Payment Gateways are online software applications found on eCommerce websites that facilitate the transfer of funds between buyers and sellers.
The best practical example of this is the Point-of-Service system found in brick-and-mortar stores where people swipe their cards, enter passwords, and make payments.
Payment gateways allow online shoppers to securely make payments using a wide variety of payment methods like credit cards, debit cards, gift cards, and other online wallets.
It’s even more convenient since buyers don’t have to physically have their credit and debit cards to make payments. All they need is their debit or credit information and authentication.
The best examples of popular payment gateways are Stripe, PayPal, and Amazon payments.
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Why is it important to understand how payment gateways work?
The checkout is a critical component of your eCommerce website. After all, without it, you wouldn’t be able to reap the fruits of your labor.
You need to also understand how payment gateways work in eCommerce to able to set one up. Make the wrong decision, and you’ll end up losing a lot of money and customers.
Continue reading to understand the how and whys of payment gateways.
How do payment gateways work in eCommerce? What are some of the things to consider when setting up a payment gateway? How do online payment gateways affect business conversation rates? Read on to find out.
How a Payment Gateway works in eCommerce
Of course, payment gateways vary from one business to another (things get slightly complicated when you factor in refunds and charge-backs). We’ll be going through the general process and flow of things.
Step 1: The buyer goes through an eCommerce website, finds a product, and decides to buy it. He or she then proceeds to checkout and fills in his or her credit or debit card details before clicking the “Order” or “Pay Now” button.
Step 2: The e-commerce website then goes ahead and encrypts the buyer’s purchasing data that will be used by the payment gateway.
Step 3: The payment gateway then comes into play and sends the purchasing data to the seller’s payment processor.
Step 4: The seller’s payment processor then sends the purchasing data to the buyer’s card affiliation. Examples of popular card affiliations include Visa and Mastercard.
Step 5: The card affiliation company then sends a transactional request to the buyer’s bank. It’s up to the bank to “Approve” or “Decline” the transactional request. One of the main factors the bank will check is if the buyer has enough funds in his or her account to cater for the purchase.
Step 6: If the transactional request is declined, the bank’s processor will relay the information back to the payment gateway. The payment gateway will then convey the message to the eCommerce website. The buyer will see a message – something like “Payment Failed.”
Step 7: If the transactional request is approved, the bank’s processor will see to it that the funds are transferred into the seller’s Merchant Account. Later on, the money will be moved from the Merchant Account into the business bank account.
What is a Merchant Account?
A Merchant Account is a special account where funds from online payments are temporarily held before they’re transferred to the business main account.
The Merchant Account was put in place to protect the customers and credit card companies in case the seller fails to deliver the product or service. When this happens, the money in the Merchant Account is used to refund the customer.
eCommerce website owners have two options to choose from:
- They can set up their own merchant accounts.
- They can use the merchant accounts offered by the payment gateway service providers.
Setting up a Payment Gateway for an eCommerce Website
Online payment has indeed made life incredibly convenient, however, some risks come with it.
Since online payment transactions are facilitated on the seller’s eCommerce website, it’s the business’s responsibility to protect its customers’ from fraud.
There are three ways to secure customers’ against fraud:
- Use of Secure Socket Layer: This is a security measure implemented on the eCommerce website. Therefore, it’s the seller’s responsibility to make sure that the website is fully covered by SSL. You can tell if an e-commerce website is fully secured by looking for a “lock icon” on your browser’s URL bar.
- Payment Card Industry Data Security Standard (PCI DS): This is a security measure taken to safeguard the customers’ payment details. It’s a necessity in subscription-based eCommerce businesses like Netflix- This way, customers won’t have to enter their payment details every time they want to renew their subscriptions.
- 3D Secure: This is a security measure taken by banks to protect buyers from fraud. When a buyer wants to make payment for goods or services, his or her bank will send a one-time code during checkout for verification purposes.
2. Your customer’s preferred payment method
You need to set up a payment gateway that is convenient for your customers. It’s best if your payment gateway offers your customers several online payment methods and in as many currencies as possible.
A customer might not have his or her credit or debit card near him or her. The availability of an alternative payment method will determine if the customer makes the purchase or not. If you’re not careful, you could end up losing a lot of customers this way.
3. The transcation costs and fees
E-commerce websites make use of several third-party services that are all paid for and coordinated to smoothen the buyer’s purchasing journey.
Below are some of the main fees and costs you should consider when setting up an eCommerce payment gateway.
- One-time registration fee.
- The fees for setting up the payment gateway.
- A recurrent monthly connection fee.
- Transactional fees as discussed with your payment gateway service provider.
- The fees on refunds and charge-backs.
You can decide to set-up your own e-commerce payment gateway or hire one from a service provider.
“In-house” payment gateways are costly to acquire compared to “Hired” payment gateways. However, their transaction costs are significantly lower.
4. Your customers’ purchasing experience
You can improve your customers’ purchasing experience by making sure they feel safe when buying from your eCommerce website. In addition to that, you should also simplify the checkout process.
We’ll get into more detail as we discuss how online payment gateways affect business customer conversion rates.
How do Online Payment Gateways Affect business conversation rates?
Did you know that almost 75% of your customers “abandon cart” before making their credit card payment? The majority of people (even you) are more likely to abandon their purchase if they’re faced with a “checkout glitch.”
Customers don’t have the patience anymore. They’ll quickly turn to a competitor if your checkout process is faulty or complicated.
Your payment gateway needs to be fast and smooth. A good example is to have a payment gateway that can store your customer’s payment details. This way, your regular customers will have access to an auto-fill feature. All they’ll have to do is click the “Pay Now” button.
It’s amazing how payment gateways work in e-commerce. Within seconds, several processes are completed to facilitate the transfer of funds that make online shopping possible.
Make sure that your payment gateway suits your eCommerce website to smoothen your customers’ journey. Faulty and complicated payment gateways frustrate customers and push them to “abandon cart” thus will miss out on a lot of profits.