In this article, we’ll cover the basics of payment processing and help you understand which option is best for your business.
SOUTHERN CALIFORNIA, CA — JULY 26, 2019 – There are two main approaches to taking consumer payments today, direct payments and gateway payments. With direct payment, the merchant and payment processor communicate directly. From there, the processor routes the transaction to the credit card network — pretty simple. A gateway payment is a bit different. A gateway serves as a middleman that connects the merchant to a processor, and then the processor will connect the merchant to a credit card network.
Payment processing basics
In total, there are four parties involved in retail payment processing: customer, merchant, customer’s bank, and merchant’s bank. The latter two are also called the issuing bank and the acquiring bank.
At a high level, what drives the right solution for a given application is often the presence, or lack thereof, of the customer’s credit or debit card when making the payment. Gateway payments are beneficial for instances when a payment is being made without a credit card on site. Direct payments are most beneficial — and efficient — for transactions that occur with a credit card on site.
How do payments get processed? Is there a norm?
The short answer: yes. Think about the last time you purchased something — take coffee, for example. You ordered, you swiped or dipped your card and the payment was complete. Depending on the shop’s point-of-sale (POS) system, you might have been prompted to insert a PIN. This transaction was a direct payment. Sometimes the merchant will take your card and swipe or dip it for you, but the basic elements still exist. Your card was inserted into a payment terminal that contacted your bank directly. Once your payment was authenticated, you were able to remove the card, and the transaction was over. The acquiring bank could then receive the payment.
Payment processors are pretty straightforward, so you’re probably wondering why a gateway payment needs the extra step. Many shops have online retail options. When the customer can purchase something through your store and neither the customer nor their credit card is on site, you need to ensure that their payment will be validated. The gateway payment is the best way to conduct secure payments for e-commerce purchases.
Because the payment has to go through an extra step, that step essentially acts as another form of authentication. Once the payment is authenticated through this middle step, the transaction information will be sent to the issuing bank.
Payment gateways and the benefits of anti-gateways
Payment gateways are easy enough to conceptualize. They are a third party that helps facilitate payment transactions. FreedomPay, Bluefin, and Shift4 are popular examples of payment gateways.
So what is an anti-gateway? In short, an anti-gateway is software that enables POS terminals to communicate directly with the payment processor, eliminating the middleman (the payment gateway).ACCEO Tender Retail is a popular anti-gateway solution and one of the few POS solutions that support direct payment processing. Benefits of anti-gateways include:
- Cost savings– Gateway subscriptions and transaction fees can eat away at profit margins. While processor costs may be less than $0.01 per transaction, gateway fees can range from $0.02-$0.08 per transaction.
- End-to-end encryption (E2EE)– Encryption is the name of the game in payment security, and ACCEO Tender Retail supports E2EE encryption, ensuring data is not decrypted until it reaches the processor.
- Enhanced speeds– One less endpoint involved means faster overall transaction times.
- Simplified reconciliation– Similarly, three-way settlements become a thing of the past with an anti-gateway. Payment reconciliation is simpler making things easier for the retailer.
Do payment options benefit one party over another?
Payment gateways make the online checkout process secure for the customer and for the merchant. It’s like a buffer to make sure that the payment is secure since gateways are typically used for e-commerce purchases and the merchant can’t watch the transaction occur on-site. Physical retail is a little different. While payment gateways often make sense for smaller retailers, generally they become too costly and inefficient at scale for POS. As we have seen, with anti-gateways, retailers can drive down costs and increase payment processing efficiency.
Direct payments offer an additional benefit for both the customer and for the merchant: enhanced security. This is because direct payments offer end-to-end encryption a.k.a E2EE. With direct payments, payment information is not decrypted until it gets to the bank. This eliminates the middleman and reduces attack vectors for individuals trying to swipe payment details.
So is one option better than the other when it comes to in-store payments?
You’ve seen that the biggest difference is simply the middle step. If you plan on using a gateway processor for the online part of your store, you’ll need to keep in mind that gateway payments require additional transaction fees as well as monthly subscriptions. These fees are determined by the gateway you choose to use. It’s typically a small percentage of each payment. These payments can add up, however, so it’s important to research your best options before you pick a gateway provider.
As for in-store purchases, it might depend on the type of store you own. Large businesses and chains are generally better off with direct payments. If your shop is smaller, though, a gateway may be a good way to get started.
If you own a brick-and-mortar store, the payment processor you use might have already bundled your POS system with a payment gateway. If this is the case, you don’t need an additional one.
The takeaway: going direct makes sense for chains
The big takeaway here is that chain retailers and large retail entities can benefit significantly from going direct. At scale, gateway fees add up fast, and there is little to no benefit in offloading processing to a gateway. Similarly, the potential damage from a security breach and the potential upside of increased operational efficiency become greater. In short: for big players in retail, the cost savings, efficiency gains, and security benefits of going direct are hard to overlook.
Balancing security and convenience in payment processing
Once you’ve determined whether or not you’ll need a payment gateway, it then comes down to making a decision on the best solution for you and your customers. If you go the gateway route, you’ll want to choose a gateway that provides security, convenience, and minimal risk. Nearly 15 percent of shoppers abandon online purchases if they are not receiving quality customer experiences, according to abandonment surveys. Additionally, in 2018, 90 percent of login attempts at online retailer sites were made by hackers, according to Shape Security.
Sometimes it’s as simple as choosing a gateway based on how it processes payments. Does it redirect your customer? Does it allow them to checkout on your retail site directly? This can have a significant impact on how safe your customers feel inputting credit card information into your site. A good tip to help your customers feel secure: update them with notifications about how secure their payments are throughout the process. If a payment page redirects them, ensure them that this is a standard part of your payment process.
You may have heard that gateway processors are less secure because of the additional step. The middleman processor should still be encrypting payment information. Its whole purpose is to act as a gateway, an additional checkpoint, to verify payment information.
The reality is that any additional points electronic payments go through will pose a potential point of failure. Direct payments also encrypt information, but they don’t need the additional checkpoint because typically, an EMV credit card terminal will prompt customers for a PIN or signature as verification.
How does the changing payment landscape affect your processor decision?
Gone are the days when cash and checks were your available payment options. Now, customers can pay with cash, checks, credit cards, debit cards and even contactless payments such as Apple Pay or Google Pay. Magnetic card stripes are becoming obsolete because of the newer, more secure chip. Cash is being used less because younger generations are using digital wallets. Because of this, businesses need to constantly adapt. The latest change is investing in POS systems that accept contactless payments and EMV chip card readers.
Does this change in payment acceptance change whether or not you should be using a gateway payment processor or a direct payment processor? That depends. When a credit card is not present, a gateway is necessary to authenticate a transaction. For instance, when a customer uses frictionless payments such as Apple Pay, the information stored in their digital wallet needs to be verified in order for your acquiring bank to accept it.
For the other changes in payments such as chip card readers, those credit card processing terminals will prompt you to input a PIN depending on the software and hardware, but those payments are direct. Most countertop payment solutions work as direct payment processors.
Putting it all together: picking the right payment solution
Choosing the correct payment processor for you means knowing what the transaction fees are, how their gateway or direct payments work, and how either of those options make the purchasing process seamless and safe for you and the customer.
The type of payment processor you choose really depends on the size of your business and whether or not you conduct a lot of contactless transactions. If you are a smaller retailer, payment gateways offer a fair amount of upside. As your business scales, direct payments begin to make more financial sense.
In both cases, security should be a top priority. While gateways offer security to retailers and abstract away complexity, direct payments can be more secure for you and your customers as they eliminate a potential attack vector (the middleman or gateway in this case).
Payment security is constantly maturing and growing and modern technology helps keep payment information safe. Banks and payment processors are constantly modifying hardware and software to prevent security breaches and attacks from hackers. The goal of EMV credit cards switching from magnetic stripe to chip technology was to further encrypt purchase information and decrease fraudulent behavior. Digital wallets prompt users to use Face ID or fingerprint technology to verify that the user is the correct cardholder.
By implementing the right payment solution for your business, you can keep your customers safe, your reputation intact, and improve your bottom line.
About Tender Retail
Tender Retail is a North American leader in the payment industry. The Tender Retail team is at the forefront of innovation, having been one of the first providers to offer an EMV-ready payment solution with End-to-End Encryption (E2EE) in North America. Deployed in major retailers throughout the United States and Canada, Tender Retail has been a leader in cutting-edge payment solutions for over 30 years.
Since 1976, Harris has focused on providing feature-rich and robust turnkey solutions to Public Sector, Schools, Utility, and Health Care agencies across North America. With the ACCEO acquisition, Harris has expanded its scope in the private sector (Retail, Hardware stores and building centers, SMBs, etc.). The company’s focus is on creating long-term relationships with its customers and ensuring that it meets the changing needs of its customers over time.
About ID TECH
ID TECH is a world-recognized leader in the design and manufacture of secure payment solutions, ranging from PCI-certified PIN-entry devices, PIN on Glass readers, state-of-the-art contactless/NFC payment devices to EMV and Magstripe readers. For more than 30 years, ID TECH has built a reputation based on technical excellence, innovation, and a commitment to superior customer service. Headquartered in Cypress, California, USA (with additional engineering centers in Fremont, California, Shanghai, China and Taoyuan City, Taiwan), ID TECH is an industry leader in delivering payment solutions across the globe.
Jenny Ouyang, Marketing Specialist at ID TECH.
Passionate about marketing, communications, and technology. Jenny enjoys writing creative and thought-provoking stories for blogs. Is a Master’s graduate of the University of Southern California, she is currently working as the Marketing Specialist at ID TECH.
For more information about ID TECH, please call 1-800-984-1010 or visit idtechproducts.com.