What is a payment gateway?
The main job of a payment gateway is to validate your customer’s credit card details securely, make sure the funds are available for the payment and get you paid.
A payment gateway is the service that authorizes credit card payments for online and offline businesses. It is the equivalent of a physical point of sale terminal in a shop or restaurant. It lets your customer submit their credit card details and then securely passes this sensitive financial information from the customer to the merchant and then between the merchant and the bank. The payment gateway then tells you whether the charge has been approved by the cardholder’s bank and submits your charges for settlement. Settlement is where the payment amount is deducted from your customer’s credit card account and deposited into your merchant account.
What is a merchant account?
Payment gateways are often confused with merchant accounts. To take payments online you need both a payment gateway and a merchant account. A merchant account is where funds are held before being deposited into your bank account. The role of the payment gateway is simply to decline or approve a transaction.
What about a Payment Service Provider?
Payment Service Providers (or PSPs) act as both a merchant account and the payment gateway, helping businesses to collect and manage their payments. Payments go to the PSP and are then transferred on to you.
How does a payment gateway work?
There are four simple steps in the payment gateway process:
1. Collection Your customer chooses the product or service they want to purchase and then enters their credit card details onto your payment page. This information is then directed to your payment gateway.
2. Authentication Your payment gateway then takes this information, and sending it via a shielded link to your bank account.
3. Authorisation At this point you will know that the sale has been approved and you can deliver the ordered products or services.
4. Settlement At last, the transaction data is verified by your bank and the money from the sale is deposited into your account. When the actual payment will arrive in your account will depend on your payment gateway – it can be as little as real-time or as long as 21 working days.
What payment gateway options are there?
There are a lot of different options for you to choose from when looking at a payment gateway. Some of the main options include:
Full service Payment Providers (Payment Gateway and Merchant Account):
Full service payment service providers are typically easier and quicker to get started with as you don't need to set up your own merchant account (and if you do the provider will offer that too):
A. Payment Gateways
Before you can start taking payments with a payment gateway, you will typically need:
A UK business bank account
A business plan and one page summary of what your business will be doing
A website (if you plan to trade online) with terms and conditions
Management accounts and a profit & loss projection for the next 6 months minimum
Setting up a merchant account requires a good relationship with a bank, and a minimum value of transactions a month (around £10,000). Banks will also typically require a bond of at least £10,000 (more if you’re in a high-risk industry).
B. Payment Service Providers
It is generally quite simple to get set up with a Payment Service Provider but requirements do still vary from provider to provider.
If you choose to use a newer full service provider like Stripe then you'll just need a bank account, email address, your account deyails and to answer some questions about your business.
Which payment gateway should I choose?
Choosing a payment gateway (or a full service payment provider) can be difficult. We have come up with a list of 10 quick questions to help you choose the right payment gateway for you.
1. How soon do you need to start accepting payments?
Setting up a merchant account and payment gateway will usually take around 3 – 4 weeks. However, some payment gateway providers like PayPal and Stripe let you sign up without a merchant account and get started straight away.
While most payment gateways offer help setting up a merchant account, obtaining one can still be a long and complex process - particularly if you’re a new or small business going through the process for the first time.
2. How much do you want to spend on a payment gateway?
Cost is obviously a concern for every business. Before committing to any payment gateway provider make sure you are aware of their fee structure. The most important thing to think about is fully-loaded costs: set-up costs + transaction costs + admin costs.
A payment gateway and merchant account will typically cost around £600 – 900 in set-up costs, 15p + 2% per transaction and a £50-100 monthly fee. You will usually also be charged extra fees for any chargebacks.
If you only take a relatively low volume of online payments, then you should try to avoid monthly fees and a high setup cost. You may want to look at a full service provider like Stripe which is quick and free to set up. You might also want to consider Direct Debit which is typically cheaper than card payments.
3. How soon do you need to receive funds from your sales?
While you will usually know that a payment has been approved straight away it typically takes a few days for a payment to be settled. Payment timings vary significantly from provider to provider.
Some gateway providers hold onto your funds (or a certain % of your funds) for up to 30 days while others can settle your funds as quickly as the next day. Some providers may also only pay out funds on set days. Ideally you should look for a provider that pays out every day.
4. Does the payment gateway offer international payments?
If you need to take international payments – or may want to in the future – you should check whether the payment gateway offers international and multi-currency payments or an interface with multiple languages.
You should also check whether there are any additional fees for accepting multi-currency payments or payments from other countries and whether you will need to have a merchant account in a specific country.
5. How secure is the payment gateway?
Security is obviously a key concern when taking payments. You should make sure you only use a provider which is level 1 compliant with the Payment Card Industry Data Security Standard (PCI DSS) and that offers built in security capabilities (such as tokenization).
You should also consider the fraud protection and screening tools offered. Most payment gateways offer a number of tools to help you guard against fraud, such as filters to define who or where you receive payments from. These tools are particularly important if you will be accepting payments from people who you don't have an existing relationship with.
6. What level of support does the payment gateway offer?
Customer experience is one of those under-valued areas which can really hurt your business down the line and as such is worth taking seriously from the off.
You should look for a payment gateway which offers support when you need it and in a way you can get it. Questions you might want to ask are:
Does the provider only offer email support or do they offer a range of support?
How responsive is the support?
Where is the customer support based? Do they work the same hours as you?
Do you need to pay extra for customer support?
A good place to start is contacting them to see how the initial experience goes as well as doing a research online into other customers’ experiences.
7. What types of cards are accepted by the Payment Gateway?
Payment gateways typically accept VISA, Mastercard and most accept American Express. Paypal is also becoming popular for online payments. If you’re collecting international payments you may want to check that the gateway supports local credit card types (e.g beyond Visa, Amex, MasterCard and Discover).
8. Does the payment gateway offer automatic recurring payments?
If you want to take recurring payments you may want to look for a system that will store your clients’ credit card numbers and let you automatically charge them on a recurring basis. Many gateways now have this feature, but in almost all cases they also require your business to have an online merchant account. PayPal Standard, Google Checkout and some others are unable to handle this kind of pre-authorized transaction
9. Does the payment gateway offer hosted or non-hosted payments?
Hosted payment gateways
A hosted payment gateway redirects a customer away from your checkout page to a securely ‘hosted’ payment page. Once a payment has been made then your customer will be returned to your website and the order will be confirmed.
Redirecting to another site reduces the risk around storing and transacting credit cards and helps you to meet PCI requirements. Hosted solutions can also be more suitable for small to medium sized businesses that require a quick and cost-effectove way to securely accept card payments online. However, it also means sending a prospective customer to another site at a critical point in the payment process. If this extra step makes your payment process longer or slower or if the payment page looks significantly different to your site customers may fail to complete their payment - 22% of customers blame failure to complete a payment on a long/ slow payment process while 58% blame security concerns.
Non-hosted payment gateway
Using a non-hosted payment gateway, your customers will be able to enter their details without leaving your site. To take payments onsite you typically need an SSL certificate and to comply with certain legal and technical PCI requirements.
However, some of the full service payment providers like Stripe and Braintree allow you to send card details directly from your customer’s browser to the provider meaning that it never hits your server. This makes the payment process much simpler for your customers without imposing any more requirements on you.
10. Can the payment gateway be used with your existing/planned integrations?
You will want to consider whether the payment gateway integrates with your current billing, shopping cart, accounting solutions you are using. Ideally the payment gateway you choose will be integrated with software you already have. If not, you should still look for a service that is integrated with software providers, both because it increases convenience and saves you time (e.g. a Zuora integration) and because it signals that the provider has an API that is easy to integrate against, saving you development time down the road.
If, after asking all of these questions, you still haven't found a payment gateway which meets your requirements there are some other options you can consider. Our guide to recurring payments compares each of the main online payment options on costs, ease of access, international reach, timings, support etc. helping you to find the right option for you.
If you think GoCardless might be the right option for you, sign up now for free and start taking payments today.