Gateways — what is their role in the payments ecosystem?
A payment gateway is a form of software that connects a businesses payment processing system to the banking system and is integral in the process that allows a business to take credit card payments from its customers.
Whether you use a shopping cart type system like Woocommerce, a virtual terminal or a form payment system like Wufoo you’ll still need a payment gateway as this is what allows your system to communicate with your acquiring bank.
In this article, we’re going to look at payment gateways and identify where they sit in the payment ecosystem so that you can understand better how all of the different parts interlink.
In this post;
- A quick glossary of terms
- How card payments work
- What is a payment gateway?
- Why do online merchants need a payment gateway?
A quick glossary of terms
There are a lot of strange terms in the world of payment processing so we thought we’d shed some light on a few that will help in this article;
Customer — this is the person (or company) that holds a credit or debit card.
Merchant — this is the business that is taking a payment from the customer.
Issuer — The issuer(or issuing bank) is the bank that provides the credit card for the customer.
Acquirer — this is the bank that receives the money from the issuer on behalf of the merchant.
You’ll find that different companies use variations on these terms but in general, these are the most common names.
How card payments work
When a customer wants to pay a business they need to enter their credit card details into some form of system.
Some companies use an integral payment process like Woocommerce. This gives the company a shopfront that allows the customer to choose their products and then at the end a checkout where the customer enters their information.
Other companies use standalone forms that collect credit card information securely.
Some businesses may have internal salespeople who take credit card information over the phone and then enter it into a virtual terminal.
Once the credit card information has been collected, a payment request is sent to the issuing bank and if valid, the issuing bank then sends money to the acquirer bank.
The acquirer bank then sends the money on to the merchant’s own business bank account.
The payment gateway ties all of these together.
What is a payment gateway?
In the early days of the internet, credit card information used to be sent unencrypted to and from businesses which meant that credit card fraud was rife.
Over the years the banks and merchant services companies devised ways to keep card information safe and that is what led to the development of payment gateways.
Naturally, in an effort to keep banking secure the banks weren’t going to allow just anyone to link into their systems and the payment gateway software gives your online shop, payment form or virtual terminal a way to connect.
The software sits in the background and allows your systems to talk securely to the banking system by encrypting the information before it is sent and then encrypting any replies such as payment confirmation or declines.
Think of a payment gateway like a wireless router. You need a router to connect your computer to the internet in the same way as you need a gateway to connect your store to the banking system.
Although the gateway is actually doing a huge number of things for each transaction, it actually takes only 2–3 seconds from the customer pressing ‘pay’ to a successful payment notification.
Why do online merchants need a payment gateway?
Unless you are an exceptionally large business, the credit card companies aren’t going to let you connect to their systems.
It is true that some global enterprises have developed secure ways to connect to the banking system but this costs a huge amount of money and the banks are generally reluctant to do this.
So whilst you don’t have to have a gateway, the practicalities mean that to all intents and purposes you have no choice.
That having been said there really isn’t any reason not to have one as the fees are small, the speed is superb and most of the time you won’t even notice you are using one.
The payment gateway also provides protection for the merchant as it checks on the validity of the credit card information before it is sent and then receives a processing report showing whether the payment has been successful or not.
In essence, it gives the merchant a level of fraud protection against stolen cards, ensures that there are sufficient funds to pay for the goods or services and makes sure that payment isn’t being charged against closed accounts or expired cards.
Summary: if you want to take payments then you need a gateway
Payment processing gateways are an integral part of the payment processing system.
Your customers will probably never know that they exist and as long as you have chosen a reliable gateway provider then you probably won’t ever have to think about them again.
But without them, businesses and consumers could find themselves at the mercy of fraudsters which means that they are an incredibly important part of the whole payment processing ecosystem.
