Online Payment Gateways: Explained
From the moment a customer arrives on your website, you want them to have a positive experience. You’ve taken the time to make your website look good, create compelling content, but how is your payment process?
Online sales are all about convenience, ordering from the comfort of your own home. And when it comes to checking out, it should be seamless and easy. After all, this could be the difference in making that all-important sale.
In fact, it was revealed by YouGov that 50% of shoppers said they would abandon a checkout process – if their preferred payment method wasn’t available. And that’s a lot of sales to be missing out on.
A solid online payment gateway is crucial to a positive purchase experience. This is basically a third-party application which helps to ease the processing of payments and sales. Some online payment gateways are already included in a package offered by merchant account providers. But not all offer the best service.
LumiPay Services
One of the best online payment gateway services for small businesses is LumiPay. It’s the unrivalled way to get paid and an online payment gateway that makes a difference. Not only is LumiPay reliable but it’s also completely free from the interest of acquiring banks.
They can provide a safe and seamless path for unique world transactions. And can adapt to suit all your business needs, whatever they may be. LumiPay can offer great low rates, high approvals, fast payments, and institutive fraud protection.
What is an Online Payment Processor?
An online payment processor is a company (often a third party) service that securely authorises credit card details and direct payments for online businesses.
It’s basically the same as a physical point-of-sale (POS) terminal in a retail shop or cafe – Simply making sure that there are funds available for you to get paid. The process lets your customer submit their card details which are passed on to the merchant and then their bank.
Your online payment gateway will be the first step in any payment process. But it’s not just about convenience; it also looks after you and your customer’s security. An online processor will act as an interface between the sales website and its acquirer.
It makes the sale completely secure by encrypting sensitive card details and making sure they are passed on securely to the customer’s bank. You can basically think of an online payment gateway as the middleman. It carries out payments securely and promptly, simplifying the role of any merchant when it comes to credit card processing or any other type of transaction.
Why You May Need an Online Payment Processor
There are a couple of reasons you might want to invest in an online payment gateway. We touched on a few of these points above, but we’ll go into some more detail here.
Security
The number one reason to use a payment gateway is to lessen the frequency and severity of credit card fraud. An online payment gateway will ensure your payment processing is secure with a number of tools. The first is Secure Socket Layer (SSL) this is the basic mandatory protocol which encrypts payment and card data.
Payment Card Industry Data Security Standards (PCI DSS) is the second. This is what’s used on LumiPay and all of the best payment gateways for small business should have one. It lists down all of the various guidelines that are needed to comply for secure payment gateway processing.
Another one is Tokenization – It goes without saying that you should never store customer card information on your server. Tokenization stores details on central servers and replaces the data with a random string of characters. These are then used by the merchant as a substitute for the actual card information.
Ease
Setting up your own payment system can be time-consuming and can require quite a bit of maintenance. The best payment gateway can be set up in a short amount of time and demand minimal effort on the merchant’s part. Another bonus is that customers will likely have interacted with these systems before, so it won’t cause any confusion.
Most present-day payment gateways will also support multiple payment methods and currencies. They ensure you can meet your customer’s needs and provide a simple and easy to use service. What’s more is that with payment processing being taken care of, you can focus on other elements of your business.
Experience
One of the most important elements of e-commerce is customer satisfaction. By providing your customers with global payment preferences or just general convenience, you’re upping their satisfaction. Of course, this means, they’re much more likely to return.
Key Players in Online Payments
Before we explain further how payment gateways work, you’ll need to know the key components of the online processing system. We’ll refer to these as the ‘key players’.
There are four key players in online payments, the merchant, the customer, the issuing bank, and the acquirer. When a customer clicks the ‘pay’ button on a website, this is who is involved in completing the payment process.
As a merchant, it’s important to know the different players involved in the payment industry. You’ll want to know how each player is involved in processing your sales, especially those making a profit from transactions.
The Merchant
A merchant is a person or company that sells goods or services. An eCommerce merchant is a party that does this through the internet. They can be operating in any industry – travel, retail, gaming, etc.
A merchant will work with an acquiring bank to apply and open a merchant account, allowing them to accept debit and credit. Whenever an online sale is made, the merchant will submit the transaction to the acquiring bank.
The Customer
The role of the customer in an online payment gateway is small but important. Also known as the cardholder, this is the person who wants access to a product or service sold by the merchant. They will initiate the transaction and begin the complete process.
Once the customer enters their card information the transaction may only take a number of seconds. With this being said, however, there are a number of things happening at this time. And this is where the process gets slightly more complex.
The Issuing Bank
The bank of the customer is referred to as the issuing bank, this is because it simply issues the customers’ credit or debit card. The bank will issue a card to consumers on behalf of payment brand networks like Visa and MasterCard. During the online payment process, the issuer will check customer details.
Their job is to make sure there are sufficient funds in the account for the transaction to take place. At this stage in the online payment gateway, the transaction process will go through a round of security checks. But, remember this is all taking place in a matter of seconds.
The Acquirer
The last key player in the ’payment game’ is the acquirer, also known as the acquiring bank. This will be the financial institution that looks after the merchant’s bank account. The role of the acquirer is to assume the risk.
What this means, is that they are trying to confirm whether or not a customer is genuine and has the means to pay. If so, it passes the transaction information to the card brands and issuers to complete the payment. All taking place at a highly impressive speed and completely securely. If you have any questions about any of this please refer to our FAQ page.
How does a Payment Gateway work?
So we’ve learned the key players in the payment process, but how does an online payment gateway fit into this? With the system of online payments via credit or credit card, a payment gateway will do the following…
Collection
During the sale process, a customer will navigate to your checkout where they enter their credit card information on your website. Your online payment gateway takes control from here. It will either provide your payment page directly on your website or securely transfer the details to it.
Transfer
The online payment gateway then sends the customer’s credit card payments and some details about the transaction to your payment processor. This is also known as your acquirer or acquiring bank, which we discussed earlier.
Authorisation
After this, the transaction details make its way to the card network and the card holder’s issuing bank. If sufficient funds are available, authorisation of the sale will take place and make its way back to your gateway. At this point you and your customer will find out if the transaction was successful or not.
Pricing
You’re now aware of how payments come in, but what about the other side of the sale, how much will it cost? As you might have guessed, every party which plays a role in the payment process wants to get paid. This includes the issuing bank, credit card associations like Visa and MasterCard, the merchant bank, and the payment processor.
Every time the payment process takes place, you’re paying four fees:
A Percentage of Each Sale
The issuer gets paid by something called the interchange. In simple terms, it’s a percentage of the transaction amount. This fee, however, will vary on a number of things like industry, transaction amount, and the card used.
Another Percentage of Each Sale
On top of the issuer fee, another percentage of the transaction amount will go to credit card associations. They charge an amount which is referred to as an assessment.
Even More Percentage of Each Sale
Another percentage of the transaction amount will go to your merchant bank. They take a cut by charging you what’s called a percentage fee. Once again this amount can vary depending on the price of the sale, industry, and the monthly processing volume.
A Pound for Every Sale…
Your payment processor, who might also be your merchant bank, makes money by charging their authorisation fee. This will happen each time you process a transaction and this happens no matter what. The transaction could be a sale, a decline, or even a return.
On top of this, they may also charge fees for setup, monthly usage, and even account cancellation.
The first three ‘percentages of each sale’ are usually added together and these get quoted from a single rate. The transaction fee, however,(number four) is usually quoted separately. Most pricing structures will generally fall into one of three categories…
Flat-rate Pricing
With this option you’ll pay a fixed percentage for all transaction volumes, no matter what the costs are. All of the above fees will be included in this single rate.
Interchange Plus Pricing
If you fall into this category, your merchant will charge you a fixed service fee on top of the interchange. With this being said, there are 300 or so different interchange fees out there. So, an initial fee could vary wildly.
Tiered Pricing
Tiered pricing involves the processor taking the 300 or so interchange fees and dividing them into three groups. The groups or tiers are qualified, mid-qualified, and non-qualified. The processor can, however, define these three groups however they wish, which can be expensive.
In Conclusion
Hopefully, by now you’ll have a pretty good understanding of how payment gateways operate. We know that this can be an overwhelming amount of information, but choosing the right payment partner is important.
Lumipay can guarantee the cheapest possible prices from banks on your merchant services. They’re able to process payments that most other payment gateways, like PayPal and Stripe, won’t. Other online payment processors simply cannot compete with how diverse your transactions can be when you use LumiPay.