Ecommerce 101: Learn About Payment Gateways

The payment gateway is an important part of any payment transaction -- online or physical. For ease of understanding payment gateways for online transactions, think of the payment gateway as the service used at a physical point of sale terminal in a store.

What is a Payment Gateway? The Online Payment Process Explained

When a customer has checked-out through his or her online shopping cart, the purchase needs to be verified for payment to the merchant. The merchant’s payment gateway handles the verification task.

A payment gateway is really a service-based infrastructure that automates the complex payment transaction process that takes place between the customer and online merchant. The payment gateway -- a third-party system of computer processes -- routes, verifies, processes and accepts (or declines) credit card transactions on behalf of the merchant over secure and encrypted Internet connections.  The processes handled by the payment gateway let a merchant accept credit cards and other forms of electronic payment online.

To accept or reject the online payment, the payment gateway handles all the complex routing of the card holder's data on behalf of the merchant. Using secure encryption means the payment gateway will provide the transaction data to the merchant’s bank processor. The processor then submits the data to the credit card network (or Credit Card Interchange), which routes the data to the customer’s credit-card-issuing bank for approval of funds.  

The transaction results are then sent back to the credit card network, which relays it back to the merchant’s bank processor, and then it's finally routed back to the payment gateway again. The payment gateway will then store the transaction data and send the transaction results back to both merchant and customer.

While a lengthy and complex process, all of this takes place in the seconds once the customer clicks the submit button on the cart page and views the transaction details page.

What to Look for when Choosing a Payment Gateway

There are a number of payment gateways from which online merchants can choose. Here's what you need to consider when choosing a payment gateway provider:

Accepts a number of different types of payments including credit card, electronic checks, gift cards and debit cardsOffers options to use the payment gateway as a secure hosted service, integrated through the shopping cart or the capability to host your own secure payment form. As your business grows your needs may change so look for more than just shopping cart integrationAlways verify a service provider’s reputation and check for PCI complianceLook for management tools so you can monitor and control payments yourselfFraud tools to help you avoid fraudulent transactions are a must-haveA payment gateway that will not hold funds for an extended length of timeMake sure the payment gateway you choose provides 24/7 email and phone technical supportPayment Gateway Service Providers

You will find that payment gateway service provider fees and subscription prices vary -- based on the services and other options offered by the provider. Typically you can expect to pay a one-time set-up fee that ranges from $50 to $250. Always look for incentives and promotions that waive this fee before buying in.

You can also expect to pay either a monthly subscription fee or a per-transaction fee.  For a subscription-based account you will pay a recurring monthly fee based on a maximum number of monthly transactions. If you exceed the monthly limit you will be charged the remaining transactions on a per-transaction fee.  Other providers may charge only a per-transaction fee (a set amount or a percentage of the transaction) instead of a monthly subscription fee. Always read the fine print so you are aware of how much you will pay for the payment gateway service.

The following list of service providers will help you get started on choosing a payment gateway that is right for your ecommerce business:

2CheckOutAmazon Payment GatewayAuthorize.netGoogle CheckoutPayPal PayFlow ProVerepayWorldPayMore Payment Gateway Advice for Your Small Business Ecommerce Website

Looking to get a better handle on starting or improving your online business? Try these ecommerce tips and guides to learn more about the payment gateway and payment processing.

4 Ecommerce Regulations to Need to Know Q&A With the E-commerce Experts: Accepting Credit CardsBuyers' Guide: Choosing a Payment Gateway ProviderAn Introduction to Payment Gateways

Vangie Beal is a veteran online seller and frequent contributor to ECommerce-Guide.com. She is also managing editor of Webopedia.com. You can tweet with her online @AuroraGG .

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