Payment Gateway: How It Works and Why Your Business Needs It

Not that long ago, payment gateways were associated with eCommerce stores. In recent years, however, more and more service-based businesses are realizing how useful this technology is for processing credit card payments. Beyond securing the transaction process, a payment gateway can extend your business hours, speed up payment processing times, and more.

Want to know more about payment gateways? Read on to learn how they work, why your business needs one, and how to choose a payment gateway provider.

What Is a Payment Gateway?

A payment gateway is a piece of software that takes payment data from your customers and sends it to the acquiring bank. It also sends a response from the bank which confirms if the transaction is accepted or declined. A payment gateway is particularly helpful in situations where you can’t access a customer’s physical card, such as in online transactions.

The great thing about payment gateways is that they can execute various transaction types. These include:

• Authorization: Ensures that the customer has enough money to pay for the ordered item
• Capture: Processes the authorized payment
• Sale: A combination of authorizing and capturing a transaction
• Refund: Processes transactions where the customer requests a refund
• Void: Like a refund, except it works in situations where the money wasn’t captured yet

Benefits of Having a Payment Gateway

The main benefit of payment gateways is that they add another layer of security to your financial system. By using sophisticated encryption protocols, a payment gateway secures customers’ sensitive card information and, in the process, protects your business from fraud. A payment gateway also protects you from expired cards, closed accounts, and insufficient funds.

Using a payment gateway also makes doing business with you more convenient. Since there’s no need for physical cards, they allow your “store” to stay open 24/7. A payment gateway also speeds up transaction processing, allows you to implement recurring billing, and makes it easier to serve a large customer base.

Choosing a Payment Gateway Provider

If you decide to invest in a payment gateway, it’s essential to choose the right provider. For starters, your provider needs to support your preferred payment methods. Credit cards are a given, but what about debit cards, digital wallets, and services like PayPal? And if you have an international business, you need a gateway that supports multiple currencies.

Other than a payment gateway, you’ll also need a merchant account to start accepting credit card payments. Many small businesses work with payment service providers (PSP), who offer both payment processing and merchant services. Larger businesses, on the other hand, tend to opt for a full-service merchant account.

Finally, you’ll need to consider the pricing options. All payment gateway providers have their own sets of transaction fees and terms of use. Most fees are based on a percentage of the total purchase price for each transaction, but some providers also offer a monthly fee structure.

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