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What's a payment gateway and how does it work?

By Steve Thompson

Do you conduct business online? If so, a payment gateway account might be beneficial for accepting credit cards. Anyone who conducts business online should be aware of the payment gateway, and how this processing tool can benefit both the business and the customer. A payment gateway is simply an authorization service for Internet credit card transactions and is used to facilitate communication between the business, the card issuer and the business's bank.

Of course, a business can choose to process credit card transactions manually, but there are several benefits to using a payment gateway.

  • Fraud protection. If a customer presents a credit card that has been reported lost or stolen, a payment gateway will notify you immediately so you don't process the transaction. This prevents charge-backs and protects your customers.
  • Speed and efficiency. If your business conducts a large number of credit card transactions, a payment gateway will significantly decrease the amount spent on processing those transactions. Saved time often means saved money.
  • Less red tape. If you have just started your business, a payment gateway allows you to start accepting credit cards immediately rather than waiting to build a positive credit history for a merchant account.

Of course, it costs money to use a payment gateway, which is probably the reason why many businesses shy away from them. A percentage of each sale will be subtracted from your profit for the payment gateway's services, which might be a major negative if you don't handle a large volume of credit card transactions.

Nevertheless, a payment gateway is currently one of the easiest ways a business can accept credit cards online.

What does it cost?
A payment gateway charges businesses a fee for processing credit card transactions, but the method used to calculate those fees will vary. One payment gateway account might charge you a percentage of each purchase, such as 1.8 percent, while another might charge you a flat fee for every purchase in a specific price range, such as 15 cents.

You might also be charged for other fees, such as charge-backs, customer complaints, withdrawals, reversals and setup. Make sure all the fees are disclosed before you sign a contract for a payment gateway account.

What should you ask?
When shopping for a payment gateway account, talk to the business' customer service representative about the features of the account. For example, can you customize the interface to align with your Web site's brand? Does the account offer free technical support? Will you be able to sell tangible products, such as electronics, or does the account restrict customers to intangible services?

You should also find out if the payment gateway service requires you to establish a retail merchant account in addition to the gateway. This will require you to hire a third-party service and may increase the amount of money you pay for each transaction.

Who should use a payment gateway?
A payment gateway account can benefit all types of businesses that operate online. From service providers to online education to retail, there are plenty of applications.

However, it's important to consider your volume of credit card transactions. If you only receive two or three per month, the benefits of a payment gateway might not justify the cost. Additionally, a payment gateway can be enormously helpful for any business that operates internationally.

Article by Steve Thompson

Published: May 18, 2009

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