
The Essentials of Payment Processing
The Role of Acquiring Banks & Payment Gateways
The payment industry has undergone a dramatic transformation over the last decade because of technology and consumer behavior. In this article, we will be discussing the essentials of payment processing. We will take a look at some of these changes and how they affect acquiring banks and payment gateways.
What are Acquiring Banks?
An acquiring bank is any bank that processes credit and debit card transactions but doesn’t actually issue credit or debit cards. A merchant’s acquiring bank will work with other banks known as issuing banks to process payments for their customers.
What are Payment Gateways?
A payment gateway is a distinct software service used by online merchants to ensure secure financial transactions. A payment gateway performs two primary functions: authorising payments and capturing data.
For example, the merchant sends a request to the gateway asking if the transaction is authorized. If it is authorized, then the funds are captured from the customer’s account.
Types of Payment Gateways
There are generally two types of payment gateways: stand-alone and hosted.
Stand-alone Gateway:
A stand-alone gateway isn’t integrated with any other software. The merchant has to work with each payment processor separately and record the secure code that goes onto their website.
Hosted Gateway:
A hosted gateway is fully integrated and hosted in the cloud, which means it doesn’t require any setup from the merchant’s end. Moreover, this means it has lower barriers to entry; the merchant can accept a wider range of payment types.
What are the Essentials of Payment Processing?
There are three essentials of payment processing. These include security, speed, and cost.
Security: In the payment industry, security is a major factor. Merchants don’t want their customers’ financial information to leak or fall into the wrong hands. This can happen when merchants store financial data on their own servers so they prefer to outsource this function to a specialized third party.
Speed: Consumers expect transactions to be completed in seconds with minimal effort– they don’t have the time to wait for a transaction to complete, especially when shopping online. Speed is largely driven by the security measures being used and the functionality of the payment gateway.
Cost: The cost of processing transactions can vary widely based on fees, compatibility issues, and hidden charges from acquiring banks and payment gateways. Some merchants are forced to pay a flat fee in addition to an interchange fee. Others may have a tiered pricing structure with monthly minimums and set fees per transaction. A few smaller merchants may not be able to afford payment processing at all, while larger companies can negotiate lower rates with their banks compared to the general public.
Different Kinds of Transactions:
Credit/Debit Card Transactions vs. Electronic ChecksWhen processing a credit or debit card transaction online, there are two possible payment methods: authorization-capture (also known as ‘card not present) or offline authorization (also known as ‘card present’).
Authorization-Capture: This is the typical model of payment processing. Most eCommerce websites are built to handle this type of transaction. The customer enters their credit card information and clicks the “submit” button to complete the payment process. The charge is authorized but remains pending until the merchant sends the information to their acquiring bank for processing. If everything looks good, the transaction will go through, and the card issuer will be billed. However, at the point of purchase, they haven’t actually been charged yet.
Offline Authorization: This type of transaction is used when a customer orders something offline or over the phone. When they place the order, they must provide a credit card number to validate the transaction. The merchant then sends the authorization request directly to their acquiring bank.
It is important to be aware of the differences between these two payment types because they have different risks and requirements. For example: when processing an offline authorization, merchants are required to post a security code onto their website (CVC, CVV, or CID). This security code is required to complete the transaction.
Costs of Payment Gateways:
For many merchants, payment gateways are quite expensive. Merchants usually avoid this by choosing a gateway that charges a lower cost for transactions and minimal or no gateway fees. This may not seem like a huge discount, but every cent counts when it comes to payment processing.
Four Components make up the Cost of a Transaction:
1) Interchange Fee: Merchants pay the fee for accepting card-based payments, typically ranging from 1% to 5%. It’s not actually paid to the card issuer but rather the payment processor.
2) Card Acceptance Fee: This fee is paid to a merchant services provider (a type of specialized bank). It’s an average of 0.10% per transaction, not including any gateway fees or other surcharges.
3) Gateway Fee: The fee charged by the vendor for providing access to the payment gateway to process transactions. This fee can be a fixed monthly fee or a percentage of the transaction total.
4) Statement Fee: Merchants must pay for online statements, which are often free with traditional processing but may incur an extra charge when using a payment gateway.
Merchant Service Providers:
An acquiring bank, sometimes called a merchant service provider (MSP), is the financial institution that allows merchants to accept credit card payments online. This bank will allow a merchant to set up an account to process their online transactions in exchange for a monthly or annual fee.
In some cases, such as with high-risk businesses like pornography websites or services that facilitate illegal transactions, the acquiring bank may even require a one-time upfront application or approval fee on top.
Three Different Types of Merchant Accounts:
1) A regular (standard) account where merchants process card-present credit card transactions via telephone or online using an electronic terminal and then submit them to their acquiring bank for payment. This type of account charges a monthly fee, but the rates for transactions are often more competitive than those for eCommerce or online-only accounts.
2) A proprietary-network high-risk account in which merchants process card-present credit card transactions via telephone or online using an electronic terminal and then submit them to their acquiring bank for payment. As a result of the higher risk, this type of account often has higher transaction rates than other merchant accounts and charges an application fee.
3) An online account is specifically designed for internet businesses that process card-not-present credit card transactions via an online payment gateway. These accounts are relatively inexpensive and generally charge a low, flat percentage of the transaction total. They are ideal for businesses selling low-ticket items online (although they still incur interchange fees and other surcharges).
Conclusion:
Payment gateways can be expensive because they charge for transactions– which can only be avoided by choosing a gateway with low or no transaction fees. Merchant service providers typically charge a monthly or annual fee (which varies from merchant to merchant). However, rates are generally more competitive for standard accounts than e-only accounts or high-risk accounts. Finally, while the initial setup fee for a merchant account may seem steep (and often is), it is still less expensive than using a payment gateway with transaction fees.
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