What is a payment gateway? (And why you might need one)
Tips / 18.08.2021
Keeping track of all the terminology out there related to payments acceptance can be quite hard – especially with all the new concepts coming out. One such term is the payment gateway.
But what is a payment gateway, and do you need one for your business? Let’s find out!
Table of Contents
What is a payment gateway?
A payment gateway is the virtual “middleman” for online transactions, passing card information from the merchant to the specific and relevant bank through the credit card network in one of two ways:
- Through a POS in a retail store
- Payment services for websites and mobile apps – virtually
A payment gateway communicates to the merchant whether the charge has been approved by the cardholder’s bank and submits the charges for settlement.
One way of putting it would be to say that a payment gateway is the “virtual” equivalent of a physical card terminal that helps merchants accept payments online. It helps with the payment life cycle and is a safe way of accepting payments as it helps to minimise fraud.
How does it work?
Let’s take a look at the intricacies of how does a payment gateway work:
- Your customer lands on your e-commerce website or mobile app, chooses the product they would like to purchase, and then proceeds to checkout. Checkout is the page on which they make payments.
- The payment page that will be displayed, usually contains fields for entry of the customer’s debit or credit card details. For example, some of the required information will include the cardholder’s name, card expiration date, PAN number, and CVV number.
- This is where the payment gateway comes into play. It tokenises or encrypts all the submitted card details, performs checks for fraud, and sends the card data to the acquiring bank.
- The acquiring bank communicates the cardholder’s information to the major card schemes such as Visa or Mastercard. This communication is again done securely.
- After this, the card schemes will perform another fraud check and follow this by sending the payment data to the issuing bank.
- Now it’s time for the issuing bank to do its job. First, it will perform fraud screening and will then authorise or reject the transaction based on whether there are sufficient funds in the customer’s account.
- Next, whether the payment is approved or denied will be communicated back from the card schemes to the acquirer.
- Then, the acquiring bank will send the same message to the payment gateway, which will then convey the message to the merchant.
- If payment is approved, the acquirer will collect the payment amount from the issuing bank and will transfer the funds into the merchant’s account – also known as settlement.
- In the end, if payment is approved, the merchant can display a payment confirmation page.
- Alternatively, if payment has been declined, the customer will be asked to provide another payment method.
Different types of payment gateways
There are three main types of payment gateways. Let’s look at each one in turn.
This type of payment gateway method takes the customer to the issuer’s payment page to handle the processing and paying. It essentially becomes a “redirect”.
While this offers a level of simplicity for small retailers, it can also mean less control for the merchant, and a further step in the payment process for the customers.
Checkout on site, payment off-site
Here, the front-end checkout will occur on your website. However, the processing of the payment will take place through the back-end of the payment gateway provider you’ve chosen.
Again, this offers an element of simplicity to your customers, but you have no control over any “quirks” that the gateway may have.
With these payment types, businesses, through their own servers, handle entirely on-site payments (on the larger side). Checkout and payment processing happen through your own systems.
While this means more control over the payment process, it also places a lot more responsibility on you to ensure that transactions are safe and secure.
How can you use one?
The type of payment gateway you choose for your business will dictate how you use it in your everyday sales process on your website.
Essentially, you need to set it up with a payment services provider, make sure all the licenses and certifications are in place and you’re ready to sell.
Criteria for choosing the best one
Some of the most important criteria to look at when it comes to your payment gateway include:
- Fraud protection – This is something you really need to think about as cybercriminals are getting ever savvier these days and you need to make sure your customers can trust you together with the payment service you provide.
- Tokenisation – ask whether there is tokenisation involved when sending and communicating card information from the customer to the issuing and acquiring banks. This adds an extra layer of security to the payments process.
How can you get one?
Getting your payment gateway up and running doesn’t have to be a pain or a bothersome experience! It just depends on your provider and who you ultimately choose to approach.
Remember that there are providers like myPOS who charge no monthly, annual, or sign-up fees, offer you a free Visa business card to manage your funds and liquidity and instant settlement of funds, in addition to many other value-added benefits and features.
How much does a payment gateway cost?
Now it’s time for the nitty-gritty. How much will a payment gateway cost you?
With many providers on the market, you’ll need to think about payment of:
- Monthly fees
- Annual fees
- Sign up fees
- Service fees
- Transaction fees
- And others
But why would you put yourself through that, especially when liquidity is something you need for your business?
At myPOS, we don’t factor these fees in – with us, you only pay a small, competitive, and affordable transaction fee for each transaction. Now that’s a bonus that’s certainly worth looking into!
If you thought that understanding what is a payment gateway is a tough concept at the beginning of this post, we hope we’ve allayed your fears and helped you gain a broader understanding of them. They are not as tough an animal to tame as some may think. You just need a basic understanding of its ins and outs and general operations to get a handle on all things related.
As a “middleman” in payment transactions, they help reduce the risk of fraud and chargebacks and give your customers the confidence to browse through your online shop securely.
And the best part? They don’t need to cost you an arm and a leg. You can implement the technology in your online store or mobile app and enjoy security and smoother payments all in one, all this without unnecessary and excessive fees.
Disclaimer: Please be aware that the contents of this article and the myPOS Blog, in general, should not be interpreted as legal, monetary, tax, or any other kind of professional advice. You should always seek to consult with a professional before taking action, since the particulars of your situation may materially differ from other cases.