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Payment Gateways: What they are and how they work

Published April 29, 2022

In the age of digital transformation, ecommerce has gone from the realm of major corporations to something embraced by everyone. Even the smallest business can now sell online expanding their market from their local town to worldwide. The key to doing this is payment gateways, but while they can look simple on the outside, choosing the right one for your business can be a complicated decision.

What are payment gateways?

Payment gateways are the way in which merchants take and authorize payments. They take payment details and check with the bank that the person has enough funds available to make the transaction. Once that’s verified, it gives the go ahead and processes the transaction.

In ecommerce, they are the equivalent of a point of sale terminal you would see in the grocery store, retail outlet, or restaurant. The customer inputs his or her credit card details, which securely passes the information between point of sale and the merchant and then between the merchant and the bank.

How payment gateways work

Payment gateways vary in nature and make up. They may come from different providers but they all follow the same broad approach.

1. Collection: This is the point at which your customer navigates to the check out on your website and enters their credit or debit card details. The payment page will then pass the data to the payment services provider.

2. Transfer: Once the details have been entered, the payment gateway securely transfers your customer’s details to your payment processor or merchant bank.

3. Verification and authorization: From here, the details make their way through to the customer’s issuing bank which will signal whether or not that person has enough funds. That data works its way all the way back to inform the customer about whether their payment has been approved or not.

Related: Omnichannel payments

This process will include several different parties.

1. Merchant account: This is a particular type of account used to accept credit or debit card payments. Funds will be temporarily held here before being passed on to your own business bank account.

2. Payment processor: They provide services to businesses to help you get paid. They may provide both a merchant account and a payment gateway to help you process and manage all your payments.

3. The issuing bank: This will be the bank of the card holder. They will have to authorize the payments and send money.

Each of these parties will play a role in managing the payments and transferring data from the customer into your bank account. It’s a complex process, involving many different parties, performing many different tasks. The important thing is that from the outside, everything looks quick and simple. Your customer selects a product, makes a payment and quickly learns if it has been accepted. The quicker that happens, the better it is for your business.

Advantages of payment gateways

Payment gateways come with several advantages.

  • Saving time: Using a gateway is the fastest way to receive card payments. It’s much easier and faster than processing them by hand. The provider takes care of everything and you can usually be up and running to accept payments within 24 hours. Speed is everything when it comes to ecommerce. Buyers have notoriously short attention spans. Any delay in processing payments may cause them to reconsider their buying decision and look around for alternative options.
    Data from Shopify shows that a staggeringly high proportion of shopping carts are abandoned online. The figures break down as follows: desktop, 69.75%; mobile, 85.65%; tablets, 80.74%. The longer you take in processing these details the more likely it is your customers will give up.
  • Customer happiness: A fast and intuitive customer experience is crucial to building up sales online. Payment gateways can offer all sorts of features which will improve the experience including the ability to add products, save them into bundles, set up their own profiles and make transactions in a single click.
  • Insights: For you as a merchant these payment gateways give you complete control over the process and harvest customer data such as past purchases. This information, once captured, can be analysed to drive personalized promotion and help you analyse sales activity on your site.
  • Expanding your customer base: As technology becomes more universally available, smaller merchants are waking up to the opportunities they bring. By providing customers with the ability to buy quickly and securely online, you open yourself up to customers from around the world. Suddenly, you’re not restricted to people in your local area. The world is, quite literally, your oyster.
  • Convenience: Payment gateways offer convenience both for you as a merchant and your customers. With the ability to take sales online, you can be open for business 24 hours a day, taking and processing payments, without lifting a finger. Your payment gateway handles everything for you. Customers, meanwhile, can browse, select and buy products with just a few clicks.
  • Increased sales channels: Payment gateways are becoming more sophisticated. They offer customers more opportunities to buy and to use whatever type of payment they want. From credit and debit cards, to mobile wallets and even cryptocurrencies, people have all sorts of options available to them. We are entering a world of omnichannel commerce in which merchants and their customers engage with people in many different ways.

For any business looking to grow, an effective payment gateway is a must have. It opens up a host of opportunities and helps you engage with customers in the way they want. However, choosing the right payment provider can be a challenge. 

What to look for in a payment gateway

Different payment gateways from different providers can vary greatly in terms of their features, cost and the way they work. Some will be better suited to larger merchants, while others will be perfect for smaller enterprises.

The biggest question many people will look at is cost. Each of those parties involved in the process will want payments for their efforts. They may come with one time set up fees, monthly costs and transaction fees. These can often be bundled up so it’s not always easy to see what you’re paying for and from who.  

Security is crucial. An end to end payment gateway should provide elevated levels of security and encryption, but it’s wise to check their security rating.

Payment gateways are judged on their PCI Compliance level. In order to be safe, you should only consider those payment gateways which have PCI DSS Level 1. Whenever you’re using any third-party service, you have a responsibility to ensure they are safe and meet all data protection requirements. Any breach in their data could leave you liable, even if the problem is down to an issue with their systems.

Aside from that you may want to consider factors such as:

  • Ease of integration: A payment gateway is just one out of several pieces of software. In order to work effectively, it will have to integrate with what you already have. For example, your content management system on your website will need to work effectively with any payment gateway in order to deliver the seamless experience your customers expect. 
  • Uptime and reliability: You want your website to be available to take payments 24/7 so you need a payment gateway which is capable of doing the same. Any downtime will be a cost to your business, not just in terms of lost individual sales, but also the impact on your reputation and future sales. Customers have been spoilt for choice in terms of the online buying experience. Amazon and other major giants have given them a glimpse at a world involving instant order processing. They expect the same experience regardless of the size of the vendor.
  • Payment options: The more payment options you can accept, the more people you will be able to sell to. Some of the more advanced gateways allow you to accept payments via vouchers, PayPal or other avenues. Ensuring you have every base covered and giving your customers the chance to pay in any way they see fit will be incredibly valuable to your business.   
  • Fraud detection: Unfortunately, online commerce is rife with fraud. Customers may attempt to defraud merchants by using charge backs or false payment details. You need the right levels of fraud detection which can filter out these toxic customers without causing you to avoid others.
  • Real time reporting: Enhanced features can add value to the whole experience. Real time reporting may not be essential and it does not have any impact on the customer facing aspect of the service but it can arm you with more information. With this in place, you can see insights which inform your decision making, develop increasingly targeted marketing strategies or deliver personalized promotions.
  • Currencies accepted: Once you get online, it’s possible that you may be accepting payments from all over the world. Being able to accept a good number of currencies including digital currencies will help you further expand your potential customer base. However, this may not apply to all types of businesses. Those who know they will only be selling locally may be content to stick with the humble dollar.

End-to-end processing and the future of payment gateways

As we move into a digitally mobile future, the way in which people interact with businesses and pay for services is constantly evolving. Speed and agility are key to everything, and this applies to payment gateways. More and more businesses are adopting end-to-end payment processing to deliver smarter, faster and more convenient forms of payments.

The problem with payment gateways is that they involve many different parties, each of which expect payment and need to be managed differently. From the merchant bank to the payment processor and the gateway provider, bringing this all together into one end-to-end payment gateway simplifies the entire process.

Many providers will claim to offer end-to-end payment processing but not all of them can really do it. However, those, such as NCR VOYIX, can offer the benefit of cutting-edge technology, enhanced security control and profitability.

End-to-end payment providers use APIs to gather information from all the different parties involved with the payment gateway and process this within one single platform. It delivers omnichannel payments by centralizing all payment methods into one application and providing enhanced monitoring and visibility of the process.

The entire solution is housed under one roof making the process as seamless as possible. It manages the different providers giving one source of contact and support. With traditional approaches, for example, merchants could spend hours sorting problems relating to their payment gateways and the different people involved. This sucks up time which could have been more profitably used on other tasks. A fully integrated end-to-end payment solution handles all this for you, freeing you up to concentrate on other duties.

A payment gateway, will handle a host of complicated functions, but will need to be plain, simple and intuitive to use . It’s not an easy take, but those which do will give your business a gateway to a host of exciting opportunities.

A better bottom line.

Payment processing tips every merchant should know.

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