What is a Payment Gateway?

As part of our series, “Understanding the Ins and Outs of Credit Card Processing” we explain what a payment gateway is and its importance in the payment process.

A payment gateway is a crucial component for businesses, especially those just starting out, that allows you to securely and conveniently accept online payments from your customers. It acts as a virtual point-of-sale terminal, facilitating the transfer of money from your customers’ bank accounts or credit cards to your business account. Think of it as the digital equivalent of a card swipe machine you might find in a physical store. The role of the payment gateway is that of a secure information conduit that complies with credit card processing security rules and regulations. Once the card information is entered, the payment gateway transmits the card data to the card network that then passes it on to the card’s issuing bank for authorization.

Most payment gateways accomplish a payment transaction in a few seconds with these steps:

• Encryption: Between the user’s browser and the server of the retailer, a payment gateway will encrypt (encode for private use) data for exclusive use between seller and buyer.
• Request: The authorization request occurs when a payment processor gets approval from a credit card company or financial institution to proceed with the transaction.
• Fulfillment: When the payment gateway has the authorization, it allows the website and interface to proceed to the next action.

All of this happens in the blink of an eye using encryption technologies to ensure confidential cardholder information is never exposed. Payment Gateways work across all payment environments: desktop, mobile, brick and mortar, bricks and clicks and even voice recognition-enabled payment processes.

Why a Payment Gateway is Essential for Your Business

1. Online Transactions: In today’s digital age, many customers prefer to shop and make payments online. A payment gateway enables you to tap into this online market by enabling your website or e-commerce platform to accept payments seamlessly.
2. Customer Convenience: A payment gateway makes it easy for your customers to pay for your products or services. They can pay using credit or debit cards, digital wallets, or other online payment methods, providing them with a convenient and user-friendly shopping experience.
3. Security: Security is a top concern for both businesses and customers when it comes to online transactions. A reputable payment gateway employs advanced encryption and security measures to protect sensitive payment information, reducing the risk of fraud or data breaches.
4. Trust and Credibility: Using a reliable payment gateway adds a layer of trust and credibility to your business. Customers are more likely to make purchases from a website that offers secure and well-known payment options.
5. Global Reach: If you have plans to expand your business beyond your local market, a payment gateway enables you to accept payments from customers around the world, opening up new growth opportunities.
6. Automation and Efficiency: A payment gateway automates the payment process, reducing the need for manual intervention. This streamlines your operations and saves time for both you and your customers.
7. Record-Keeping: Payment gateways provide detailed transaction records, making it easier for you to keep track of your sales, customer orders, and financial data.
8. Payment Gateway Integration: Many payment gateways offer integration with popular e-commerce platforms and business tools, making it easier to manage your online store and streamline your operations.

What’s the Difference between a Payment Gateway and a Merchant Account?

Payment gateways and merchant accounts go hand in hand and are needed in order to accept payments.  However, they are very different and play different roles within the payment process. While a payment gateway routes the payment transaction information to the processor,  a merchant account allows a businesses to receive the funds from these transactions. Some payment gateways require you to use a merchant account with a specific bank while others do not. There is an application process. Here’s what to expect when applying for a merchant account.

What Do Payment Gateways Include?

In addition to their basic function of transmitting and receiving credit card transaction data via the internet, most payment gateways also come with several useful “extras.” Features you should consider in choosing a payment gateway include the following:

• Payment Information Storage: No customer wants to have to re-enter their credit card information every time they place an order. Payment information storage builds a database of customer information, so the customer can simply choose a card they’ve used before when they come back to your site. Best of all, the gateway encrypts this information and stores it separately from your website. This provides an additional layer of security and eases your PCI compliance requirements.
• Encryption: 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.
• Virtual Terminal: As noted above, a virtual terminal is a browser-based version of the physical credit card terminal. A virtual terminal allows you to input a customer’s credit card information and process a transaction directly through your computer’s web browser via an online web form. Virtual terminals can also be set up to run on mobile devices, including smartphones and tablets. In a retail setting, you can attach a USB-connected credit card reader and take advantage of lower, swiped (or card-present) processing rates.
• PCI Compliance: Several gateways on the market today simplify PCI compliance for eCommerce merchants. Transactions are conducted on the gateway provider’s servers, instead of 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 (it’s still a good idea, of course).
• API Tools & Developer Information: One of the most appealing 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. If, on the other hand, you’re a proficient software programmer (or you have access to a web developer who can do it for you), most gateway providers offer a number of APIs (application program interfaces) that will allow you to customize how the gateway functions on your website. Each gateway provider has its own unique set of APIs that you can access.

To summarize, a payment gateway is a critical tool that allows your new business to accept secure online payments, enhance customer experience, establish credibility, and facilitate smooth transactions. As you set up your business, make sure to research and choose a payment gateway that aligns with your needs, offers the required features, and provides reliable customer support.

You’ll want to learn all the players in the payment process and how they work together from the moment a customer’s card has been swiped, keyed into a terminal, or entered into a web page, up to the moment the funds are transferred into your bank account. Our ebook, Understanding the Ins and Outs of Credit Card Processing explains this and more.