Hi, I’m setting up my own e-commerce store. Any suggestions on how I should select a payment gateway?

A payment gateway is an e-commerce application that links your website and your merchant bank in order to authorize online payments.

Using the right payment gateway is essential for the success of an e-commerce store and therefore it’s essential that you should spend sometime researching on the best payment gateways.

Here are some of the key factors that you should consider while selecting a payment gateway:

1. Security: Never compromise on the security of your online payment system. Your e-commerce website should have a safe and secure payment gateway. It should protect all the credit card and transaction information of your customers. Address Verification System (AVS) and CVV are a must in a payment gateway to protect your business from fraudulent transactions. Apart from this, your payment gateway should also be able to detect fraudulent transactions through some warning signs like mismatch between shipping address and billing address and high value orders from first-time buyers.

2. Compatibility: The payment gateway should be compatible with your shopping cart software. If you’re not well versed with the technicalities of setting up a payment gateway, hire a web-developer for this purpose. He’ll check the types of payment gateways that would get along well with your shopping cart.

3. Monthly fee: Payment gateway service providers charge fee on each transaction. It could be a fixed amount or a percentage of the transaction value. Depending upon the volume of your sales and the average value of your sales, you could decide which payment option would work best for you.

4. Customer Support: You should choose a payment gateway service provider that provides excellent customer service. Payment gateway is the backbone of your e-commerce business and therefore it should work well 24 x 7.

5. Features: Payment gateway service providers offer different features. Depending upon your requirements, shortlist the features that are must for your business. For example, if you want to offer your products and services worldwide, your payment gateway should be capable of accepting different credit cards, debit cards and currencies. If you need to collect bills from your customers periodically, you’d need a payment gateway that has an automated system for issuing recurring bills.

There are two types of payment gateways – seamless payment gateways and non-seamless payment gateways.

In a non-seamless payment gateway, you don’t need to have a merchant’s account. The payment processor will hold money into your account till you withdraw it. In a seamless payment gateway, you need a merchant’s account. Your credit card company would credit the money after deducting their fees into your merchant’s account periodically.

Is a payment gateway must for an e-commerce website? I’ve heard about payment gateways and third party processors. What’s the main difference between them and can you provide the name of some payment gateways that don’t require a merchant’s account?

No, it’s not necessary for you to have a payment gateway for your online business. If you don’t use a payment gateway, you’ll need to collect credit card information of your customers to process the payment. However, I’d recommend that you should have a payment gateway, as it allows secure payment processing and also prevents credit card frauds.

Coming to your second question, a payment gateway is a seamless payment processing system that is integrated into your e-commerce website. You need to have a merchant’s account for the services of such a payment processing system. But, if you don’t want to open a merchant’s account, you could use a third party processor. A third party processor is a company that accepts payments on your behalf. If you use a third party processor, your customers would be directed to the website of the payment processing company to pay for their purchases.

The most popular payment gateways that do not require a merchant’s account are Google Checkout, Paypal Express Checkout, and Amazon Simple Pay.

Which payment gateway should I choose – one that requires a merchant’s account or one that doesn’t require a merchant’s account?

There are pros and cons on both. You could decide which payment gateway is suitable for you depending on how much you can invest, what features you want in your payment gateway and how much convenience you want to offer to your customers.

Some of the pros and cons of payment gateways with and without merchant’s account are:

Pros of payment gateway with a separate merchant account:

1. The recurring cost of a payment gateway with merchant account is lower than a payment gateway with third party merchant.
2. The money is deposited into your merchant’s account within one or two days.
3. It is safer.

Cons:

1. The cost of initial setup may be higher.
2. It takes time to set up such a payment processing system.
3. The payment gateway might not be able to process all types of credit cards.

Pros of a Payment Gateway without a Merchant’s Account:

1. Quick setup and sometime free setup.
2. Integrated security system.

Cons:

1. The commission you’d have to pay for each transaction is high, up to 5 percent.
2. The money would be deposited into your bank account within three to five days after your instruction.
3. Your customers could pay only if they have an account with your third party payment processor. If they don’t have an account, they’d have to create one.

I prefer having a merchant’s account rather than using a third party processing firm like Paypal. I think Paypal and Google Checkout are good for people who are just venturing into an online business or don’t have enough funds for setting up an elaborate payment gateway.

Not only is it costly to use these third party merchants but it also discourages some buyers from buying from your website, as buyers don’t like to undergo the hassles of creating an account with these payment processors. I like to offer my customers a seamless shopping experience. Also, I don’t want my buyers to go on another website while buying from me.

Good point! When buyers are directed to another website for payment, they get discouraged. Some buyers don’t like to share their credit card information on third party payment processor websites and therefore most online businesses prefer to have a separate payment gateway and merchant account.

But, I believe that these third party payment processors are secure. If you don’t have time and resources to set up a merchant account and payment gateway software, you could easily use a third party payment processor like Paypal.