What is a payment gateway, and how does it work? If you are an aspiring online merchant who’s trying to establish a successful enterprise, it is necessary to know how to successfully implement gateways into the purchase process. Of course, you will not have to delve too deep into this issue, but the fundamentals have to be understood.
So, what is a payment gateway? Gateways are basically programs that process a customer’s credit card information before the finalization of a transaction. It could be said that they act as controllers who check whether the card’s information is valid, and if it is, they ensure that transactions pass successfully.
Payment Gateways Are a Necessary Part of Every Online Merchant Services
- First, a customer needs to send a request for a purchase on your website.
- Immediately after the request has been sent, this program is activated. It checks first whether the customer has the available funds for the purchase (if not, the purchase is stopped).
- If funds are appropriate, it encrypts all the needed information (meaning that the customer’s data will be given thorough protection against potential theft) and sends it to the issuing bank or entity. After the request has been approved by the appropriate provider, the funds are withdrawn, and the encrypted data is then sent back to the program.
- Finally, the program sends the funds and data to your account, and the transaction is completed.
As you can see, these programs are not just important for customer service. They provide the much-needed protection against credit card fraud, which is becoming a serious issue as the eCommerce business models are developing more and more. Luckily, they are easily obtained nowadays via credit card processing companies.
Is Getting a Payment Gateway Truly a Necessary Step
It is understandable that you’ll be looking for small business expenses and tax deductions, and it is natural to wonder whether your business can manage without taking this step. However, we have to say that not acquiring a gateway for payments is a major mistake that merchants can make, as merchant services and credit card processing services are more or less inseparable.
Unfortunately, if virtual credit card terminals are left unprotected, you can become an easy target for cybercriminals. The security that these programs provide for the transaction process is invaluable. There are many scams that you can become a victim of and lose a lot of money. However, the most important thing is that these scams can ruin your reputation, which is often irreparable damage. Without this program, you will basically be running a high-risk enterprise.
What Are the Main Advantages of This Software? What Does It Improve?
You’ll certainly be asking this question as well after learning that as an online entrepreneur, you’ll require this program for your enterprise. Let’s see what the main advantages are:
- As mentioned, this software has integrated features that protect your online enterprise from cybercrime. Establishing protection without it is possible but quite inconvenient and costly. These programs have features that automatically encrypt information, such as the card’s number (usually, it is a combination of random numbers and letters). This new code is only meaningful to other software connected to the purchase (bank’s software, for example). That makes it really hard for hackers to steal data.
- This program represents a single software that will completely link your website with all other software and perform all necessary actions for a successful purchase. Without it, you would require numerous programs for each part of the procedure, which would both be time-consuming and costly.
- You will easily keep track of all the payments and your profit with this software. This means that it will be much easier to create a merchant’s statement and all other accounting obligations that you will have as an enterprise owner.
- If you plan to run an international enterprise, there are multi-currency processing programs. Once the purchase has been made, this software will automatically change it to your local currency.
Do All Gateways Have the Same Contents? How to Choose the Right One?
There are different types of online businesses. Hence, there are different types of processing programs as well. Here is what needs to be considered when looking for one:
- First of all, you need to make sure that it is available in your country. There are processing programs that only work within a single or few countries.
- The mode of payment can differ. You need to make sure that a processing program supports the method that your enterprise will employ.
- Check whether it is compatible with your website and the financial software that you are using.
- Check whether the features are suitable for your enterprise. Different software can have different methods of collecting funds.
- Finally, credit card processing fees can also differ. There are many good processing providers for small businesses, and you should choose the one that accommodates your budget the best.
A Merchant Account Is Needed in Order for Gateways to Efficiently Process Payments
Before setting up this program, you will need to apply for a merchant account. You shouldn’t confuse this with an ordinary bank account. All your earnings will be stored on this account once the payments are approved. Here are the two main characteristics of these accounts:
- This is mainly important because there will always be a chance that customers will ask for a purchase reversal. So, it will be much easier to perform such a service, as you will pay the money back directly from your own source, rather than notifying your bank every time. After the refund has been successfully performed, the rest of the money is available to be sent to the bank.
- These accounts are also extremely useful for people who own several online businesses. You can have a single gateway for all your websites, and if you have this account, all funds will be stored by the program in one place. This is important for the bank reconciliation process, which monitors whether your bank statements and personal accounting match.
You can apply for these accounts in banks for independent sales organizations (ISOs). You will receive an identification number (MID) which will always be required when money is being transferred to an ordinary bank account. All in all, with these accounts, it is much easier to keep track of profits, as they are specifically designated for transaction services.
In General, There Are Three Different Kinds of Gateways That You Can Use
Of course, in the age where eCommerce is winning the battle against traditional shopping, the software is developing rapidly, and each year is bringing new trends. At the moment, it can be said that there are three types of processing programs.
A redirect is software that sends a customer to another website for the finalization of the purchase. So, for example, if your enterprise uses platforms like Amazon, Shopify, or such, the redirect will send customers to their websites. These are not quite popular if you want to have maximum control of your enterprise, and also, people don’t like too many steps when making a purchase. Therefore, having to go through additional procedures on Amazon’s website after yours can be a bore.
Hosted (off-site purchase)
When a customer makes a purchase, all the data goes to the processing provider before the transaction can be complete. This is probably the most convenient type for new online entrepreneurs.
This type of processing is typical for corporations and large enterprises. You can acquire the needed software and then create your own servers that will regulate all the transactions. Corporations often have their own IT teams that manage payments, and as an owner, you would be in complete control of all the processes. Nonetheless, it is absolutely viable for a small enterprise owner to control the servers, but you would certainly have to invest a certain amount of time to gain a thorough understanding of the whole procedure.
Many Online Entrepreneurs Stack Various Types of Software for Purchase
This means that you will employ different software that will regulate transactions. Different processing software will offer different options. For example, certain software supports Visa, while the other one supports MasterCard. Ideally, you would want your enterprise to cover all the most popular providers. Also, some people don’t use cards but purchase things using PayPal, Venmo, or Apple Pay. In order to cover all these options, you will need to have at least several different software. Keep in mind that the most successful online enterprises usually offer all the most popular purchasing methods.
Make Sure That the Software Is PCI Compliant Before Purchasing It
PCI compliance is absolutely necessary when it comes to software that regulates online transactions. PCI represents a set of standards that every business that has any sort of connection with transaction processing has to meet. In short, these standards entail implementing various features that will ensure maximum security both for the customers and business owners.
Although PCI is still not regulated by federal law, states have begun to recognize its importance and are starting to enact laws that compel all businesses to meet these standards. Furthermore, these laws also entail punitive measures in the form of PCI non-compliance fees. Therefore nowadays, the majority of processing providers follow PCI standards.
What Is a Payment Gateway vs. Payment Processor Difference?
“Gateway” and “processor” are terms that are often used interchangeably, but these things are actually different. Often the term “service provider” is also used in the same context. This is again a mistake. Hopefully, the meaning of the first term is by now clear. Let’s see what the other two terms mean.
A processor is a software responsible for transferring money from customers’ funds to merchant accounts. However, a processor cannot work without a gateway. The latter first has to authorize the purchase, and once the procedure begins, the processor is notified to perform the transfer of funds. A service provider is an umbrella term that includes all three aforementioned things. Here is a useful video that further explains this issue.
Payment Software Is an Integral Part of Every Successful Online Business
What is a payment gateway, and how it works? We hope that we’ve provided you with all the necessary information about this topic. If you are thinking about starting an online enterprise, we at the Merchant Chimp credit card processing company can provide you with the best software of this kind that will both ensure maximal security and convenience for your customers and yourself.