A payment gateway is a merchant service provided by an e-commerce application service provider that authorizes credit card or direct payments processing. Payment Gateway is for e-businesses, online retailers, bricks and clicks, or traditional brick and mortar. Wikipedia
What is the role of a Payment Gateway?
The Payment gateways main role is to authorize transactions between you and your customers. Without a payment gateway, approving the transaction process cannot move forward and you won’t receive your payment.
Payment Gateway vs Merchant Account
Payment gateways are often confused with merchant accounts. To take payments online you need both a payment gateway and a merchant account.
A merchant account is where funds are held before being deposited into your bank account. While a payment gateway is an eCommerce service that’s used to authorize and process credit card and debit payments for any business.
There are four main types of payment gateways.
1. Hosted payment gateways
First we have hosted payment gateways: They direct your customer away from your site’s checkout page. When the customer clicks the gateway link, they are redirected to the Payment Service Provider (PSP) page. Here, the customer fills in his or her payment details. Then after paying, they are redirected back to your website to complete the checkout process. The most noteworthy example of a hosted payment gateway is PayPal.
- Secure – transactions are PCI compliant and typically offer the customer fraud protection
- Simple – most users are familiar with this type of payment gateway, and they’re easy to set up
- The gateway is external, consequently the merchant can’t control the whole user experience
2. Self-hosted payment gateways
With this type of gateway, payment details are collected from the customer within the merchant’s website. After the details are requested, the collected data is sent to the payment gateway’s URL. Some gateways require the payment data be provided in a specific format. Others require a hash or secret key.
- Good customer experience – the entire transaction is completed in one place
- Customizable flow – the merchant has control over the payment journey
- No support system – Usually self-hosted gateways do not have a technical support team. When something fails, you will have to figure out how to resolve the problem on your own. Or you can hire a professional which could be costly.
3. API hosted payment gateways
With API hosted payment gateways, customers enter their credit or debit card information directly on the merchant’s checkout page. Payments are processed using an API (Application Programming Interface) or HTTPS queries.
- Customizable – offers full control over the customer experience and UI of the payment journey
- Capable of integration – can be used with mobile devices, tablets, etc.
- Security – merchants are responsible for PCI DSS compliance and purchasing SSL certification
4. Local bank integration
Local bank integration gateways redirect the customer to the payment gateway’s website (the bank’s website). This is where their payment details and contact details are entered. After making the payment, the customer is redirected back to the merchant website. Payment notification data is sent upon redirection.
- Quick and easy set up – good for small businesses who need a simple one-time payment structure
- Include basic features only. As a result this feature usually doesn’t enable returns or recurring payments. For this reason, not ideal for wholesalers
What Payment Gateway Type should you choose?
Above all, the payment gateway you choose should be dependent on your business model. For example, required features and the amount of control you want over your customers’ payment experience.
Finally, for online businesses and wholesalers, a self-hosted payment gateway will be the most streamlined experience. Because it allows the customer to complete the transaction from a single page and offers the merchant control over the customer experience.
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