Ecommerce Payment Gateway Primer

By: John Conde, Published: 2006-07-10, Parent Category: Ecommerce

Introduction

So you're taking the next step and starting your own ecommerce website. Good for you! But you have so many decisions to make. Do you write your own shopping cart or use an existing one? Who should be your merchant account provider? Who will you choose to deliver your goods? With there being so many decisions to make you barely have enough time to sort through all of the information available to make the choice that is best for your business.

One important decision to make is which gateway will you choose to handle your credit card payments? Authorize.net jumps to most merchants' minds but are they really the best? Or, more importantly, are they really the best for your business? Below I will take an in depth look at some of the more popular gateways and explore the ins and outs of their services.

Definition: What is a Gateway?

A gateway facilitates online payments by connecting a secure order form with a specific merchant account at a processing bank. The gateway takes the submitted form data and presents it to the processing bank and awaits a response. It then returns this information to the site of origin to handle the response as it deems appropriate.

In short, a gateway connects your website to your merchant account.

By definition, gateways do not provide other ecommerce features such as shopping carts, web hosting, or merchant accounts. However, as you will see below, many of the larger gateway providers do offer additional services to compliment their gateways.

Criteria for Comparison

Before we can compare gateways we have to decide what criteria we will compare them by. To keep this article from becoming a novel I have decided to limit the scope of my comparison to three factors:

Available Features
Cost
Reliability

Naturally one of the greatest concerns for all parties involved in an ecommerce transaction is security. Not only is your sensitive information kept on file but your customers' personal information passes through your gateway's system every day. This information is of huge value to hackers and must be protected. When choosing a gateway provider you must be confident that security is their number one priority. However, security will not be covered here as all of the gateways discussed in this article house their operations in state-of-the-art datacenters using the latest methods of security to keep your data safe.

Additionally, all of the gateways that will be discussed in this article are compliant in all of the security initiatives put forward by the major credit card providers including the Visa Cardholder Information Security Program (CISP), MasterCard Site Data Protection (SDP), and Discover Information Security and Compliance (DISC). However, if you choose to go with a lesser known gateway provider it is important to verify that their gateway service is compliant in all of the above mentioned security initiatives. Failure to do so could result in your business paying higher fees, your account being closed, and maybe even having your business added to The Match File (the blacklist of credit card processing).

Features

Most online merchants don't realize that their gateway may offer many more features beside the expected ability to accept credit cards through an online form. The truth is that almost every gateway provider offers at least some sort of value-added features that can either make your life easier or assist you in increasing your revenue streams. Below is a short list of some of the more common features:

Virtual Terminal
Let's say you receive a phone call from a merchant who has a few questions about a product you sell on your website. Let's assume you answer their questions adequately and they decide they want to purchase that item. Do you tell them to go back to your website and place their order? Sure you can but why run the risk of them never completing their purchase when you take their order right there over the phone? But then how would you process their credit card? You can use a virtual terminal! A virtual terminal is quite simply a special web form accessible to the merchant that allows them to key in credit card sales. You can also use your virtual terminal to issue returns and void previous transactions as well.

Fraud Prevention
Fraud Prevention tools are probably the most important, and underutilized, feature offered by the major gateways. Most merchants who have had their store online for more then six months has been introduced to chargebacks and the negative effects that come with them. One of the biggest reasons for chargebacks in online transactions is fraud. Verifying that an order is legitimate during an online transaction is often difficult and time consuming. Utilizing the tools offered by your gateway provider means less time dealing with money-losing chargebacks and more time selling to your customers or promoting your business.

All of the gateways being discussed below support the most basic fraud prevention tools including Address Verification (also known as AVS, this is when you capture the customer's zip code and street address and verify it matches what the card issuing bank has on file) and CVV2 (the three digit number on the back of Visa, MasterCard, and Discover Card credit cards and the four digit number on the front of an American Express card).

Recurring Billing
Merchants who charge their customers for services on a consistent recurring basis (month-to-month, quarterly, annually) will certainly find the recurring billing feature offered by many gateways a time saver. Simply provide the gateway with the pertinent billing information and tell it how often to charge the customer's credit card and it will automatically bill the customer for you. No more keying the information into software or a credit card terminal every month anymore. Just enter it and forget it. Great for subscription and membership type businesses.

eCheck Processing
Although accepting credit cards is by far the most popular way to pay online, other forms of payment should not be ignored. After all, your goal is to make it as easy as possible for your customers to part with their money. Electronic checks (eChecks) are a growing form of payment in which a customer enters their banking information (routing and account number) instead of physically sending a check by mail.

Integration
Maybe not a "true" feature this is still something to be considered when choosing a gateway. Do you want to make your checkout process completely transparent to your customers? Are you a total "noob" when it comes to web programming and want a very simple set up that you know will just work? Want to start off with a basic set up and then switch to a more advanced set up when you have more time or experience? Having the option to choose the method of integration without an extra cost can mean saving you headaches both during the setup process and as you manage your growth in later months.

Cost

Just as with any service related to merchant accounts there are fees associated with using a gateway. These are in addition to any fees charged by your merchant account provider. Unlike merchant accounts, however, there are a fairly standard set of fees charged by gateways which make a comparison much easier. The following three are the most significant:

Set up fees
Exactly as the name implies this fee is charged when you initially establish your gateway. Most will charge this before your gateway is built and it is non-refundable. Setup fees can vary from hundreds of dollars to absolutely nothing (free).

Monthly fees
Just like most merchant accounts, gateways charge a monthly fee for their service. This is usually independent of monthly processing volume.

Transaction fees
Once again, just like the monthly fee, most gateways charge a fee for every transaction you process through their service. This is regardless of whether the transaction is approved or declined.

Additional Features
Most gateways charge extra fees for the additional features they offer to be used in conjunction with their basic gateway service. These extra fees can include a set up fee, monthly fee, and transaction fee which are in addition to the standard gateway fees mentioned above.

Reliability

In the ever-increasing speed of the Internet world it seems one second lost is an eternity. Every online merchant knows that if they are unable to process a transaction when their customer is ready to make their purchase that sale is assuredly lost. Why would the customer hang around and try to figure out what the problem is when they can go to a competitor's site and finish their purchase now? There's enough potential for problems in so many areas (programming, hosting, inventory) that the last thing you need is a third party service to fail you when you need them most. You need your gateway to be up and running 24 hours a day, seven days a week.

The Gateways

So you now know what to look for in a gateway and have the tools to make a thorough comparison. There are many gateways vying for your attention so who are you going to compare? In this article I've chosen the more popular gateways and will break down their features, costs, strengths, and weaknesses (reliability will fall under either strengths or weaknesses). The gateways that will be discussed below are:

Much of the content in this article was scavenged off of the website of each provider as well the result of emails inquiring deeper about their services. Some companies were more responsive then others and some websites were more informative then others. If there are any holes in my data it would stand to reason that the offending gateway provider should consider improving their marketing!

Note: Because some gateways charge different prices and offer different features for their gateways depending on which method of integration you choose to use I have separated each gateway that charges separate pricing based on integration method and classified it as its own unique product for the sake of easier comparison.