Payments gateways. They might not be as fun as other popular gateways throughout history and fiction – think Stargate, the Black Gate of Mordor, Platform 9 ¾ – but they’re basically the magical wardrobe to Narnia for the payments world.
Think about it. On one side, you’ve got a consumer with a credit card who wants to complete a transaction and receive goods or services. On the other, you’ve got a business with a virtual cash register who also wants to complete that same purchase and deliver goods or services.
But without a gateway, they’re worlds apart. You’re tasked with bringing them together while guarding their interaction from any forces of evil – which in the payments world are usually fraudsters and poor customer experiences.
That’s where the payments gateway comes into play.
What’s in your wardrobe?
OK, enough nerdy references (for now). What even is a payments gateway and why should you, as a merchant, have one?
Maybe you have a brick-and-mortar retail store with a cash register, equipped to accept payments by credit card or smart phone. But even if your business is 100 percent pure eCommerce, you still have a cash register of sorts; it’s just that, instead of a point of sale (POS) terminal, you have a portal.
There are many pieces to a successful online transaction, both at the brick-and-mortar cash register and at the digital payment portal, which uses payment services and APIs to let consumers pay on websites and mobile apps. A payments gateway is something like a courier running data between the different nodes of transaction processing and authorization.
Consider the processor – one of the critical components in any successful eCommerce transaction. The processor’s job is to analyze and transmit transaction data from the digital point of sale to the issuing bank that powers any given payment method. The issuer can then run all its standard fraud checks and make a decision to approve or decline the transaction, before handing the baton back to the merchant bank and its payment gateway.
On its own, a processor is just a magical wardrobe. It needs somebody to open the doors and run through with information, and a payments gateway is one secure and reliable way to do that.
3 Types of Payments Gateways
There are a few common types of gateways from which merchants can choose, depending on their size, budget, and type of business.
First, there’s the redirect, where the customer is routed to a different, third-party payment page to complete the transaction. PayPal is an example of a redirect.
Leveraging widely trusted redirect gateways such as PayPal and Apple Pay can help give consumers a sense of confidence and security when shopping on unfamiliar websites compared to entering their credit card number, which is why many small, lesser-known businesses use a redirect gateway.
Second, there are on-site payments, which are fully owned by the merchant and live on premise within the merchant’s own bespoke systems and servers.
This method works best if you are a very big business with very deep pockets, able to afford handling all your own payments on your own secure servers, as well as the liability that comes along with doing so. One purpose of payments gateways is to encrypt customers’ sensitive payment data and keep it out of merchants’ servers. Hosting on-site payments can undermine this key goal if the merchant has insufficient resources to support proper security hygiene. There are offerings today, however, that will host elements of your payments stack securely in the cloud so you greatly reduce the risk of customer data being hacked.
Third, there are hybrid payments gateways like Stripe, which powers a front-end checkout experience on the merchant’s website followed by off-premise processing on the gateway’s back end.
Some merchants choose to stack more than one gateway in order to increase the number of payment methods they can accept. After all, not being able to use a favorite payment method is one of the top drivers of cart abandonment in eCommerce as we know it, and you want to keep a steady flow of traffic coming through your magical merchant wardrobe.
Using a payments gateway isn’t always a fairy tale. If you go through the wardrobe, be prepared to pay some fees, from monthly account and membership fees to per-transaction percentage shares (which can be higher for credit cards like American Express). You’ll pay for things like account setup, PCI compliance, and batch processing.
Because of these costs, which can be unpredictable for merchants, Square has branded itself as an anti-payments gateway, providing similar function and security without the myriad fees. Of course, like gateways and any other technology, Square too has its pros and cons, so be sure to weigh the options and do what makes sense for your business and the way you will be using the tool.
Like any good fairy tale, history, or legend, the key points around this tech can be distilled into a few takeaways:
- Payments gateways can be physical or digital, for brick-and-mortar or eCommerce applications.
- They bridge the gap between payment processors and merchant account providers – that is, between the service that is charging the card, and the service providing the merchant’s payment systems.
- A merchant may use one or more payments gateways to accept transactions.
- The gateway authorizes transactions with issuing banks.
- Payments gateways may come with some unexpected fees or costs, but many merchants still find them to be a secure and reliable way to get the job done and stay PCI compliant.
In the spirit of accuracy, we must point out that payments gateways cannot actually take you to Narnia, Hogwarts, or deep space. But we still think they’re pretty darn useful!
Are you interested in adding a new payments service provider or gateway to your payments architecture? Modo allows enterprises to add new payment services with the click of a button, and manages and maintains those connections for you after you’re integrated. Reach out to the #paymentsgeeks at Modo at www.modopayments.com/contact for more info!