What is a payment gateway, and how does it work?
Of all the steps in the online shopping journey, the payment process is crucial. Without an efficient and seamless payment solution, your conversion rates will be low. Therefore, choosing the right payment gateway is essential to encourage customers to complete their transactions. Good news! Here’s a complete guide to understanding how this service works, its benefits, and how to choose the right one for your platform.
How does a payment gateway work?
A payment gateway is an essential service that enables online payments on e-commerce platforms. Its role is to connect merchants with their payment processing provider or bank. The system validates the customer's information and transmits it securely.
When the customer enters their banking information on the platform’s payment page, the gateway encrypts the data before sending it to the payment processor to reduce the risk of fraud. The acquiring bank (the merchant's bank) then transmits this information to the issuing bank (the customer’s bank) for approval.
The issuing bank checks the banking information and performs additional anti-fraud checks. It approves or denies the transaction, and the acquiring bank informs the payment gateway of the transaction’s outcome.
If approved, the buyer receives a confirmation, and the business collects the funds in its merchant account. If the transaction fails, the merchant can ask the customer to choose an alternative payment method.
Why should you use a payment gateway?
Are you hesitating to use this service for your online store? Payment gateways and online payment solutions are valuable allies for merchants who want to improve the management of their online business while reducing costs.
Enhanced transaction security
One of the main advantages of a payment gateway is its enhanced security.
A payment gateway protects your customers from data theft, ensuring peace of mind during transactions on your e-commerce platform. This service allows you to secure online payments, reduce the risk of fraud, and ensure that your customers:
- Don’t exceed their credit limits,
- Aren’t paying from blocked accounts,
- Have sufficient funds on their cards to complete the purchase, etc.
Thanks to this system, you can offer a secure payment solution that complies with all necessary security requirements for online payments.
PCI-DSS compliance
Good payment gateways ensure PCI-DSS compliance. This standard consists of policies that secure consumer payment data. Every online merchant is required to comply with this standard to avoid heavy fines.
Using a high-quality payment gateway allows you to establish this security framework based on your transaction volume. PCI-DSS compliance builds customer trust in your website since it guarantees their credit card information is secure. This standard also helps prevent credit card breaches and supports appropriate security controls.
Multiple payment methods
Another advantage of using a payment gateway is the increased sales due to diversified payment solutions. Nowadays, customers don’t just pay with credit or debit cards. Many use electronic services or wallets to make purchases.
A good payment gateway integrates all these technological solutions to simplify checkout. With it, you can offer your customers a convenient and suitable payment method, encouraging increased sales.
Simplified payment processes
This type of service simplifies transactions by grouping everything within one channel, ensuring faster payments into your merchant account. Some payment gateway providers also offer solutions that integrate with tools like CRM or accounting software.
With a system offering these features, you can focus on improving your services as a merchant. It also supports better financial management of your merchant account.
The impact of payment gateways on the customer’s buying journey
According to a study by Forrester, offering more than three payment methods can increase conversion rates by 30%. Payment gateways optimize the buying journey on your site by easily integrating new payment methods.
This system orchestrates payments to manage transactions better, reduce failures, and maximize conversions. For consumers, this solution significantly enhances the customer experience. The payment process is smooth and obstacle-free.
Customers also have access to a wide range of payment methods that match their preferences. The gateway minimizes checkout failures and ensures visitors complete their purchase journey without difficulty.
Different types of payment gateways
To choose the right payment gateway, you can select from four types of services. Let’s review them.
Hosted model
This is a third-party system that redirects your customer to the payment provider’s page, where they enter their banking information before being redirected back to your page to finalize the purchase.
Hosted gateways are popular because they are secure, but they don’t offer much flexibility in the purchasing journey. As a merchant, you have no control over the customer experience, and customers may be annoyed by the redirection to external pages during payment.
Self-hosted gateway
The self-hosted payment gateway addresses the limitations of the hosted model. With this service, merchants control the entire payment process from start to finish. Here, the buyer enters their details directly on the platform. The information is then encrypted and transmitted to the gateway.
With this service, your online store automatically complies with PCI standards. It also allows you to optimize the customer experience with a more intuitive and faster purchasing journey.
API-hosted gateway
This system allows full control of the payment process. It offers a customizable interface to handle transactions and manage each step, from collecting payment details to final validation by the banks. However, if you choose this payment gateway, you are responsible for securing your customers' banking information and complying with PCI standards.
Local bank integration model
Like the hosted model, this gateway redirects the customer to a bank’s website, where they enter their details before being redirected back to your online store. However, this system is not widely used because it doesn’t provide control over the payment process and isn’t suitable for businesses looking to grow.
Criteria to consider when choosing your payment gateway
The quality of a payment gateway can affect a prospect's decision to purchase your products or services. If consumers find it unreliable, they will likely abandon their cart and turn to a competitor. Here are some criteria to consider when choosing the right gateway.
How much does a payment gateway cost?
The cost of the service is one of the first elements to consider. Each provider sets their pricing. Some charge a fixed monthly fee, while others take a percentage of each transaction.
Find out the pricing terms of the providers you're interested in and consider the different fees associated with using the payment gateway.
How does the integration of a payment gateway work?
Generally, integrating this system is not a problem. However, before making a choice, make sure it’s compatible with your e-commerce platform. Check whether you need an extension or software.
It’s also essential that the gateway easily integrates with the mobile version of your online store. Otherwise, a prospect unfamiliar with using a computer for shopping might not complete the buying journey.
Compatibility with your environment
Before using a payment gateway, ensure it’s compatible with your environment (website, app, or physical sales terminals). Some services are more effective for online sales, in-store sales, or both.
As a merchant, you need a system that meets your specific needs. Prioritize payment gateways with features tailored to your industry, region, or business model.
Payment speed
At the end of a transaction with the customer, the payment gateway transfers the funds to your merchant account. Ask providers about their transfer times.
Some systems deduct fees immediately, while others don’t. Keep this in mind, as it can affect your cash flow.
Associated fees
You’ll have to pay various fees for setting up the payment gateway, data security, or penalties. Examine these closely as they can directly impact your profits or the transaction fees paid by your buyers.
Available support
Make sure the provider has a responsive customer service team to resolve issues quickly or answer your questions. Some providers don’t offer support, leaving merchants stranded when problems arise. A lack of support can even cause customers to lose trust in your store.
Security guidelines, procedures, and certifications
A good payment gateway should have essential security certifications and accreditations for storing, processing, and transmitting sensitive customer financial data.
Any business involved in processing, transmitting, or storing card information must comply with PCI standards. Ensure the provider is up to date with these requirements.
Synchronization of products between Retail POS and e-commerce
If you sell both online and offline, choose a payment gateway that offers synchronization between POS systems (point of sale hardware) and e-commerce.
This way, your inventory is automatically updated across all channels when a customer purchases in-store or online. Choosing a system with these features is part of good e-commerce practices to grow your business.
Payment gateway or payment processor?
The difference between the two services is often hard to grasp, especially when you’re working with a payment service provider (PSP) that offers both. The processor handles data and manages communication between the parties, while the gateway securely transmits banking information.
