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Payment Gateways Explained

Updated on February 8, 2011

To verify payment information and transfer requests, and certify credit cards in real time, an online processor called a Payment Gateway is required. Payment Gateways reference customers’ credit card accounts as well as your merchant account. Auhorize.Net, CyberSource, and VeriSign are three companies that offer Gateways to small business.

Payment gateways are important because they approve transactions, protect them using encryption, and prepare orders prior to processing. The gateway is responsible for ensuring that the customer has sufficient funds or credit to pay for the transaction, and, if approved, submitting the results to the credit card processor so the merchant can be paid.

When a transaction takes place, the Payment Gateway executes a variety of functions between the bank, customer and merchant. These include:

  • An order is submitted via your website or credit card details are received from an “IVR” service.
  • Using SSL (Secure Socket Layer) encryption, the order information is encrypted and sent from the customer’s browser to the merchant’s server, often encrypted again, and sent to another server hosted by the Payment Gateway.
  • This information is then sent to the merchant’s “acquiring bank” and forwarded to the customer’s issuing bank for confirmation. Depending upon the result, the card issuing bank will send either an approved or denied message back to the business’ website.
  • The acquiring bank forwards transaction information to the bank that originally issued the customer's credit card to obtain authorization.
  • The card issuing bank returns a response to the payment gateway or receiving bank via a response code. The card is either approved or denied and a response code is provided to explain the reason for denial if this should occur.
  • The payment gateway sends the response to the web site or other interface, where an 'Approved' or 'Denied' response is given to the customer. Typically, this only takes a few seconds.
  • Usually, acquiring banks will wait until the conclusion of the day to deposit a total amount of confirmed funds into a merchant’s account, whether it be an account with the acquiring bank, or a completely independent account.

While most gateways do not provide shopping carts, advanced gateways will offer more complex packages containing such tools.

Criteria for Comparison

There are three main factors you should consider when investing money in a gateway:

  1. Features
  2. Cost
  3. Reliability

Security is probably the most important factor when considering a gateway, as so much personal information is transferred from customers to banks and servers when executing a transaction. There are unscrupulous people who would love to get their hands on your customers’ credit card numbers, or your company’s bank account information, so you literally cannot afford to underestimate the security features offered by Payment Gateways.

Bear in mind, however, that all major gateway providers put security at the top of their priority list. They understand that they cannot have customers (or themselves!) dealing with unsecure transactions, and are always up to date on the latest ways to keep data secure.

There are several security initiatives, including the Visa Cardholder Information Security Program (CISP), MasterCard Site Data Protection (SDP), and Discover Information Security and Compliance (DISC). All major gateways comply with these, and also many of the lesser known ones. Make sure that whatever gateway your business uses is up to date with these security measures.


Many gateways have more capabilities than merely processing credit cards through websites. Gateways are intended to make your business run smoothly and help increase revenue. The following are some of the more frequently included features:

Virtual Terminal

A virtual terminal allows your business to enter a customer’s information manually. This may not seem important, but it allows you to help customers save time and energy by letting you sell products over the phone, as well as on your website.

If a customer calls your business with questions regarding your merchandise, there is no reason why they should have to hang up the phone, get back on their computer, and place their order via your website. With the use of a virtual terminal, you can process the order immediately and much more professionally. In addition, merchants can cancel transactions and distribute rebates and returns via a virtual terminal.

Fraud Prevention

Perhaps, the most effective way to prevent chargebacks is by utilizing fraud prevention tools. Often, merchants don’t realize, or take advantage of, the capabilities offered by a Gateway’s fraud prevention utilities. Getting to know such tools will help your business avoid chargebacks and allow you to concentrate on sales and promotion rather than risk and deceit.

Most gateways support basic fraud prevention tools such as Address Verification (AVS) and CVV2 verification. CVV2 refers to the three or four digit security code which appears on the back of credit cards, while AVS confirms that the address the customer provides is the same address the card-issuing bank has in its records.

Recurring Billing

Recurring Billing is a nifty feature that automates billing for your business. You only need to tell the gateway how frequently to bill customers and direct it towards their billing information. This is useful for businesses that deal with subscriptions or memberships and have a relatively constant amount to bill each period.

eCheck Processing

Because you want your business to be as open as possible to all payment methods, allow your customers to pay with an electronic check or eCheck. Electronic checks are becoming more popular because customers do not need to have a debit or credit card attached to an account to make the payment—they simply provide your business with their bank account information and can pay instantly. It’s a much better option than asking for a check to be sent through the mail.


Another consideration when choosing a gateway is the level of integration with your website that the gateway offers. How visible do you wish the gateway to be to your customers? If your business is just getting started, this may not be your greatest concern. However, more experienced merchants will want to fully integrate gateways with their sites, allowing for a more fluid buying experience for their customers.


Different payment gateways charge different fees for the services they provide. The following fees are common and can be easily compared:

  • Setup fees: Many gateways do not charge setup fees while others will charge you hundreds of dollars to set up an account. Typically, your business will not be refunded for this cost.  
  • Monthly fees: Your business will need to make a monthly payment to your gateway provider—expect to pay this just as you would for any merchant account service. 
  • Transaction fees: Every transaction that is processed by a gateway will attract a fee, and often even if the transaction is declined.  
  • Miscellaneous fees: There are sometimes other features that gateways will charge set-up fees, monthly fees, and transaction fees for. These will often be independent of the charges just covered.


The most important features of shopping on the Web are convenience and speed. Your business needs to be able to process transactions quickly and without problems. It’s too easy for a shopper to click away and buy your competitors’ products. You need to have complete confidence in your payment gateway, as it will be handling a great deal of the mechanics behind your sale. Make sure your gateway is reliable!

Reputable Gateways

There are many payment gateways to choose from. Some of the more popular gateways include:

  • Verisign Payflow Pro
  • Verisign Payflow Link
  • LinkPoint API
  • LinkPoint Connect
  • Plug 'n Pay



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