As per a CLSA report, UPI in India comprises 60% of total payments by volume, and digital payments have risen from $61 billion in Financial Year (FY) 2016 to $300 billion as of FY2021. If we pay attention to the increase in digital adoption and online purchases, the figures are expected to grow to US$0.9-1 trillion by FY2026. As an e-commerce business owner in an increasingly cashless world, an e-commerce payment gateway is crucial to perform transactions for your venture. Therefore, it is essential to understand how they work.
A payment gateway acts as a channel through which your customers or clients can transfer funds to you. They are the same as taking cash from the customer; only the transaction takes place online and is performed digitally or using credit/debit cards. Let’s understand how e-commerce payment gateways work to execute it smoothly on your website.
How do e-commerce websites and payment gateways work together?
A payment gateway allows the transfer of funds between consumers and merchants. They enable e-commerce pages to request money from a consumer’s bank account to finalise their purchase of products or services. If the customer’s bank account has enough funds, the request is approved, processing a secure payment transfer to the merchant’s bank account.
Is the above information enough to understand how payment gateways works?
NO! You need to make several decisions before setting up a payment gateway for your e-commerce website. You will have to choose the most suitable type of merchant account for yourself and ensure that your customer’s payments are secure. To understand these details, let’s first take a look at the process of placing an order and paying on a website.
What does the payment gateway process look like?
Note: In case of refunds, or charge-backs, the process would be slightly different. Otherwise, let’s look at the standard procedure that takes place:
- The customer chooses the items to be purchased and places them in their cart, before proceeding to the checkout.
- Once after reconfirming their order at the checkout, they are asked to submit their billing and shipping information (in case it is their first purchase, or they didn’t save their details earlier) or they confirm their shipping and billing information (in case it is already saved) and proceed by pressing ‘order,’ or ‘pay now.’
- The consumer’s web browser will encrypt their payment information and forward it to the business’s server using the Secure Socket Layer (SSL) encryption. As a merchant, you are required to acquire a full SSL Certificate.
- On the merchant’s web server, the gateway app forwards the transaction details, using SSL encryption, to the chosen payment gateway.
- And the payment gateway sends the encrypted transaction information to the payment processor of your bank. It then forwards it to the consumer’s card association like MasterCard, RuPay, or Visa.
- The card association reaches the bank that issued that card to the customer. Upon receiving the request, the bank checks the funds available in the customer’s account to see if they are enough to cover the requested amount.
- The bank’s payment processor then responds with a code indicating if the request is declined or approved, and in case it is denied, they also state the reasons.
- The payment processor takes this response back to the payment gateway and forwards it to the merchant’s website.
- The website then decodes it and passes the information to both – the merchant and the customer who was checking out.
In a couple of seconds, the whole process takes place. If approved, the payment processor carries that information to the merchant’s acquiring bank, the payment gets processed, and the bank credits the approved funds into your merchant account. The payment is then deposited into your business bank account.
What is a merchant account?
A merchant account is required to process card payments/ online transactions. However, it is different from a business bank account though. Payment gateways, independent sales organisations (ISOs), payment processors, or payment service providers (PSPs) can provide a merchant account to you. Your Merchant Identification Number (MID) is assigned to you when your application for the merchant account is approved. (MID acts as an account number for your merchant account.) Before the money from your customer is credited to your business account, it is processed in your merchant account.
Why can’t the money be transferred directly from the consumer’s bank to your business account?
Merchant accounts are crucial to maintaining authorisation from when your customer or client fills in their card details to them completing the payment process. There is always a chance that the money paid might have to be returned due to exchange/return policies. Hence, the merchant account holds onto the funds until some time before crediting them to your business account. It also eliminates the multiple deposits that might occur due to your payment gateway accumulating payments from various sources. Your merchant accounts collect them and make a single deposit into your business account instead.
What are the crucial things to setting up a merchant account?
Apart from your time and effort, you have to pay a setup and monthly fee to set up a merchant account. If the payment gateway’s merchant account saves you time and money, it will also subject you to a higher individual transaction fee. A joint account can be more viable if you are a small start-up or a new business. But as your business grows, it is always better to invest in setting up a merchant account.
2. Cash flow
There is a delay in the payments being deposited in your business account from your merchant account. However, the waiting period depends upon your chosen payment gateway and merchant account.
Factors that influence payment gateway charges
The elements listed below can influence the payment gateway charges.
- What services or features does a merchant expect from a payment gateway?
- How much is the setup fee?
- What kind of a business model is it?
- What is the maintenance and software fee?
- What is the transaction discount rate?
How to incorporate the payment gateway in an e-commerce site?
1. The payment process can be done offsite.
This process redirects the customer away from the business’ website to pay. This can be your go-to if your business receives little online traffic. When customers click the payment link, they are redirected to the payment processor’s page to enter their card details and initiate the payment. Once that part is done, they are returned to your website, where their order confirmation is shown. You can customise these payment gateways by adding your business’s logo or name. The one drawback you might face is that since the gateway is external, you can only control part of the user experience.
2. The payment can be made onsite.
The payment gateway handles the payment, and throughout the entire process – initiating payment to completing the transaction, they stay on the company’s page. Once the consumer enters the details within the business’s site, the information is carried to the payment gateway’s URL, and the actual transaction happens. Since there is no involvement of external factors, this type of payment gateway is referred to by businesses receiving most of their revenue through online payments. It also promises a better customer experience. To keep the process hassle-free, the company should take all the necessary precautions to ensure the process is secure and the consumer’s information is safe.
3. The payment can be processed using the application programming interface.
While customer adds their details for the transaction on the business’s online payment page, the payment is processed using the application programming interface (API). These gateways are customisable and offer complete control over the user experience. But businesses using these must thoroughly take care of PCI compliance and SSL certification.
It might seem like a complex process, but it is crucial for business owners to understand the growing importance of payment gateways for e-commerce websites. If the business is online, then incorporating the best e-commerce payment gateway is a necessity.