The evolution of commerce has not only changed the way people shop but how they transact online. In traditional brick & mortar shops, a customer would carry their merchandise to the cash register and the cashier would ask, “how will you be paying?” Traditional payment methods include Cash, Debit or Credit and even Cheque! Nowadays, payment options have expanded to include EFT (electronic funds transfers), digital currencies and online payments. The payment landscape is going to revolutionize the way shoppers buy and how merchants collect payments. For those of you new to eCommerce, I’ve prepared a beginners guide to help understand what Payment Gateways are all about.
What is a payment gateway?
It is the online equivalent of a cash register connecting websites to credit card carriers so that online credit card transactions can be completed in real time. It is essentially a credit card terminal for your website. Unlike the payment terminals you see in-store, payment gateways are virtual but operate in the same way. What do payment gateways do? When a customer enters their payment details at check out, the gateway sends these details to the credit card company for authorization then returns to your online store in order to complete the transaction.
How do they work?
The Folks over at Authroize.net have put together a useful demonstration (click on the image below):
Payment Gateway vs. Merchant Accounts
You may be thinking what’s the difference? Well, when the payment gateway processes a transaction the customer’s credit card will be debited for the purchase. But sometimes a merchant may want to hold onto the funds until an order is processed, this is where merchant accounts come in handy. A merchant account is essentially a bank account used to hold funds obtained from a credit card purchase. Store owners have to apply for a merchant account.
Types of Gateways & Payment Methods:
Now that we are clear on what Payment Gateways are and how they function, it’s important to know what’s out there and which are better suited for your online store. Some payment gateways offer external payment services while others are direct. Some online merchants even require a gateway for accepting manual payments!
Here’s the difference:
Off-Site Payment Gateways move your customer away from your store in order to complete the check out process. PayPal Payments Standard offers a perfect example. When a customer clicks on the PayPal button to pay, they are sent to the PayPal checkout pages then back to your site for confirmation.
Manual Payment Systems allow merchants to accept manual forms of payment e.g. Mail Order, Direct Deposit, and Cash on Delivery (COD). This is great for merchants selling in countries that still enforce this method of payment such as Sweden, Spain and Germany.1
Did you know, according to Ernst & Young (E&Y), COD accounts for 50%-80% of India’s online transactions? – Business Today
On Site Payment Gateways allow customers to complete transactions within your store. You can create your own secure check out page to process payments from within your site. In other words, customers don’t leave your site to complete transactions. This is the ideal approach simply because it creates a seamless user experience, not to mention keeps your SEM efforts in tact!
Here are just a few examples of Payment Gateways that are available. For a comprehensive list of Payment Gateways available, on Magento and Shopify, be sure to check out their sites!
The simultaneous operation of multiple payment gateways is possible, however it is very rare and impractical. Ideally a merchant would accept multiple payment methods so that the check out process as frictionless as possible. On average, merchants will operate one payment gateway in conjunction with another payment method (e.g: credit or debit card gateway + PayPal). Why would I want to have more than one payment gateway? It all boils down to the gateway that offers the best transaction rates. If you are considering this option, it is important to note, there could be accounting implications that may arise during reconciliation.
The most ideal situation for running more than one payment gateway is when the merchant collects more than one currency. When a merchant accepts both American and Canadian currencies, may want to run separate payment gateways dedicated to each currency. The gateways will be set up in the same manner, however gateway credentials will differ (e.g. Merchant ID, Terminal ID, User Name and Password).
What are the Benefits?
Steady Cash Flow: Forget waiting for a cheque to show up in the mail, merchants no longer have to depend on snail mail for cash flow. Payment gateways and third party payment processors accept payments via credit card. Furthermore, if you have frequent shoppers, you can charge your client’s credit card on a recurring basis. Automating this process provides you with peace of mind that you can rely on recurring revenue.
More Options for Customers: Did you know you can display more than one payment gateway at a time? Offering multiple payment options signals that you are flexible and want to make it easy for shoppers to pay you. Sometimes, when certain payment gateways are not visible or accepted, shoppers tend to abandon cart. Offering multiple payment options can decrease shopping cart abandonment and increase your chances for conversion. But merchant beware: over saturating your check out page with third party badges crowds the page. Figure out what is appropriate for your business or maybe stick to the staples (e.g. Paypal, Authorize.net, Google Wallet)
The council has established a set of guidelines designed to help merchants and organizations safely handle cardholder information. For more information on PCI compliance, read the PCI SSC Data Security Standards Overview
Are you Ready to accept online Payments?
“Many small and medium sized businesses, especially small retailers, still rely on cash payments and have yet to be convinced that electronic payments can help grow their business and boost their bottom lines.” – Walid Hejazi, Rotman School of Management, U of T
Now this statement maybe true for brick & mortar retailers, but he further explains that accepting electronic payments are a pre-requisite for merchants seeking to capture more online business not to mention opportunities for businesses to accept higher value transactions.
The Payment gateway is the key ingredient to turning an ordinary website into an online store. By adding a payment gateway to your check out process, you are ensuring the most streamlined and secure buying process, making the path to purchase much easier for your customers.