Traditional payment methods have been around for decades, but online selling is still a relatively new phenomenon. As a result, there is no single dominant payment method for eCommerce transactions. Business sellers rely on traditional payment methods such as paper checks, money orders, wire transfers, and trade credits. For many B2B eCommerce businesses, these methods offer security and traceability and avoid the risk of online fraud.
Trust remains a big deal in the world of online transactions. According to a Baymard Institute survey of over 4,560 buyers, lack of trust is an oft-cited reason for cart abandonment.
Sellers that want to process customer payments online need a payment gateway system – a technology that accepts and authorizes electronic payments from customers. Selecting the right payment gateway is essential, as it improves the customer and the checkout experience, thereby minimizing purchase friction and abandoned carts. A payment gateway directly impacts conversion rates and the bottom line.
What is a Payment Gateway?
Payment gateways are software platforms that provide merchants with secure, affordable, and reliable access to payment processing networks.
An online payment gateway manages electronic payment methods with technology. It performs the same function as a physical point-of-sale (POS) – it authorizes a customer transaction.
Temporary payment information storage. As customers submit their payment data, it is temporarily stored in a secure fashion before routing it to banks.
Encryption services. Payment gateways encrypt sensitive information during transit between payment processors and banks.
Reconciliation reports. Matching settled funds to transactions is challenging. Payment gateways provide reports for easier reconciliation and discrepancy identification.
Virtual terminal capability. Process transactions offline and settle with the online batch to eliminate the need for a traditional credit card terminal.
How Does a Payment Gateway Work?
A payment gateway is a software system that provides the connection between an online store and its bank. It enables secure online transactions for a wide variety of online businesses.
The payment gateway process involves the customer, bank, and online store – to make transactions involving the transfer of funds or credit possible.
As an example, let’s say you want to purchase a pair of jeans from a small clothing shop that accepts only cash or checks as payment. You would not be able to complete your transaction because there would be no way for the clothing shop to get paid for your purchase.
A payment gateway solves this problem by acting as a middleman between you and your bank. The payment gateway receives authorization from your bank (or financial institution) to pay the merchant on your behalf; then it sends confirmation of the authorization back to your bank so that your account can be debited.
Payment Gateways vs. Payment Processors
Payment gateways are used by eCommerce businesses to process credit card payments securely. They provide a secure connection between the merchant’s website and its bank account. A payment gateway is also known as an acquirer, acquiring gateway, or acquirer processor.
The terms payment gateway and payment processor are not interchangeable. A payment processor (also known as a payment service provider) is the conduit between the seller’s bank and the customer’s bank. An online payment processor allows sellers to receive money from their customers. When an eCommerce payment system in business contracts with a payment processor, the processor sets up a merchant account to hold pending transactions until finalized and passed on to the business’s bank account.
A payment gateway is a software that securely processes payments. Its goal is to encrypt data, streamline the checkout process, and improve the customer experience. A payment processor is required for debit or credit card transactions and the payment gateway goes between the website and the payment processor.
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