What is a Payment Gateway and How Does It Work?

Payment Gateway

A payment gateway is a must-have for every business owner. Almost 90% of internet users are expected to make an online payment to purchase a product or service. And the best way to make a payment in an online store is by paying through a payment gateway. 

For businesses, an integrated payment system is a good option because it facilitates online transactions and as well protects cardholder data. This makes customers securely buy your products or pay for your service without any risk of being scammed. A payment gateway is also the middleman between a customer’s credit card and your website or store. It is an important solution for eCommerce because it simplifies payments. 

Therefore, as a business owner in today’s world, you must consider payment processor partners and point-of-sale transactions as an addition to your payment method because this system allows customers to pay conveniently without any hassle. In this article, you will learn what a payment gateway is, how payment processors work, and how to use a payment gateway for your business. 

Payment Gateway – What Is It?

A payment gateway is a technology that reads and transfers customers’ payment details to a merchant’s account. The job of a payment gate is to capture all the important data, ensure funds are available on the card, and ensure that a merchant gets paid. 

In addition, a payment gateway is an online cloud-based integrated payment solution software that connects a customer to a merchant without seeing in person. In-person, this software is called a card reader or point-of-sale (POS) that processes a customer’s payment through the use of their card. 

What is a Payment Processor?

A payment processor is a financial institution or a company that handles credit card transactions and is used for online store sales. Without a legit payment processor, your store won’t be able to accept debit and credit card transactions. 

In the online space, payment processors work by transferring customers’ credit card details between the issuing bank, business owner and acquiring bank. Payment processors also communicate the denial or approval of a transaction. They also ensure that the payment funds are withdrawn from a customer’s account while the merchant’s bank account is credited with the same amount. 

In the physical space, payment processors provide the physical equipment needed for business owners to accept payments. This equipment includes a POS system. And this system is essential for physical business owners to read the customers through card schemes such as Mastercard, Visa and Europay.  

How Does a Payment Processor Work?

You must have a payment processor if your business wants to accept online or card payments. A payment processor is not the same as a payment gateway, but they are both essential for a successful integrated payment system. A payment processor is a vendor used by businesses to accept card payments.

Regarding how payment processors work, some companies like PayPal or Square combine payment processing with POS systems while some only focus on online payments. So it all depends on your business volume and the method of payment you want. 

 When a business store accepts a card payment, the payment gateway system will work in the background to help finalize those transactions and make money from a customer’s account to a merchant’s account. Here below are how the process works;

  • A customer gives the merchant their card information. This can be done at a store terminal, online payment page or through another method. The information is submitted through the payment gateway, a payment processing portal that sometimes comes bundled with payment processing services.
  • The payment gateway first sends the card information to your payment processor, which initiates the customer’s transaction by sending the card and payment details to card networks like Visa, American Express or Mastercard for approval. 
  • Then the card networks will now inform the payment processor, if the payment request is rejected or approved. 
  • Then as a merchant, you take over by completing the transaction with the customer.
  • After a successful transaction, the payment processor will automatically inform the issuing bank to send funds to the acquiring bank. 
  • Finally, the merchant will access the funds in his or her bank account. Usually, this does happen immediately in some integrated payment systems while some may take a few days, depending on the payment gateway and the merchant’s account. 

How Does a Payment Processor Work?

Choose Payment Gateway for Your Business

Choosing the right payment gateway for your business is an essential step to take for your business growth. Because if you choose a payment gateway that doesn’t fit your business structure, you might lose customers and a huge amount of money, which may lead to the end of your business. However, below are some important factors you need to consider to choose the best:

Cost

You first need to consider the total cost you will need to pay for a start. When it comes to using integrated payment processing, the fee comes in three types, which include: set-up fee, transaction fee, and monthly fee. 

Therefore, to find an effective one for your business you need to consider the value and volume of your transactions. If your business deals with high-value transactions, you must look for payment gateways that offer monthly and low transaction fees. 

Types of cards allowed

The most used cards in the world today are Amex, American Express, MasterCard and Visa. It is rare to see a payment gateway that doesn’t accept all these popular credit cards. Except for new payment gateways and it is wrong to choose them too. However, if your top customers love to pay with other card networks like Diners Club or debit cards, you need to look for payment gateways that support the card. 

However, if your customers usually pay you using other card types, such as a debit card or a Diners Club card, you need to ensure that your payment gateways support that card.

Holding time

In all payment gateways, despite making payments immediately, they hold the money for some days before it is delivered into your account. This is done for your customers’ safety too, Incase of refunds and chargeback. Depending on the integrated payment system provider, these holding times can be between 2 weeks or a month. You can either choose to wait or get paid immediately; it all depends on your cash flow rate.

Multiple currency support

If you sell an international product, you must ensure that your payment gateway can handle multiple currencies from different countries. This is important to make your customers pay for your products or services through their local currency. 

Recurring billing

If you are running a subscription-based business, choosing a payment gateway that can handle all parts that go into recurring billing is also important. In this case, any integrated payment system you choose must be able to store and ace customers’ information for future transactions, offer retry options for failed transactions and charge the credit card on the due subscription date. This is essential so you won’t have to do the work manually.

Security

When choosing a payment gateway, you need to ensure you are choosing a gateway with secure methods of payment. Because you and your customers are storing sensitive information in your store, consider that every payment gateway’s security standards are different. But in all, ensure your chosen gateway has a level 1 PCI DSS compliant.

Why Use Integrated Payments?

With so many integrated payment systems available everywhere on the internet, choosing is beneficial for you, your business, and your customers. Here below are some of the reasons you need to use integrated payments: 

Fraud Protection

The first reason you should use a payment gateway is that it protects your business against fraud. As technology is advancing, so also are the cybercriminals evolving. A payment gateway is a system that provides innovative solutions to fraud by delivering cyber security intelligence your business needs at every point in time. No matter the methods of payment your business accepts, payment gateways can help you outsmart fraudsters and increase your customer’s confidence in you.

Tokenization

Another benefit of using a payment gateway is that they make payment card security their priority. They ensure your data, and that of your customers are protected from when it enters your systems till it is transmitted to the card networks. Their tokenization solutions replace the personal account number with a token that looks meaningless to everyone except the payment processors. So this frees you from storing important data in your system and helps minimize liability and PCI.

Recurring Payments

One of the reasons you need a payment gateway is that it provides recurring payments and benefits you and your customers. By creating a payment schedule that works for you and your customer, payment will come in on time. The payment gateway also increases cash flow and customer retention by offering flexibility to customers. With all these payment gateways, you can set up a frequency with their PCI-compliant payment scheduler.

Software Integration

Another amazing thing about using a payment gateway is that it allows you to manage payment effectively by integrating the payment system. Integrating the software into your store will save you time, transaction reconciliation, and greater accuracy without human error. 

Application Programming Interface as part of payment gateway integration allows two applications to talk to each other, while plugins allow business owners to modify existing software easily.

Hosted Payment Form

Another benefit of using a payment gateway is the ability to host payment forms securely. This payment form is needed for eCommerce payment without the use of a shopping cart. So payment gateways host them to ensure no important information passes through your system, minimizing liability and reducing PCI scope.

Virtual Terminal

The last and yet one of the greatest benefits of using a payment gateway is a virtual terminal that enables you to turn your personal computer into a point of sales system, only with an internet connection. In this case, you don’t need to install any software; you just need to log into your payment gateway and start accepting debit, credit, or recurring billing. 

Multi-currency Integrated Payment Systems

Multi-currency Integrated Payment Systems

Before your store can accept credit card payments from foreign countries, you must choose a multi-currency integrated payment system. This is necessary to display to your customer the products’ prices in their local currency while you get paid in your local currency. So when looking out for a multi-currency integrated payment system, you need to consider the following:

Your business location

The first thing to consider is your business location. Most payment systems provide the list of countries and business models their systems support on their website. So to make sure your application isn’t rejected, ensure you do your research deeply.  

Desired processing currencies

In most cases, multi-currency integrated payment systems offer a lot of currencies. But ensure you check whether all your desired currencies are supported before signing a contract with them.

Settlement currencies

It is also necessary that you ask your payment gateway provider about settlement currency because this is what will ensure that your funds are deposited in your local currency.

Multi-currency merchant account fees

Another factor to note is that a multi-currency business owner’s account will incur additional fees. In most cases, if you receive a payment in the same currency it was paid, payment processors won’t charge you much for this because any conversion wasn’t done. But when your customers’ local currency is different from yours, the conversion will come with at least an additional fee.

Multi-language checkout

It is also essential to look for multi-currency payment systems that offer checkout that is translated into different languages because how checkout is designed will determine the complete purchase of a customer. 

Conclusion

The key point is that integrating a payment gateway into your business as a payment solution is beneficial to you. Even though the first few steps may be overwhelming, if you are committed and willing to learn, you can overcome them with the help of the right payment gateway.

A payment gateway also gives you peace of mind in business because as you reach a solution that strikes a perfect balance between a cost-effective and user-friendly approach, you can process your customer transaction.

If you are thinking about payment types and fees, remember that choosing the best payment gateway will stop all this confusion. Also, a payment gateway ensures that you understand more about merchant account providers so that you can optimize your eCommerce website, have easy-to-use solutions, and process payments for your business to thrive. 

What is a Payment Gateway and How Does It Work?

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