What Is A Payment Gateway and How Exactly Does It Work?

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Ever questioned how online businesses process online payments or what a payment gateway is?

If the answer is yes, read on.

Processing debit or credit card payments is simple when done in brick and mortar; you present your credit card and it gets processed at a POS terminal, and your transaction is complete!

However, since e-commerce transactions are completed over the internet, there’s no way a customer can physically present their card. 🤔

Instead, you deal with a digital equivalent to a POS terminal, hence the introduction of a payment gateway.

For the sake of this article and above explanation, we are going to investigate payment gateways: the technology used in online stores. Here, you’ll get some useful information for when you are setting up your e-commerce business.

What is a Payment Gateway?

A payment gateway is what authorizes and deals with debit/credit card payments for online retailers. The process is simple: sensitive data is encrypted and then sent between a portal (like a website or a mobile app) and the bank or the front-end processing entity.

What is a payment gateway

If you’re a business operating in the Middle East, you can also check out the Top 10 Payment Gateways for Small Businesses in the Middle East 2021.

How Does a Payment Gateway Work?

The function of a payment gateway is to make the communication between a website, payment processor, and the bank that issued the credit card used in the buying process. One very important feature of the credit card is security, manifested in the encryption of the transaction data between the merchant and the issuing bank.

Although it happens within a few seconds, there are a number of steps that take place. The customer is asked to visit a secure payment page where the transaction data is input and encrypted to be sent to the payment processor through the gateway.

The payment processor then communicates with the card issuing bank, which replies with either an approval or a decline. Such a reply then arrives at the payment gateway which then forwards it to the website. Finally, the information is interpreted into a response that appears on the transaction window. If approved, the online merchant fulfils the order.

How Secure are Payment Gateways?

It’s crucial that you maintain the highest kind of security before asking your customers to input their card data. Data security is important as to prevent breaches that could be highly threatening to both your customers and your business.

Luckily, payment gateway providers take security quite seriously.

Highly prestigious payment gateway developers should be level 1 compliant with Payment Card Industry Data Security (PCI DSS), which is the strictest standard out there and requires many security routines and assessments.

Are Payment Gateways Susceptible to Fraud?

Payment gateways can be extremely secure, but that unfortunately doesn’t mean that fraudulent transactions won’t be possible.

The good news is payment gateways typically come with dozens of configurable fraud prevention tools. There are far too many to talk about in detail so we’ve picked out three popular tools you may have heard of.

The first is 3-D secure, which is the name of security protocols provided and operated by card networks. Visa uses Verified by Visa, Mastercard uses SecureCode, American Express uses Safekey, and the list goes on!

payment gateway

The details vary depending on the network, but it works by entering an additional password (such as a one-time password) separate from their password for the website. If the password doesn’t match the records registered in the network, the transaction will be then declined. Such an additional test is to make sure that the customer is the cardholder and not someone who has stolen the card or hacked the account.

Second, velocity checks by IP address are used. This tool basically keeps track of how many times a particular IP address has been used to place an order. If one IP address attempts to place a dozen different orders with a dozen different credit cards in the span of one hour, it’s highly likely that a fraudster is working through a pile of stolen cards.

The third tool is location blocking: certain countries, such as ones with developing economies, have higher fraudulent incidents more than others. So, if, for example, your business is in one place and you receive a lot of transactions from a country in Africa, it’s more likely to be seen as a fraudulent attempt.

The Most Popular Payment Gateways

It’s crucial for an e-commerce business to work on growing its capability to earn. Additionally, it’s important to know that having the proper mix of payment gateways for your store can be a catalyst in generating more revenue, as the opposite could cause lost conversions and sales.

As you use some of the popular payment gateways, you could also invest in using additional gateways that might be less popular yet are a better match for your target market in different countries. Some of the popular options are:

How to Choose the Right Payment Gateway for Your Online Store

With may payment gateways at your disposal, it could be tricky to decide on which ones to integrate your business with, so to be more certain, you could ask yourself the following:

What is my target customer’s preferred method of payment?

It’s very important that you understand which method of payment shoppers prefer to use, which could make all the difference when you’re sealing your deals. Therefore, it’s very useful to do your research to understand paying habits and preferences, especially if you are targeting other countries. That way you will get to know what kind of payment gateways to adopt on your online website.

How does this gateway affect my checkout user experience?

It’s vital that you make the checkout experience as short and as easy as possible. For example, you could use payment gateways that auto-populate user’s information using a certain API to bring the shopper a step closer to checking out. Avoid prolonging the checkout as much as you can, and you will notice a decrease in drop-off rates!

How easy is it to integrate with this payment gateway?

At all costs, you would want to avoid a custom checkout experience while integrating with a payment gateway. This might lead to more difficulty in streamlining across all your devices besides the hefty costs you will have to pay.

What is a payment gateway

Will this gateway grow with my business?

Choose to work with agile provides who will be willing to keep up with changing market conditions and innovate as needed with the emerging trends. Also, don’t forget to observe how transaction fees are changing as your sales volume increases too.

Is this the most cost-effective option?

Each payment gateway charges differently with transactions. Look for 2 goals: to streamline the checkout process in all channels with the most common payment gateways and to make sure the transaction costs don’t negatively affect the profit margins. For your reference, here are the commission fees charged by some of the most popular payment gateways:

  1. PayPal:$0.10 per transaction
  2. Authorize.net: 2.9% + 30¢ per transaction
  3. Stripe: 4% + 20p for European cards, 2.9% + 20p for non-European cards
  4. Square: 75% per swipe, dip or tap, 3.5% + 15¢ per keyed-in transaction
  5. Worldpay: 75% + £0.20 (pay as you go)
  6. SecurePay: 4% per transaction
  7. Braintree: 9% + £0.20 for most transactions
  8. 2Checkout.com: 2.4% + 30¢ (UK), 2.9% + 30¢ (US); country-dependent

 

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