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What is a Payment Gateway? Meet the Magician Behind Ecomm Payments

By Jordan Dooley

A payment gateway is the magician of the payment processing world. To enjoy the benefits, you don’t have to be a payment gateway expert. But to be an informed merchant who’s setting their ecomm business up for success, you should at least understand how and why a payment gateway does it what it does.

All any merchant really needs to know is that their online payment gateway protects their business, and delivers the ultimate customer experience. There’s certainly magic in having that peace of mind. To fully understand how that can happen, you’ll want to know a little more about this simple question: what is a payment gateway?

As a merchant, if you’re wondering if you really need a payment gateway, the short answer to that complicated question is a resounding YES.

An online payment gateway enables a secure transfer of payment information across your systems. This improves checkout flow and makes payments seamless for you and your customers.

Let’s start with looking at how an online payment gateway functions. From there, we can get to the bottom of your questions to help you quickly learn how this magical solution can save your business time and money. And keep your customers happy. Ready to dive in?

Payment Gateways: What Merchants Need to Know

An online payment gateway serves as the middleman in your payment process to ensure the transaction is properly handled. Like a magician’s apprentice, a gateway makes sure the act itself goes off without a hitch— eliminating any gaps — so there are no risks in the transaction.

When a transaction is made on your site with a credit or debit card, a payment gateway is needed to encrypt that data before sending it along to your payment processor for authorization. Once approved, your e-commerce platform gets the green light that the transfer of funds can take place. Without an online payment gateway, the risk of error and propensity to outside threats would increase astronomically.

This turnkey solution takes the guesswork out payment processing so you can focus on delivering top-notch customer service. Instead of worrying about the nitty-gritty of how payments flow across your online payment gateway, you can sit back and relax and let the experts handle the hard work. An online payment gateway serves as the protective barrier over your payment data to fully protect your business, your issuing partners and your customers.

It’s also important to understand who is controlling the flow of this transaction data. An online payment gateway serves as a third-party solution that can simplify how merchants integrate the necessary software to make their payment processing fully functional. As the middleman in the payment processing equation, the gateway manages the transaction details between the merchant’s acquiring bank and the e-commerce platform.

You may be thinking, well that’s great, by why is that middleman actually needed? When a payment is authorized, an online payment gateway steps in to ensure no payment data is improperly shared with an outside party. They’re essentially the bodyguard for your payment data. Wouldn’t your customers feel better knowing their payment credentials are in the hands of someone who knows exactly how and when their personal details are being shared across your payment processing systems?

That’s the simple beauty of an online payment gateway. Of course, to make the magic happen, it’s a little more complex.

The Online Payment Gateway Secret Sauce

We’ve covered the first step: if you’re a merchant, you need a payment gateway. Now we’re going to get into why.  

It’s a given that every merchant needs to accept payments online.  Data from Mary Meeker’s highly anticipated  Internet Trends 2018 report indicates that the U.S. saw a 16% year-over-year growth in the e-commerce market in 2017. In terms of e-commerce sales, that figure is up roughly 18%. As consumers gravitate more toward e-commerce, accepting payments online can ensure you’re delivering that top-notch customer experience they expect.

Let’s start with the payment authorization aspect. An online payment gateway is the cog in the wheel that relays the payment information from the merchant to the processor. This is all done through a gateway that has built-in data encryption to keep unwanted outside threats far away from that payment data. Data encryption is key for protecting you and your customers. For merchants, a gateway serves as the security layer against cards that are expired, don’t have enough funds, have been closed or are over their credit limit.

This embedded security is all part of what makes an online payment gateway necessary. Since gateways are integrated within a merchant’s e-commerce platform, merchants have the added benefit that their entire payment processing experience has the latest and greatest security features on the market. This includes tools like P2PE (point-to-point encryption), which fully protects data across a secure environment during each step of a transaction.

What would happen if a payment gateway was taken out of the equation? Fraudsters would have easier access to payment data, harming your relationships with your customers and your payment partners. Fraudsters would find more ways to push illegitimate transactions through, which means you’d be left chasing down more fraud.

Another core aspect of an online payment gateway is how the transaction details are passed through a payment processor. This involves referencing a merchant’s unique ID number in order to pass the transaction details across a secure environment hosted on a merchant’s internal site. The gateway ensures the payment details are not shared with any outside parties while allowing for legitimate transactions to pass through seamlessly. Once the proper details are shared between the e-commerce platform and  the merchant’s acquiring bank, the transaction can be completed. While this process seems complex, this is all happening in a matter of seconds. A fast transaction means less friction, higher conversions and happier customers.

By now, you’re probably catching onto why it’s tough to answer “what is a payment gateway?” without fully understanding why an online payment gateway matters for the customer experience.

As the interface of a payment processor, a gateway allows for transactions to be settled more quickly between merchants and issuers. This improves a business’s cash flow and keeps customers returning.

Getting the Most out of Your Payment Gateway Experience

What really matters at the end of the day is the customer experience. Security, of course, is a key component of the gateway equation, but without keeping your customers happy, there won’t be any payments to manage.

As we’ve detailed above, the right online payment gateway partner delivers fast, secure transactions. The other end of the equation is about helping your customers pay on their terms.

This means delivering payment options beyond just credit cards. Here at Klarna, our mission is to provide secure payments within the smooothest checkout experience possible. The two don’t have to be mutually exclusive. In fact, they should go together.

When we say smoooth, we mean creating a flexible checkout that tailors options to fit customer demand. By providing more payment options, you empower your customers to control their online shopping journey, which drives more conversions.

Klarna’s online payment gateway experience allows merchants to embed our ‘Slice It’ option to offer instant financing in their checkout process, so customers can pay for an item over time, on their own terms, at a fixed interest rate. By integrating instant financing into the checkout process, you can deliver the flexibility customers want in today’s booming e-commerce ecosystem. With more shopping options than ever before, all merchants need an edge.

A powerful gateway can give you — and your customers — exactly what’s needed. Nearly 82% of merchants surveyed believe that offering instant financing options would help them boost sales, according to a 2018 survey conducted by Klarna.

Delivering an open-end line of credit is one more way merchants can personalize the payments process to fit their customers’ needs. By choosing a gateway with flexible payment options, merchants give their customers purchasing power — increasing the chance they’ll convert and become repeat customers.

A dynamic online payment gateway process can also expand your payment options beyond what customers expect. Why not deliver extra delight by providing an option they may not even have known was possible? With Klarna’s  ‘Pay Later,’ merchants can allow shoppers to try, touch, and see before they commit to buying. Try Before You Buy is quickly becoming a trend that savvy consumers are catching on to, as it eliminates the gap that exists between the in-store and online shopping journey.

Pay Later allows merchants to provide their customers with the option to pay for their purchase up to 30 days after delivery. Klarna pays the merchant up front, and once an item is delivered, the customer receives an email with information on how to pay Klarna. No extra terms. It’s as simple as that. This is just another way having a powerful online gateway partner can deliver the extra level of customer experience to help set your brand apart.

Leveraging your Online Payment Gateway Partnership

You may already feel bombarded with having to make too many decisions to find the right online payment relationships to power your e-commerce business. We know these tasks aren’t easy, which is why we’ve designed our platform with merchants and their customers in mind.

Guiding shoppers through the online customer journey is challenging enough. Convincing customers to get to checkout, and then convert, is an even bigger hurdle. We know you’ve got a lot on your plate, which is why managing payments should be the least of your concerns.

For every online transaction, there are key relationships you must have: payment processing, payment gateways, e-commerce platforms, and credit issuers. Making the transaction flow smooothly across each and every step of the customer journey depends on the quality of the process that your online payment gateway delivers.

Payments are complicated, especially when dealing with the security of your customers in the breach-filled ecosystem of today. Technology is changing rapidly, and so are the techniques of hackers and fraudsters who aim to undermine your business. By leveraging an online payment gateway that is built for today’s evolving transaction needs, your business will be well-equipped to deliver richer, more personalized online shopping experiences and empower consumers to take charge of their own purchasing decisions.

If you put your customers’ needs first, the rest of the puzzle pieces will fit into place. That’s the magic of the right online payment gateway partnership.

Dying to know more about online payment gateways and how they fit into the ecommerce ecosystem? We’ve got you covered. Download our ebook: Ecomm Payments Explained.