If your business wants to accept online payments, you’ll need to use a payment gateway. In this article, we explore what a payment gateway is and how it works. We also look at the benefits of using a payment gateway and things to look at when choosing between payment gateway providers.
What is a payment gateway?
A payment gateway is a technology used to authorize online credit card payments. It can be thought of as the online equivalent of a physical point-of-sale (POS) terminal in a store.
Online payment gateways connect the different parties involved in the payment process, including the acquirer, issuer, and card scheme (more on these below). Essentially, a payment gateway:
- Allows customers to securely submit their credit or debit card information
- Check that the customer has sufficient funds for the transaction
- Informs merchants and customers if a debit or credit card payment has been approved or declined
- Transfers funds to the merchant’s account for settlement.
As per PCI DSS compliance standards, payment gateways must incorporate a range of security features including encryption, tokenization, fraud-prevention measures, and annual audits. This protects both customers and merchants during the payment process.
How do online payments work with a payment gateway?
While it seems like a payment gateway processes payments instantly, there’s a lot that happens behind the scenes and many different parties are involved.
Before we explain how a payment gateway works, let’s explain the role of each party:
- Merchant: Any individual or business that sells goods and services.
- Payment service provider/payment processors: Also known as PSPs, these are third party companies that provide payment processing services to merchants, including payment gateways.
- Customer or cardholder: Anyone initiating a purchase of a merchant’s goods or services.
- Card schemes: Payment networks linked to credit and debit cards, such as Mastercard, Visa, Amex, and Union Pay.
- Issuer, issuing bank, or card issuer: The bank or other financial institution that issues a customer with the payment card they use for a transaction. When a customer makes a payment with this card, the issuer checks that they have enough funds to cover the transaction and transfers the funds to the acquirer.
- Acquirer, acquiring bank, or acquiring member: While the issuer represents the customer, the acquirer is the bank or financial institution that represents merchants. They ‘acquire’ money from the issuing bank and ensure it’s transferred to the merchant’s account.
- Payment gateway: The technology used by merchants to authorize credit or debit card payments and securely transfer payment data between acquirers, issuers, and card schemes.
Difference between payment gateway & merchant account
Many people confuse payment gateways with merchant accounts. While both of them are essential for businesses to accept payments online, they serve different purposes:
- Merchant account: This is a special type of bank account businesses use to accept credit or debit card payments, process transactions, and settle funds. Merchant accounts receive information from the payment gateway, hold funds from customers temporarily, and then transfers them to the business bank account.
- Payment gateway: This technology acts as a middle-man between customers and businesses, securely transmitting payment information and authorizing transactions. Payment gateways encrypt payment data and send it to the business’s merchant account for processing.
How do payment gateways work?
Below is a step-by-step outline of how payment gateways work.
Step 1: Customer makes a purchase: A customer initiates a purchase by entering their credit or debit card information on a payment page. This usually includes their cardholder’s name, card number, card expiration date, and card verification value (CVV) code. The payment page can either be hosted by the payment gateway or have encrypted entry fields that then securely pass information onto the payment gateway.
Step 2: Information is encrypted & sent to the acquirer: The payment gateway encrypts the card information, carries out fraud checks, and transfers the cardholder’s information and transaction data to the acquirer.
Step 3: Card schemes carry out fraud checks: The acquirer safely passes the information on to the card scheme (e.g. Visa, Mastercard, Amex) and more fraud checks are carried out. The payment data is then sent from the card schemes to the issuer.
Step 4: Issuer authorizes transactions: The issuer carries out further fraud checks, such as validating transaction information, checking if the cardholder has sufficient funds, and confirming validity of the bank account. Depending on these checks, the payment is either authorized or declined.
Step 5: Customer & merchant are notified: The issuer sends payment approval or denial to the payment gateway and both customer and merchant are notified.
Step 6: Payment is confirmed: If the payment has been approved, the customer will be directed to a payment confirmation page. If the payment was declined, the customer will be asked to try another payment method.
Step 7: Settlement begins: After payment approval, the acquirer collects the funds from the issuing bank and puts them on ‘hold’ in the merchant account.
While it sounds like a lot of information is being passed on between different parties, all of the steps above happen in just a few seconds.
Benefits of using a payment gateway
Below are some ways businesses can benefit from a good payment gateway.
1. Improved security
Payment gateways are a secure way for businesses to accept payments. Firstly, several checks take place during the payment process to avoid fraud. Secondly, payment gateways must be PCI DSS compliant, which means they adhere to specific security standards. This adds another layer of fraud-protection. Thirdly, many payment gateways support features like tokenization and risk management to further enhance security and protect both businesses and customers.
2. Better payment experience
One of the biggest benefits of using a payment gateway is that it enhances the payment experience for customers. They can easily make purchases anytime, from anywhere in the world, and securely save their payment information for future transactions. A seamless payment experience for customers is essential for increasing conversions, cultivating brand loyalty, and improving customer retention.
3. Enter new markets
Many payment gateways offer support for multiple currencies and integrate with global payment methods. This breaks barriers and makes it easier for businesses to enter new markets and allow their customers to choose how they want to pay.
For example, ZEN accepts more than 20 methods of payment that can be customized to meet your clients’ needs. Enable and disable payment methods and easily cater to specific client payment preferences no matter where they’re located.
4. Customized checkout page
Many payment gateways allow you to integrate their technology with your existing website or e-commerce platform. This means you can customize the page’s appearance to suit your brand’s style and align with your store’s aesthetic.
What to look for when choosing a payment gateway
If you’re searching for the right payment gateway for your business, here are some things to consider:
Hosted vs non-hosted payment pages
The first thing to think about is whether you want your payment pages to be hosted or non-hosted. We cover the difference between these two options below.
Hosted payment pages
With a hosted payment gateway, your customer is directed away from your checkout page to the payment gateway’s hosted payment pages (HPPs) where they’ll make the payment. Once the payment has been made, the customer is returned to your website for confirmation.
The benefits of using a hosted payment page include:
- It’s easy and quick to integrate into your website
- It reduces the risk involved with storing and transacting credit cards
- It can be more cost-effective for smaller businesses.
However, some drawbacks to using a hosted payment page are:
- You’ll be sending your customers to a different website at a critical point in the checkout process. This extra step may make your payment process longer or create customer distrust, leading to abandoned carts.
- You’ll have less control over your customer’s payment experience, including the look and feel of the payment page.
With non-hosted payment gateways, your customers complete the transaction without leaving your website. This is done by entering their credit card details into secure and encrypted payment fields.
The benefits of using non-hosted payment pages are:
- An easier and frictionless customer experience with payments handled onsite.
- Customizable payment pages that align with your brand’s aesthetic.
- Not having to store sensitive information on your own server.
Consider these two options and look for a payment gateway that aligns with your business model and requirements.
Security and fraud protection
One thing you can’t compromise on when choosing a payment gateway is security. Be sure to choose a payment gateway provider that is compliant with PCI DSS and offers additional screening tools to protect against fraud.
Support for alternative payment methods
Another thing to look out for is support for alternative payment methods. Offering different payment methods at checkout can improve conversion rates, so be sure to find a payment gateway that supports a range of payment methods that meet your customer preferences.
If your business works with companies across the world, multi-currency support is essential. This allows you to accept payments in different currencies and offer support for different languages. Be sure to check which currencies your payment gateway accepts and whether any additional fees are involved for payments from other countries.
Mobile and tablet support
People may be accessing your online payment gateway from anywhere, be it a phone, tablet, or computer. Be sure to choose a responsive payment gateway that can support payments on these devices while maintaining a seamless payment experience.
One essential consideration when choosing a payment gateway for your business is transaction fees. To find out whether a payment gateway is cost-effective for you, consider the volume and value of transactions you’ll be processing as well as the fees involved. Another cost to take into account is extra fees for chargebacks. With ZEN, you can be assured that you’re paying the lowest processing fees on the market, guaranteed, so you save on each transaction and never pay more than you should.
Payment gateways can be tricky and finicky things, especially when your business is just starting out with them. Try to choose a provider that offers merchant support so you know that help is there when you need it. Consider things like:
- What kind of support is available? Is it through live chat or via email?
- How quickly do they respond?
- Where is their customer support based? Do they work the same hours as you?
- Are there extra fees involved with support?
If your business offers subscriptions or memberships, it’s important to search for a payment gateway that offers recurring payments. This is usually done by storing credit card numbers and automatically charging them on a recurring basis.
Finally, one feature that shouldn’t be overlooked is integrations. Ideally, your payment gateway will integrate with your current billing, shopping cart, and accounting solutions. This makes it easier to set up the payment gateway and saves you and your developers time. ZEN allows direct checkout integration without a complex API implementation, making it super simple to get started.
Accept more payments with ZEN
ZEN was created with your business in mind, including a seamless customer payment experience, multiple currency support, the lowest fees on the market, and easy integration. Contact us now to find out how we can help your business accept online payments easily, securely, and seamlessly.