
Here’s a condensed explanation of how payment processing works.
The Customer’s Payment Is Handled By Your Gateway
The customer visits your eCommerce website, places an order, and provides a credit card number or another payment method. The customer’s payment information is then securely uploaded to the payment gateway. The gateway encrypts this information and sends it to your merchant account or a third-party processor.
The Credit Card Association Charges A Fee & Sends The Payment To The Issuing Bank For Approval
The transaction data is routed to your credit card association (think Visa, etc.), which then charges the processor an interchange fee (which then gets passed on to you) if the transaction is approved. The transaction is then either approved or declined by the customer’s issuing bank.
The Authorization Goes Back To You
After authorizing or declining the transaction, the issuing bank transmits this information back to the credit card association. From there, it goes back to your merchant account/processor, then to your gateway, then to your website, where you and your customer learn of the approval or denial of the transaction.
Funds Are Sent To Your Merchant Account & The Transaction Is Processed
Assuming the transaction is authorized, the issuing bank releases the funds to the acquiring bank to cover your customer’s order and the fees owing to all parties to the transaction. The acquiring bank then sends the funds to your merchant account and alerts your processor. That’s when your processor actually processes the transaction.
Your Business Receives The Transaction Proceeds
The processor, credit card association, acquiring bank, and the issuing bank all get a cut of the processing fee. The remaining funds get deposited in your business’s bank account. Merchants usually receive their funds within 48 hours. If the transaction is declined, your funds might be held while the processor investigates.
Types Of Online Payment Gateways
An internet payment gateway can be offered in one of three ways.
A redirected gateway is the simplest and least expensive solution for a merchant to implement. When a customer goes to check out after putting items into their cart and is taken out of your online store and sent to a separate site (often a PayPal page) to complete the transaction, this is known as a redirect.
A redirect is convenient for the seller, as the redirected gateway lets another platform handle the task of processing the payment. However, it also entails the merchant having less control over the process. Additionally, the customer may not appreciate having to complete their purchase on another site or may lose trust in the payment process, both of which can result in lost sales.
Checkout On-Site With Payment Processing Off-Site
With this kind of payment gateway, the customer checks out on your site, but the gateway directs the payment to be processed off-site. This is what happens when you use Stripe as your online payment gateway.
Off-site processing allows the merchant to avoid having to process payments on-site and doesn’t fluster the customer by taking them to another website to complete a purchase. However, the seller is still relinquishing control to the off-site gateway. You may get blamed for gateway problems over which you have no control.
On-Site Gateway & Processing
On-site processing is the preferred solution for larger, well-resourced businesses. In this setup, the gateway and the payment processing all occurs on your server — essentially, you handle everything.
This kind of gateway setup ensures that you retain control over each step in the checkout process. You won’t be reliant on another service to provide a good experience to your customers. However, you’ll be responsible for any problems that arise, and you’ll need to have the capacity to handle this responsibility.
How Much Does A Payment Gateway Cost?
Payment gateways and processors typically charge you in some combination of the following ways:
- Monthly gateway fee
- Membership fee
- Batch fee
- Setup fee
- PCI compliance fee
- Chargeback fees
It’s instructive to look to Authorize.Net, the largest provider of standalone payment gateways. The payment structure of Authorize.Net’s standalone gateways is as follows:
- $25 per month gateway fee
- $0.10 per transaction processing fee
- $0.10 daily batch fee
- No setup fees or other fees
Merchant account providers and other processors that include a merchant gateway with their other offerings may advertise a “free” credit card payment gateway. Of course, you can figure that the gateway cost gets absorbed by the fees you’ll pay for the company’s services. And regardless of the processor, 5 to 10 cents of every credit card transaction typically go to the online payment gateway.
One way or another, gateway credit card processing takes a cut of the pie.
7 Considerations In Shopping For A Credit Card Payment Gateway
Not all website gateways are created equal. Let’s go through some of the options you may be looking for in a gateway, depending on your business’s needs.
Do You Need Recurring Billing?
Subscription-based pricing is more popular than ever, and a recurring billing feature can allow you to automate this process. With this feature, you can also customize billing intervals and set up trial periods for your subscriptions.
While many payment gateways and processors offer support for recurring billing, the quality of this support can vary. Be aware that the subscription management system may not allow for easy pricing changes, reporting may be too basic to be useful, and other limitations may apply. It may be necessary to use specialized recurring billing software rather than rely on your gateway in some instances. Check out our guide to recurring billing for more information on the subject.
What Payment Types Do You Want To Accept?
If you’re running an eCommerce business, you’ll certainly want to be able to accept credit and debit cards. However, as the payment universe continues to expand, you’ll need to consider accepting other forms of payment as well. If you want to accept payments via PayPal, Venmo, Apple Pay, Click To Pay, and/or echeck (ACH) payments, research different gateways and processors to make sure the one you ultimately choose offers support for the kinds of payments you want to accept on your website.
Do You Have International Customers?
If you intend to sell primarily to the domestic market and don’t anticipate expanding into the international market in the future, you don’t need to concern yourself with this. However, if you do intend to sell to customers outside the US, you’ll need a gateway with international capabilities.
Of course, good international support entails support for multiple currencies and international credit cards. That’s not where things end, however. Consider that different markets have different preferences when it comes to payment types as well. You may also want support for handing foreign tax systems, such as VATs (value-added taxes). If you intend to sell internationally, research the features you’ll need, then make sure your chosen gateway provides everything required to realize your international plans.
How Much Customization Do You Need?
One of the best features of payment gateways is that they’re generally “plug-and-play,” meaning you can set them up on your website without having to do any coding. However, some merchants will need a higher degree of customization. Thankfully, most gateway providers offer a number of APIs (application program interfaces) that let you customize how the gateway functions on your website. Such APIs can help you manage your customer data, track inventory, and more.
These customization features may require a pricier gateway. You’ll also need to hire a developer if you don’t have developer skills yourself. However, for the right kind of business, the payoff can make this well worth it.
What Payment Gateway Integrations Do You Need?
You may need functionality beyond what the gateway itself provides. For that, you’ll need a gateway that integrates with other payment and eCommerce services.
Accounting-wise, most major payment gateways will integrate directly with QuickBooks, potentially saving you many hours of manually transferring transaction data into the program. You might require a shopping cart integration as well.
The payment gateway integration process can be easy or difficult, depending on how you’re integrating. For instance, if you’re using a popular shopping cart (such as Shopify or Magento), there are prebuilt payment gateway modules that make integration easy. If the shopping cart doesn’t have a prebuilt module, you’ll have to do a custom integration. This requires a web developer and can get expensive.
Should You Use Multiple Internet Payment Gateways?
If you find a gateway that provides most of what you need but doesn’t support all the payment methods you want to accept, you can integrate with additional payment gateways that accept other payment methods. Many merchants do this by offering PayPal Checkout as an option for their customers, though there are other options.
What Security Features Do You Need?
For modern eCommerce outfits, PCI compliance is a must. Several gateways on the market today simplify PCI compliance for eCommerce merchants. Transactions are conducted on the gateway provider’s servers, not the server hosting your website. Because the gateway interface is integrated into your website, the customer never needs to leave your site to complete an order. With this arrangement, you don’t need to maintain a secure network to be PCI compliant, though it’s still a good idea, of course.
All payment gateways encrypt sensitive credit card information before they pass it along to the processing bank. It’s a bonus if the gateway also offers tokenization, a complex process that further protects your customers’ credit card information.
Merchant Gateway FAQs: What You Need To Know
How Do I Choose A Payment Gateway?
Payment gateways perform the basic function of facilitating the processing of credit card transactions over the web and bring a host of security and fraud prevention features that protect both you and your customers. Make sure these features are included when choosing a payment gateway.
Integrations with online shopping carts and accounting software (such as QuickBooks) make running your business smoother and more efficient. eCommerce businesses would be well-advised to look for such integrations when shopping for a credit card processing gateway. They’ll make your life easier!
While not every business needs a payment gateway, every business can usually benefit from some aspects of a gateway. Since there are gateways that come with little to no additional cost, it makes sense to consider using one even if you do not absolutely need one.
Need more help choosing a payment setup? Check out these helpful resources!