An Introduction to Payment Gateways

Payment gateways are an essential part of e-commerce, but there’s a lot of mystery around them. We explain what they are, how to pick one, and how to set them up.

Virtually all e-commerce sites accept credit cards as their primary form of payment. To accept credit cards, you need a merchant account with a bank. A payment gateway is simply a service which connects your Web site with the bank. While there’s a bit more to it than that, in essence that’s all it is – a way to take payments online.

Typically, when a customer enters credit card details on your Web site, those details are sent to the payment gateway, which then does some hard work in the background and processes (or rejects) the transaction. It then tells your shopping cart whether the payment was accepted or rejected. All this happens in a few seconds while the customer is waiting. The money is then transferred to your bank account – when that happens depends on the terms of your service.

It’s a diverse industry and the description above is the most common scenario, but there are many variations on it.

There are three basic types of payment gateways. The first is an API (Application Programming Interface). This means that the customer never sees the payment gateway Web site – your shopping cart talks to it seamlessly in the background. This is generally the best option as it’s a transparent experience for the shopper, rather than being transferred to another site at the crucial moment of taking the money.

Adding Authorize.Net as a gateway is as simple as filling in this form on this shopping cart.
(Click for larger image)

APIs sound a bit scary, but your shopping cart vendor should have done the hard work to support it, so there’s very little work for you, the shop owner, to do – see below for more. The only catch with this option is you’ll need a secure certificate installed on your server. These start at around $100 per year and work their way up quickly.

The second type is a third-party payment gateway. The customer starts the checkout process on your site, but completes payment on the payment gateway site. While this can be simpler to setup in some cases, the experience is unsettling for the customer, and you’ll probably lose a few sales. Some third-party payment gateways allow you to customize the page design.

There are also integrated payment gateways. In this scenario, you don’t need a merchant account from your bank – the payment gateway does everything for you. For start-up businesses, this can be an easy start. Generally the fees are higher for an integrated service, but the trade-off is simplicity for the shop owner. The best known integrated gateways are PayPal and 2Checkout.

How to Choose a Payment Gateway?

The first thing you need to know about a gateway is whether your shopping cart supports it. Unless you want to do some programming, you need to check for support. Most shopping carts support at least a dozen gateways, so check the list on your shopping cart vendor’s Web site.

Different payment gateways support different features. The most common features that you might need include:

  • Fraud detection: If your business is susceptible to a lot of fraudulent transactions (for example, you sell digital goods or mobile phones) then you should ensure your chosen gateway has fraud detection technology. You may pay a little extra for this, but it could be worth it. A shop selling women’s fashion will have far fewer fraud problems, so the extra cost (if there is one) may not be worth while. Additionally, if your business is classed as “high risk” – especially adult sites – many gateways won’t take your business.
  • Virtual terminal: This is a place where you can log in and manually process transactions among other things. For example, if you do phone orders, a virtual terminal may be important.
  • Recurring fees: If you have a service that takes regular payments – a monthly subscription for example – make sure your gateway supports this.
  • Fees: Of course, the fees the payment gateway charge are important. Be careful as there are a range of fees, and some services can get pretty imaginative on how to charge you. Fees might include a setup fee, monthly/yearly fee, fee per transaction (fixed or percentage), withdrawal fees (getting charged to get paid – amazing!), chargeback fees (these can add up quickly), fraud detection fees and possibly more. You’ll need to have an estimated number of transactions per month before you start to work out the best service for you.
  • There are many other issues to consider, such as accepting foreign currency, so you need to look at your individual requirements.

Setting up a Gateway

Generally, setting up a payment gateway is easy. When you sign up, they’ll usually give you a customer ID, API key or similar. You go into your shopping cart, choose the payment gateway you’ve signed up for, and enter the details provided. That’s it!

There’s usually a “test mode”. This means the shopping cart will be integrated with the payment gateway, and will talk to it, but won’t actually process the transaction. Sometimes they have a special credit card number for test mode (Visa card 4111 1111 1111 1111 is a popular one) – check with your payment gateway for more details.

Choosing a payment gateway can be tricky. But apart from sign-up fees (which can often be waived if you ask nicely), it’s not too hard to switch to another if your service isn’t performing well. With easy integration and low barriers to switching, it’s a buyer’s market out there.

Mark Baartse is founder of , the leading shopping cart information site. He lives in Sydney, Australia where he works on e-commerce sites, helping to maximize their profitability. You can follow him on Twitter at .

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