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What Is a Payment Gateway? (And Why You Don’t Need One)

September 14, 2021

A payment gateway is more than a way to collect credit card payments, it enables the facilitation of payments between your business account and the accounts of your customers. Generally, gateways are payment services that allow you to process payments online or in person via a point-of-sale terminal.

That said, you might not need a payment gateway of your own if you work with the right payment processing partner. Things like instant bank verification and credit card and ACH processing are all possible without your own payment gateway, and that means you can focus more on building your business rather than worrying about the money you’re taking in from various sources as you attempt to stay on top of your cash flow.

What does a payment gateway cost?

Unfortunately, payment gateways aren’t necessarily always transparent with the fees that they charge. And if you don’t read the fine print, you could end up paying a small fortune for the privilege of collecting payments, all without enough of a buffer to make it worth your while — if they don’t start eating into your profits entirely.

Beyond a standard per-transaction rate, payment gateways may collect monthly account fees, membership fees, compliance fees, setup fees, batch fees, chargeback fees and refund fees, as well as different fees for certain types of payments such as American Express and Discover. 

What does a payment gateway do?

In a nutshell, a payment gateway is the tech that enables money to be moved between a customer’s bank account and your company’s bank account. That’s different from a payment processor, which is only concerned with processing the payment itself. There are also acquirers, or banks that manage merchant accounts, as well as merchant accounts.

It’s the merchant account that defines the relationship between your business and the processing of payments that occurs via the payment gateway, and that means being able to process more types of payments beyond what’s available to you from traditional credit card processing services. The payment gateway simply connects the accounts.

What about PCI compliance?

If you’re working with a payment gateway, you’ll still need to stay on top of your PCI compliance for all credit card payment information that is gathered and processed. The good news is that payment processing partners can help you meet the required rules and regulations without having to overextend yourself or your company’s resources with a payment gateway, while also protecting the information that you’re collecting at the point of sale.

How does a payment gateway work?

It can help to think of a payment gateway as a facilitator, passing credit card transaction data from the merchant to the banks. This happens via one of two different processes. The first uses a credit card terminal or some kind of physical payment gateway while the second is more of a payment service or API that works primarily with websites and mobile applications.

But whether a payment is made in person or online, transactions typically follow the same workflow. Here’s how that typically works.

First, a customer uses their credit card to purchase a good or service in person or via your website. Then the payment gateway feeds that information to the merchant bank while determining which credit card network is required (Visa, MasterCard, etc.). The payment is then routed with the transaction information to the correct switch.

Next, the switch routes the payment to the customer’s issuing bank, after which it’s sent to the appropriate credit card network. The issuing bank will check the transaction for fraud and determine legitimacy, as well as verifying that sufficient funds are available in the customer’s account. After all that, the issuing bank will render a decision to approve or reject the transaction, informing the credit card network, merchant account and the payment gateway.

If everything looks good, the payment will be authorized between the customer’s bank account and the merchant. However, just because a payment was authorized doesn’t necessarily mean that funds have been transferred. Instead, the customer’s bank will put a hold on the funds as a pending transaction. Only once a merchant sends a clear — often at the end of the day — for the pending payments will they be credited to the merchant account. 

Do you really need a payment gateway?

If all that sounds complicated, you may be thinking that a payment gateway is a lot of work. Not only do you still have to wait for processing, but if any problems arise, you may need to revisit the payment itself, which can represent a substantial burden to small and mid-size businesses that don’t necessarily have vast resources to throw around.

Instead, you might be better off opting for a payment processing partner that gives you all the benefits of a payment gateway — things like instant bank verification, ACH processing and instant credit card processing — without the hassle of following up and reconciling each payment. Rather than working directly with payment gateways and responsibilities that come with it, you’ll get more time to focus on growing your business while your payment processing partner takes care of the security, routing and reconciliation needed for each payment. 

In fact, funds can still be deposited into your bank account in just a day or two, which isn’t much longer than if you were managing the entire process yourself. You won’t even need a separate merchant account or to nurture some kind of special relationship with your bank — the payment processing partner handles all that with easy-to-understand fees so that you know exactly what to expect.

Compared to the traditional payment gateway model, the payment processing model is significantly easier to manage and stay on top of, all with flat transaction fees that are attached to each transaction type. That can help you avoid the complexity and quickly multiplying fees that is common under the payment gateway model while still offering a secure and easy checkout process for your customers online and in person.

Transcend Your Payment Processing Problems

Here at Transcend Pay, we’re more than just another payment processor. Contact us today to see how we can help you get control of your payment processing while you focus on growing your business.