Payment Gateway System Overview: Everything You Need to Know
As a business owner, you should understand what a payment gateway is and how it works. This includes prices, the best setup for your case, and a comprehension of some nuances that influence the final decision when choosing a provider. So, in our guide, we will cover some basic terms, overview types of gateways, features and functionality, security issues, and more.
What is a Payment Gateway System?
A payment gateway system is a combination of technical devices and digital solutions needed for organizing a digital or offline all-in-one point of sale. In more detail, an online payment gateway system is a network processing set that connects sellers and buyers to accomplish transactions. In the offline sector, a payment gateway can be imagined as a POS terminal that connects the bank accounts of a merchant and a customer.
Payment Gateway Scheme
The payment gateway process can be explained by using the scheme presented above. Thus, the Customer visits an online (or offline) Store and starts a payment procedure. Here, the Payment Gateway receives a request and sends a response to the Issuing Bank (client’s bank) to receive a confirmation of the deal (enough money for a transaction). Then the Payment Gateway makes a payout for a Merchant, sends a deal confirmation back to a website or POS terminal, and informs a Client.
Types of Payment Gateway Systems
To better understand what the process of an online payment gateway is, let’s review four common types of processing. For business owners, it’ll also be useful as we will explain what is a payment gateway with examples:
Hosted Payment Gateway
This is one of the simplest but costliest methods of adding a payment gateway to your online store. It is based on the separate PSP (payment service provider, like PayPal), which redirects clients from your website to a different page and proceeds with the payment. The benefits of this method are full PCI DSS compliance and fraud protection, with support included in the service cost. The drawbacks include higher fees and transaction rates, alongside limited payment info that can be useful for a merchant.
Self-hosted Payment Gateway
This method looks quite similar to the previous one but with no redirection of the customers to external pages. However, you still use an outsourced gateway service (like Shopify). It means organizing the technical processing of the payments on your servers, including protection procedures like encryption. It leads to higher costs spent on technical support, which can be a headache for the merchant. At the same time, it facilitates money processing and simplifies customer payment, giving more info about the client’s journey and reducing fees.
API-hosted Payment Gateway
An API-hosted online payment gateway process combines the first two methods, where the client isn’t redirected to additional pages but uses an external processor. However, the merchant should keep in mind data security issues and adjust the API thoroughly so it will work on all the preferred devices. Similar services (Stripe) are usually pretty cheap in terms of fees and fast enough for clients, but they require more time to set up.
Local Bank Integration Gateway
Despite being listed at the end, this is the simplest and the most limited way of organizing a gateway on the website. Here, a client’s payment request is redirected to the bank’s gateway, which is then redirected back after the payment is confirmed. With a pretty simple setup procedure and suitable fees, this method has many drawbacks. This gateway process has limited options (repeating transactions, chargeback), isn’t prepared for scaling up, and has no payment journey tracking.
Features and Functionality of Payment Gateway Systems
We've reviewed the major processing features when discovering what the payment gateway service types are. Now, let's see in detail what functionality should payment gateway system have:
This is the most crucial thing when setting up a payment gateway. Clients can be disappointed with slow processing or the absence of some specific payment method, but insecure payment and potential problems may even result in legal issues with significant fines for both merchants and clients.
Merchants should understand both sides of transaction speed. Clients should receive the fastest possible way of closing the deal, while business owners should be able to choose the payment period to the merchant bank account.
If you have a small business, you may not have additional team members to integrate and support complex payment gateway systems. Ease of integration, therefore, is the vital aspect, especially for inexperienced merchants who don’t fully understand what a payment gateway account is and how to set it up.
This is so-called “payment journey tracking.” When you have enough information about the refusals, disagreements, or money freeze cases, you can adjust the processing for better sales.
Here the simple rule “the more, the better” works almost perfectly, as your clients may want to pay in diverse ways. Still, if you are ready to offer them dozens of payment options, highlight the most widespread ones so as not to confuse the customers (credit and debit card payments, e-wallets, checks, and bonuses).
Setting Up a Payment Gateway System
Now, let’s turn from the questions like “How does a payment gateway work?” to more practical issues — how to set up a gateway for your business. The following plan will be valid for small startup-like companies which are focused on online payments:
- Research your business's specifics regarding potential clients and their paying portraits (methods, locations, currencies, etc.).
- Choose the payment gateway that fits your needs the most — the optimal combination of the above features and functionalities.
- Define specific points your business needs to implement the payment gateway (find an API specialist, set up a server for a self-hosted option, open all needed accounts, create a CRM or specific database, etc.).
- Choose the cooperation plan and start implementation of the functionality of the gateway provider.
- Checkup and test the system, including the speed, fees, and security of connecting payment processors.
- Be ready for some adjustments afterward and leave room for maneuvering.
- Use and test the gateway in battlefield conditions.
Security Considerations for Payment Gateway Systems
Independently of what payment gateway providers offer and their authority, business owners should know basic terms in the security sector:
PCI DSS Compliance
The Payment Card Industry Data Security Standards or PCI DSS is the cornerstone for all the gateways. It refers to international rules requiring a strict protocol for processing banking cards, excluding potential sensitive data leakage.
Encryption and Tokenization
With both terms referring to data protection, they are still quite different. Tokenization stands for replacing sensitive banking info with a token, which is an identifier (or the key) that helps to “understand” the code. Encryption means the same approach where the needed info exists in the hidden code, which must be further decrypted to access.
Address Verification System (AVS)
The Address Verification System is aimed at limiting fraud, especially during chargebacks. To accomplish this task, AVS links the info about the card and address to exclude suspicious data substitutions.
3D Secure Authentication
Implemented by two global card giants, Mastercard and Visa, 3D Secure Authentication aims to reduce fraud via two-factor verification. The newer 3DS2 protocol is in action, which uses advanced authentication methods like biometrics and aforementioned tokenization and works worldwide.
Fraud Prevention Measures
Identifying security threats and frauds in time can save you a lot of money and increase clients' trust in your website. By implementing Fraud Detection and Prevention Systems (FDPS), you can monitor patterns and suspicious activities and prevent any fraudulent transactions before they do any harm.
Choosing the right payment gateway is one of the key decisions for businesses of all scales, as this step involves dozens of aspects to be considered. Thus, a complicated or lengthy payment checkout can stop 87% of buyers from completing the purchase. And while convenience for clients is of utmost priority, merchants should not forget about the security measures and compliance that must be met and don’t sink into too high fees and transaction rates.
What is a payment system?
A payment system is a set of hardware and software that helps to organize money transactions between sellers and clients.
How do I choose a payment gateway?
You should choose a payment gateway according to your business specifics, considering the factors like security, transaction fees, payment options, ease of integration, and many others.
How do I set up a payment gateway?
Setting up a payment gateway involves the following steps:
- research your business needs
- choose a suitable gateway
- prepare your business for implementation
- add the system (hiring specialists if needed)
- test it, including real-time sales
How do I integrate a payment gateway?
Integration depends on the payment gateway type and website specifics. Most services require adding programming code to your website so that it can interact with the payment’s API, create payment forms, and ensure a security measures appliance.
Do I need to create a merchant account before adding a gateway?
Yes, having a merchant account is one of the initial steps that should be made before starting payment gateway integration, as you will be receiving your money there.