If you want to provide online payments to your customers, you need a payment gateway and a merchant account.
A payment gateway is a merchant service that processes card payments for ecommerce sites (and traditional brick and mortar stores). It makes selling online and taking payments easier than ever before.
What is a merchant account?
A merchant account is a specific type of business account that allows you to accept payments online and is fundamental if you want to make money from your website. The merchant account works to take debit or credit card payments from the payment processor, often the same provider. Once your merchant account receives the funds, this is then sent to your own business account.
How does a payment gateway work?
The online payment process can be broken down into five steps, as follows:
- The customer browses your site, adds the product or service to their basket and hits checkout.
- The customer enters their card information, including their name, address and card numbers. This is a great reason to use a virtual debit card.
- Your payment gateway secures that card information and forwards it to the acquiring bank.
- The acquiring bank then forwards the card information to the card scheme that has branded the card and then onwards to the issuing bank. If the card information matches the issuing bank’s records, the transaction is approved.
- The success is reported back to the payment gateway, which, in turn, reports it back to your site.
And just like that, a website automatically processes an online payment!
Below is a simple illustration to demonstrate how a payment gateway works:
The payment gateway also serves a few other functions including screening orders, calculating tax costs and using geo-location for location-specific actions.
How secure is a payment gateway?
A payment gateway must be secure and convenient to use. Most accomplish this in a few seconds with these 3 steps:
- Encryption: between the user’s browser and the server of the retailer, a payment gateway will encrypt (encode for private use) data for exclusive use between seller and buyer.
- Request: the authorization request occurs when a payment processor gets approval from a credit card company or financial institution to proceed with the transaction.
- Fulfillment: when the payment gateway has the authorisation, it allows the website and interface to proceed to the next action.
What payment gateways are in the UK?
There are several payment gateways to choose from including the well-known ones like WorldPay and PayPal plus new contender Stripe. We will look at these three briefly below:
Worldpay
Due to its high levels of security and flexibility, Worldpay’s services are used by big businesses across the UK such as Tesco, HMV and the British Heart Foundation, but are also ideal for SMEs and start-ups launching new e-commerce sites.
PayPal
PayPal is the must-have payment gateway for your e-commerce store, purely because it's the one solution that guarantees you'll be able to sell your products to everyone.
Stripe
Stripe has been one of the most popular payment gateways in the market for a good couple of years. It has a clear fee structure, good integration with all major e-commerce systems and easy to use interface.
Unfortunately these leading gateways are often not accepting of those using cryptocurrencies or operating in the gaming industry.
How much does a payment gateway cost?
The costs involved in setting up a payment gateway include:
- One-time Set-up Fee: fee payable to get you started.
- Monthly Fee: fee you will pay every month to keep the service running regardless if you make any sales or not.
- Transaction Fee: the money you pay per transaction processed by the gateway, usually a percentage over the amount paid by your customer.
- Other Fees: some services might charge you other fees such as exchange rates or daily batch fees.
Hosted vs. Integrated Payment Gateways
When selecting payment gateways there are two options: hosted and integrated.
A hosted payment gateway e.g. PayPal, redirects your customers to the payment platform’s processor to complete the transaction. The benefit of this gateway is that it’s responsible for all PCI compliance and data security. The drawback with hosted gateways is that it could harm your conversion rates since customers are leaving your site and may not trust the gateway.
Integrated gateways allow you to connect your eCommerce website through the gateway’s provided API. This means that your customers aren’t redirected to another site, so you aren’t harming your conversions. However, you’re responsible for the security of your customer’s data.
How to choose a payment gateway
When comparing payment gateways the first thing that you should look at is pricing. Then consider whether the payment gateway will grow with business in the long term. Other factors to consider are whether the payment gateway will enhance the checkout user experience (UX). And finally, evaluate whether the gateway will integrate with your current platform.
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