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The Main Types of Payment Gateways and How They Work

Payment Gateways
Payment Gateways

A business selling goods or services has to provide a reliable way for customers to complete transactions. So, payment gateways are integral for e-commerce sites and brick-and-mortar stores. As a merchant, you must know at least the basics of payment processing and how to provide secure, dependable solutions to your customers. If your business accepts credit cards, then you must be able to distinguish between the different payment gateways available for merchants.

How do payment gateways work?

A payment gateway is one of the primary points of a payment ecosystem. It facilitates transactions from customers to businesses. When a buyer makes an online payment, the gateway transfers information from the payment portal, such as a website or app, to the merchant’s acquiring bank. In the payment ecosystem, the acquiring bank or acquirer is the financial institution where a merchant has a bank account.

When a transaction passes through a payment gateway, the acquirer, through a merchant account, forwards the details to the issuer to authorize the payment. The gateway then transmits an approved or declined request back to the interface. Payment gateways are responsible for validating card details and ensuring they get to the acquiring bank safely. In card-not-present transactions, a payment gateway offers fraud protection by verifying information before submitting it to the bank.

Redirect payment gateway

Hosted or redirect payment gateways include third-party payment processors. When customers want to pay, the site redirects them to another page. Here’s what to consider about this payment solution.

Basic features

A redirect payment gateway is suitable for a small business because it allows a third party to accept payments. Therefore, your business doesn’t have to deal with the running costs of a payment gateway. PayPal is an example of such a payment solution. A hosted payment makes it easy to set up recurring payments because users can link their credit cards. Recurring payments simplify transactions for subscription services. Redirects provide small businesses with the convenience and security of a first-class payment processing solution without the challenges of day-to-day maintenance. Additionally, you don’t have to worry about storing customer data, thereby decreasing the burden of PCI compliance.

Downsides

Having your payment gateway hosted by other companies like Square or PayPal gives you limited control. You have to trust the payment service provider to offer customers smooth transactions. Another disadvantage is that redirects add another step in the online payment process. Buyers have to leave your page to complete the process, thus reducing the chances of customers returning to your site.

On-site payments

Payment gateways based on a company’s servers are on-site. This payment processing solution is suitable for merchants with large volumes of payments.

Basic features

With on-site payments, you have total control of the system as a merchant. Everything goes through your system, meaning you can customize payments as you see fit. On-site payments give you the freedom to improve the shopping experience to suit your customers. Another plus point is that you can ensure consistency in the customer experience, including the transaction fees charged. Since shoppers don’t have to leave your website, you can make certain they all enjoy high-quality services. On-site payments make it easy to market to customers at the last minute because they can quickly return to the product page.

Downsides

Handling all aspects of customer transactions means more responsibilities. On-site payments are costly to set up and maintain. Besides the merchant account, you need the right software and data servers. So, your business needs enough resources to operate and maintain the system. The duty of collecting and storing customer information falls on you. Hence, you must ensure PCI-DSS compliance, among other requirements.

Off-site payments

Some payment gateways allow customers to finish the checkout process on a merchant’s website, but process payments on third-party servers.

Basic features

Off-site payments work almost the same as redirects. You don’t accept payments directly. Therefore, you don’t need merchant services. These solutions are ideal for small and medium enterprises that lack the resources to host their own servers. If you choose this gateway, you still have to work on the checkout process and ensure it caters to customer needs. You must also be careful when selecting a payment provider. A reputable processor increases the probability of buyers returning. Off-site payments save you the costs of maintaining data servers.

Downsides

Given a third party is responsible for most of the credit card processing, you can’t do much to personalize the customer experience. The most you can do is make the checkout as painless as possible. It’s why your choice of processor matters a great deal. Take the time to find a provider with robust security and solid credibility.

Conclusion

Any business that accepts credit cards requires a secure payment gateway to ensure customers transact without any issues. Payment processing is one of the biggest elements of a company. A poor checkout experience can affect sales dramatically. For this reason, you must know how to compare payment gateways and pick the most appropriate one for your business. Consider the pros and cons of each. Factor in the transaction fees, security, and currencies supported.

Read More: How To Balance Your Online & Offline Life?

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