1. Payment Gateways Are Not Merchant Accounts
For simplicity gateways and merchant accounts are often bundled together and assumed by new businesses to be the same service. Merchant accounts actually allow you to accept credit cards and provide an account where funds can be deposited and fees charged. The merchant account and its acquiring bank are the most important piece in ensuring your business can process and will not be shut down.
A merchant account is backed by a particular bank. Certain banks do not allow certain industries or have restrictions based on the amount of risk they perceive in the particular business or business type.
On the other hand, payment gateways are to online businesses what credit card terminals are to brick and mortar businesses: Gateways securely transfer data. The confusion comes from the way a lot of gateway providers market their software. For example, two of the biggest players in online payments, PayPal and Stripe, provide both payment processing and payment gateway services, though neither provides you with your own dedicated merchant account.
2. Security and Compatibility Should Be Your Main Priorities
Once you know you need a gateway you need to ensure it will be secure and compatibility with your business. For most businesses the main considerations are:
a. Does the payment gateway adhere to Payment Card Industry Data Security Standards (PCI-DSS)?
b. Does the gateway integrate with your virtual shopping cart/basket?
c. Will your business accept recurring payments?
d. Will you accept credit/debit cards and/or direct account debiting?
e. Do you want the cardholder to enter their information on your site or on a separate securely hosted page?
f. What kinds of transaction and data reporting will you need and how quickly is it available?
g. What currencies would you like customers to be able to pay in?
h. Does the gateway provide additional fraud prevention measures?
Many businesses do not take a lot of the above points into consideration when first starting, but doing so can save time and money.
3. Know Your Processing Costs
Equally important to most business owners are the processing fees they pay for being able to accept credit and debit cards. Processing fees depend on the types of cards your business takes (debit, rewards, business, etc.) and the fees charged by your processor. Additional gateway fees may apply but in reality fees are less connected to the use of a particular gateway than they are to your merchant processor and their prices. But as with my many other aspects in the industry many companies bundle gateway services with processing fees when they are not necessarily directly connected.
If you are currently in business, a good rule of thumb to figure out how much you’re paying is to take the total amount of fees for a month and divide it by the total amount of credit card sales for that month. This will give you your Effective Rate. For a standard risk business in the U.S. a good effective rate is between 2 – 3% of total credit card sales for the month. High risk businesses will usually pay more and their rates are more dependent on the industry and business model.
For example, the standard PayPal fees in the U.S. are 2.9% and $0.30 cents a transaction. Depending on your business type and risk factors the fees associated with these can vary. Many payment processors bundle fees to simplify for merchants how the credit card payment industry works, but this simplicity can often be more expensive to businesses.
Often new entrepreneurs will choose payment gateway and merchant account options that are easy to implement. Sometimes these are the only options available to them. Over time though the fees charged can make a substantial difference in business profitability, often hundreds or thousands of dollars a month.
Because pricing is a complex subject, if you are interested in learning more about fees, please read our other articles or contact us.