If you’re new to the credit card processing game, it might seem impossibly confusing to you. After all, there are a lot of merchant services out there, a lot of payment gateways, and numerous third-party providers. Which one should you choose?
The Payment Gateway
A payment gateway is the actual service that processes the credit card transactions for you. When your customers surf your site, add items to their cart, and then checkout, your e-commerce site will then send that information to another company for payment authorization and processing.
As soon as the credit card information is matched to the information on file with the credit card company, the charge is approved and the gateway then forwards the money from your customer’s credit card to your merchant account.
Of course, you still have to wait out the 30 day chargeback period in which the customer can charge back the account, causing a reversal of funds. Fortunately, some companies are better about protecting the merchant. For example, read Authorize.net reviews – they are consistently good with merchant protection and service.
A true blue merchant account is a rare commodity these days. Why? Because, merchant service providers want to ensure that they’re taking on a low-risk customer, and most businesses are a bit too risky, especially online businesses. A merchant account is basically an online bank account that temporarily holds the money transferred from your customer’s credit card until it’s moved into your bank account during batch processing.
There are two types of merchant accounts:
Dedicated – the dedicated account is one that’s set up just for you.
Aggregate – an aggregate account is one where your money is dumped into a large pool of funds and is later segregated out when those funds are transferred to your business checking account.
Some companies, like Paypal, work like an aggregate account. Money is transferred into a large account that’s segregated only on “paper.” Then, when money is transferred to your business checking account, everything is handled “on the books.”
With a company like Authorize.net, you have an actual bank account where the gateway provider dumps the funds. Most businesses don’t use their own merchant account, however. Sometimes, it’s just too difficult to get a merchant services provider to agree to reasonable terms. Instead, they go through a payment provider.
By far the simplest solution is to use a payment provider. Payment providers combine the benefits of merchant accounts, and payment gateways, into one single service. So, instead of managing all of the separate parts yourself, you hand over management to the payment provider. An example of a payment provider would be Paypal. Another example would be BluePay.
These companies look and feel like gateways in that they provide virtual terminals or virtual shopping carts so that your customers can pay you. For example, Paypal provides all merchants with a “pay now” or “buy now” button that goes on the website. When users want to buy something from you, they click the “buy now” button. They are transferred to Paypal’s site (in some cases, you can host all payment information and processing on your own site) where the transaction is completed.
Unless you opt for self-hosted payment processing, Paypal handles all of the backend processing, PCI compliance, and merchant services.
Payment providers do have a drawback, however. Some of them charge a flat annual fee for merchant services, contract fees, or higher transaction and flat per transaction fees.
You pay for convenience and, since the service consolidates several services for you, those fees may be prohibitively expensive.
At the same time, these types of service providers tend to be ideal (and sometimes the only solution) for merchants operating in high-risk markets. For example, if you’re an online business, you may only be able to get a payment provider to process credit card transactions for you.
Jessica Bunn has been running her own shop for several years. After getting her hands on technology, she puts her trial and error experience to good use by writing on several business and entrepreneurship blogs.