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Internet Payment Processing

Processing electronic payments through payment gateways

For many businesses, if you don't have have the ability to seamlessly collect online payments, you're going to be in serious trouble. So you need a payment provider that you can trust to collect online payments. A payment gateway for internet payment processing is an online service provider that connects an electronic shopping cart or virtual terminal/POS to an electronic payment processor. The main function of a gateway is to pass authorization, payments, and settlement data securely to and from the merchant's website to the merchant's processor. The merchant processor in turn connects to the card association (or "network"), which connects to the card issuing bank. It is your gateway to the rest of the Internet payment processing infrastructure.

The Payments Value Chain

When a customer swipes their credit card to make a payment, it usually takes just a couple of seconds for the point of sale system to prompt for a signature or a PIN, and another few seconds to complete the transaction and print out a receipt. It is testament to the robustness of the electronic payments system that the end user is typically completely unaware of the complexity of the underlying plumbing that makes it possible for them to walk out of their homes without a cent in their pockets, armed with just their credit or debit cards, and have complete confidence that they will be able to purchase the goods and services their desire.

In fact, the Internet payment processing ecosystem is very fragmented, due to a high degree of specialization, and any given payment transaction typically passes through at least five or six different parties, which we refer to as the "payments value chain." The fully-fragmented chain comprises:

  1. Payment gateways
  2. Merchant account providers (or merchant acquirers)
  3. Processors
  4. Networks (card networks)
  5. Issuers

Payment gateways

The term payment gateway is often used loosely to describe a variety of payment service providers that a merchant deals with in order to accept electronic payments. However, in the strictest sense, a gateway is an intermediary that sits between a merchant's virtual POS or online shopping cart, and serves as the first interface from the merchant to the rest of the payments value chain.

The gateway essentially ferries messages between the merchant and the payments system. These messages can be card authorizations, capture (or settlement) transactions, voids, or refunds. In all these cases, messages travel to and from the merchant and the card issuing institution (typically a bank or credit union).

There are two types of gateways:

  • Independent Gateway Providers: These are gateways that can connect to 3rd party merchant account providers or processors. Examples are: Authorize.net, Cybersource, Paypal Payflow, Verifi (some of the most popular gateways). The advantage of going with an independent gateway provider is that you are not bound to a particular merchant account provider, and could easily switch if offered a better price or superior services.
  • Full Service Payment Providers: These are owned by merchant acquirers or processors, and connect only to the processors that are affiliated with that merchant account provider. Oftentimes the advantage of using a full service payment provider (those that provide a gateway, processing services, and/or merchant acquiring services) is that you get better processing fees and cheaper (often free) gateway services. The other advantage is that they're a one-stop shop, offering a single customer contact for the gateway, processor, and acquiring bank (for example, Chase Paymentech). Snce the gateway and processor come pre-integrated, the time and effort to connect the gateway and processor is negligible. Examples of Full Service Payment Providers with a gateway or processor pre-integrated to Zuora are: Orbital and Spectrum by Chase Paymentech, Merchant eSolutions, Litle & Co., GlobalCollect, Quick Gateway by Qvalent, Website Payments Pro by PayPal.

Merchant account providers

Merchant account providers (or merchant acquirers) provide merchant bank accounts that are capable of receiving and transmitting electronic payment funds. The merchant account provider owns the merchant relationship, and is most often the primary interface to the merchant for everything related to payment acceptance, processing and customer service. Their typical responsibilities are:

  • Signing up merchants
  • Merchant marketing and POS sales
  • Disputes and chargeback processing
  • Setting price / MDR (merchant discount rate)
  • Underwriting merchant risk
  • Connecting to the merchant processor

Examples are: Chase Paymentech, Silicon Valley Bank, Wells Fargo.

Merchant processors

Merchant processors receive and store merchant transaction data and process payment transactions by connecting to the "backbone" networks like Visa and Mastercard. In effect they are the switch that receives the card details from the gateway and decides which network to route them to. They receive data back from the networks and pass them back along to the gateway. Some payment processors also provide other payment services, such as payment gateway and acquiring services.

Examples are: Litle & Co., Merchant eSolutions, Chase Paymentech, GlobalCollect, PayPal.

Networks

Networks provide the payment infrastructure ("pipes") to route card payment transactions between merchant processors and issuers. Key functions are:

  • Acceptance network brand marketing and awareness
  • Transmission of payment data to issuers
  • Risk management

Of these functions, the first is probably the most critical, as it drives merchant card acceptance and consumer demand for specific network-branded cards. Most consumers only know that they have a Visa or a Mastercard card, not the issuing bank. This is not a coincidence, but a carefully crafted branding strategy on the part of the card associations/networks that have funded and driven the creation of issuer-agnostic, consumer-friendly card features and programs, like zero-liability or travel/accident/rental car insurance, and merchant-specific loyalty program promotions.

Issuers

Issuers are the banks that issue payment cards. They serve two broad functions:

  • Consumer-side demand generation. This includes:
    • Consumer marketing and acquisition
    • Credit risk analysis
    • Provision of credit / lending
  • Payment processing
    • Authentication and authorization approval
    • Receipt, processing, and storage of issuer transaction
    • Credit/debit card servicing (billing, statementing, payment collection)

Larger banks have the scale to economically process payments in-house, but outside of the top 10 banks, and for smaller credit unions, this is usually outsourced to a third party such as FDC or Fiserv.

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