This article originally appeared on informed-merchant.com, a blog started by one of our founders, Sean, before he started FeeFighters.
If you want to process transactions over the internet, you will need a payment gateway. I often find that people are confused about what the payment gateway does vs. what the merchant account provider does. I also find that merchants are usually steered by their merchant account provider to a certain gateway because their merchant account provider gets a commission from that gateway, not necessarily because it is the best product for that merchant.
The Gateway and The Merchant Account Provider are NOT (Necessarily) The Same
The gateway sits between your shopping cart software (or POS software if you are a physical store) and your Merchant Account Provider / credit card processing. The Merchant Account provider ALWAYS must be the one who sets you up with authorize.net – you can do it yourself but you need information that only the Merchant Account Provider can give you. Additionally, many times the Merchant Account Provider refers the merchant to a gateway. While they are interlinked, remember, in most cases Merchant Account Providers can interface with many Gateways, so use the combination that you like the best.
At the heart of the credit card processing system are the payment networks. Each of the major credit card processors, such as First Data, Total Systems, Chase Paymentech, etc. have several processing networks. Additionally, some of the larger merchant account providers such as Heartland and ECHO have their own processing networks. Those networks gather the transaction data from millions of merchants, aggregate it and then send it off to VISA and Mastercard to calculate how much each bank needs to pay each other to settle up at the end of the day. Traditionally the way that merchants connected to those networks was through dialup modem communication. The reason why you hear a modem tone after swiping your card into an older point-of-sale terminal is that there is a modem in there that is dialing into the network to get authorization for the transaction. Increasingly, the transactions are no longer done via dialup but rather through IP and leased line. In the case of internet transactions and transactions using modern, IP-based POS (point-of-sale) terminals the connection is always via IP. However, you cannot just connect to the network on your own for several reasons:
- It is hard – each network has it’s own protocol which requires engineering to implement properly
- The network owners don’t want the networks bogged down and are stingy about who they let in (they must test and certify anyone who wishes to connect)
- You wouldn’t want to connect directly unless you had built some management logic into your code to manage the transactions (for example, what if you want to reverse a transaction, or prevent duplicate transactions, etc.).
Therefore, a number of service providers, called Gateways, exist to provide the middle layer between your online store or your IP-based POS system and the processing networks.
Gateway Process Flow
- The customer navigates to your website, selects an item and clicks “Buy”
- Your website’s shopping cart software sends the credit card data to your Gateway
- Your gateway connects to the processing network. This processing network is either a service that your Merchant Account Provider pays for, or it is owned by your Merchant Account Provider
- That processing network connects to the VISA or Mastercard network
- The processing network tells your Merchant Account Provider (and their sponsor bank) and your customer’s bank (credit card issuer) about the transaction so that they can sort out the money transfer
- The result (either the transaction was sucessful or it was not) is passed backwards through the chain – the Visa / Mastercard network tells your processor’s network the result of the transaction. The processor’s network then tells the gateway, which in turn tells your website, which in turn tells the user.
- Money Flow
The money flow is simpler. The money flows from the customer’s bank (credit card issuer) to your Merchant Account Provider to your bank account.
Independent gateways can be used with most any merchant account provider. Authorize.net
– the largest in volume, with about 25% of the market. Authorize.net usually costs about 0.10 / transaction, although the pricing is determined by the reseller (merchant account provider). Because of their large precense on the web, many people first call Authorize.net when they want to setup online processing. Authorize.net then sets them up with a merchant account provider from which they get a commission. Many merchants think that they can’t get better pricing than they did when they were initially set up with Authorize.net, which isn’t true. As the largest, Authorize.net can interface with every merchant account provider. Cybersource
– the second largest in volume. Cybersource has historically focused on the larger merchants, with 50% of the top 100 internet merchants. They are widely believed to have the best interface and the most robust anti-fraud tools. They are beginning to focus more on small and medium sized merchants but very few people have experience with them right now. Cybersource can be used with any merchant account provider. Payflow
– the third largest, was sold in 2006 by Verisign
. Historically Payflow has also had a focus on small and mid-sized merchants and also costs $0.10 / transaction. Payflow can be used with any merchant account provider. USAEPay
– Not as well known.
Captive gateways are owned by merchant providers and only made available to their customers. Captive gateways are usually much cheaper, either free, used as a loss-leader to capture the fees associated with your merchant account, or for a monthly fee, with no per-transaction fee. Linkpoint
– Linkpoint is owned by First Data
and can only be used with merchant account providers that use First Data for processing. However, First Data is the largest processor by far, with over 50% market share, so chances are pretty good that your merchant account provider can set you up with Linkpoint. Linkpoint doesn’t have as nice an interface as Authorize.net but it is significantly cheaper, costing only a monthly fee of $25 with no transaction fee. Innovative Gateway – Intuit bought a merchant account provider called Innovative Merchant Services
that had a gateway called Innovative Gateway
which is now branded as part of their Quickbooks Merchant Services
– a smaller competitor, compatible with a wide number of shopping cart packages. Orbital Gateway
– a gateway owned by Chase Paymentech, can be used by merchants that are directly served by Chase Paymentech
or by merchants served by other merchant account providers that use the Chase Paymentech
– owned by Nova (a subsidiary of USBank
Private Label Gateways
There exist many merchant account providers that are not as large as First Data or Quicken but still want to offer their merchants something other than Authorize.net. For such companies it is cost-prohibitive to build or buy their own payment gateway technology. Consequently a number of companies have sprung up that provide gateways that such merchant account providers can package and sell as their own. It is harder to figure out who all the players are in this part of the industry because they don’t put their name on their product. Just keep in mind that if your merchant account provide suggests something other than the “Big 3″ (Authorize, Cybersource, Payflow) to make sure that it has the capabilities that you need (you can get a free demo of Authorize.net to compare) and that it is priced less than the Big 3. Network Merchants
– This is an independent company but they sell their gateway services only through merchant account providers who private label it as their own. I have never used it before but I hear that it works.