MerchantSelect
 
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Payment Gateways

What is a payment gateway?

If you use a credit card to make online purchases, then chances are you have hesitated at least once before submitting your final order. After all, you have no idea how secure your credit card information is as it travels over the Internet. As a merchant, when you sell online it means you participate in an exchange with a buyer who is not physically present, you require a secure method through which to accept credit card information over the Internet, and you need fast and convenient online payment transacting.

A payment gateway will authenticate an online buyer and seller, enable real-time credit card processing online, and protect credit card information given over the Internet, by bridging a merchant’s online storefront with the financial institutions that authorize the transactions.

What kinds of payment alternatives exist?

While credit cards are the leading method of payment for online purchases, offering multiple payment alternatives will bring improved convenience to your customers and increased confidence in your online business. The kinds of payment methods you provide will depend on your web site, your customers and your markets. For instance, in some countries, credit cards are not a common way to purchase online. Therefore, it is important to consider different payment alternatives for your international clients.

There are a number of alternative payment methods that exist, including the following:

Person-to-Person (P-to-P)

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This transaction method enables payments to be made to an individual’s e-mail address without any need to send cash, cheque or use a credit card or chequing account. If you wanted to pay back a friend, that friend would only need an e-mail account to accept the payment. On the other hand, as a merchant, you require software that accepts P-to-P payments in order to receive funds. For instance, your customer has a P-to-P account, where he or she has deposited a certain amount of funds. The customer buys a product from your site and uses funds from his or her P-to-P account to pay for the purchase. Your web site will provide the customer with an option to pay through this method.

Electronic Cash/Digital Cash

E-cash is money that is converted to an electronic equivalent, and present either on a smart card, or on a consumer’s personal computer. The cash is normally used for making small purchases over the Internet.

Smart Cards

The smart card looks like a credit card, the biggest difference being it holds a chip that enables applications and data to be downloaded. Since it can store and process information, the card has the capacity to collect customer information as well as E-cash.

To use the card, the cardholder needs a PIN. To read the information on the card, a smart card reader is required. The reader is connected to the Internet, and enables the cardholder to transfer information from his or her computer to an online merchant’s site or from a point-of-sale terminal at retail stores. It also enables the card to capture data from other sources, such as the cardholder’s bank account. As a merchant, you require a smart card reader on your site to access payments from customers.

Digital Wallets

A digital wallet enables consumers to store their personal information online such as credit card and shipping details so they can carry their identity with them as they browse between sites.

A digital wallet comes in two forms - client-based or server-based. A client-based wallet requires that consumers download and install software on their computer. They input personal information into the wallet, which is secured and protected locally on their computer’s hard drive. When using a digital wallet, consumers will not be required to fill out order forms on each site they purchase from as the information required is readily available from their hard drive and automatically entered into the order fields of the online site.

A server-based wallet is acquired from a merchant’s site. When consumers complete a merchant’s Web form to make a purchase they are invited to sign up for a free wallet where they provide a username and password. The information they add to the Web form, including credit card number and shipping information, is stored on the merchant’s server or the merchant’s payment processor’s server. When consumers go to the same site to make a purchase in the future, their personal information is easily extracted for the purchase. The servers will have encryption security. As well, since certificates are used to verify the identity of all parties, the merchant is protected against fraud.

E-Cheque

An E-cheque is essentially an electronic version of the paper cheque, except it is created on a computer and processed via the Internet. To issue a cheque, a consumer uses an electronic chequebook issued by his or her bank, which displays all the same fields as a paper cheque. Before it is sent to the merchant, the consumer enters a PIN in addition to other required information and signs the E-cheque with his or her digital signature. The digital signature is stored with a bank so that the E-cheque can be verified as it moves through the payment process.

What types of payment gateways are there?

Payment gateways can be implemented through two methods. As a merchant, you can either house the gateway on your server, which requires installation of software, or you can choose to implement the payment gateway on your payment processing company’s server i.e. financial institution.

Housing the payment gateway on your site requires you to have appropriate security measures in place to encrypt and protect customer information. If you implement a payment gateway separate from the rest of your shopping cart solution, all the components will require configuration to ensure they work properly together, which can require high level technical capabilities. The advantage of housing your own gateway is that customer information can be collected in your database, enabling you to better manage your customers and site.

If a payment processing company houses your payment gateway, then customer information will not be at your easy disposal. As well, since you do not gain access to customers’ credit card information, it is more difficult to track charge backs.

However, since the gateway is out of your hands, problems that occur are the responsibility of the payment gateway provider.

How do I get a payment gateway?

Deciding how to develop a payment gateway is an important task to undertake. Whether you decide to build your solution in-house, outsource it to a provider or buy a solution to install within your business, there are a number of criteria to consider including cost, risk, scalability, time to market, and resources.

In-House Solution

In-house solutions bring high costs and risk, and require the most resources and time to develop. Costs to implement this solution are particularly high in the early stages of development since hardware and software need to be purchased and infrastructure requires development. Consultancy fees also need to be taken into consideration if technical resources are not available within your company. As a result, resource commitment is highest in the early development stages. Building an in-house solution also means upgrades will be required, along with staff training and the development of redundancy systems. Because it is important to ensure the solution works with no problems, particularly in the first crucial months of operation, time spent on development can be high. Risk is also high since you are completely responsible for problems that occur with the solution.

Despite the high costs involved with developing an in-house payment gateway, businesses with high transaction volume benefit, as there are no transaction fees to pay. As a result, when volumes increase there are no additional costs. As well, since the solution is in your hands, there is no dependency on an outside provider to ensure the system is operating. Finally, scalability is high since the solution is built to your precise specifications.

Purchased Software Solution

Payment gateway software solutions bring lower up-front costs and risk than in-house solutions, but still require relatively high levels of resource commitment. As with in-house solutions, there is still a need to maintain the systems and ensure the gateway is operating effectively. If operations are impacted negatively in any way, you are responsible for fixing the solution. During these times, resource commitment can reach high levels. While it is not as expensive to install a software solution, as it is to build a solution in-house, upgrades to the system can bring potentially high long-term costs.

Scalability is not a problem for most purchased solutions as top software products will be able to communicate with various processing companies, giving you flexibility in negotiating fees with processors. There is also capability to handle increasing transaction volumes. While an in-house solution can take months to develop, implementing a store bought solution will take less time to implement.

Outsourced Solution

Outsourced payment gateway solutions are better for businesses where time to market is essential. In comparison to in-house development, which could take months, outsourcing a solution can take weeks, sometimes days to develop. There is low merchant risk associated with this solution as development and maintenance is in the hands of your provider. And, while some support is required, such as on-going security testing, costs of allocating resources to maintain the system are avoided.

On the other hand, if you like to have control over your systems, outsourcing is not the best option. As well, while the cost to outsource is not as high as in-house development, there are transaction fees to consider. In addition, if you are a small merchant, outsourcing can be a challenge because there are fewer provider options, particularly with high consolidation in the marketplace.

Criteria for Choosing Between In-house, Outsourced or Software Gateway Solutions
Solution Cost Merchant Risk Scalability Time to Market Resources
In-house Solution High High High Low High
Outsourced Solution Medium Low Medium High Low
Software Solution Medium High Medium Medium Medium