Online Selling

Role of Payment Gateways, Payment Processors, and Merchant Accounts in Online Selling

Online retailing has caught up like wildfire on the internet due to its fast-paced functionality, flexibility, and varied security features for transacting on multi-channel Listing management platforms.

Global connectivity and cross-border business prospects encourage many merchants to sell online and grow their business through online prospects.

Most online sellers benefit from these features since a secure way of transacting with different customers around the world is enabled in a fraud-proof way.  Different transactions are processed through these 3 components namely payment gateways, payment processors, and merchant accounts.

Payment Gateway

Merging the interface that seamlessly integrates various transaction-based operations from the buyer’s payment channel to that of the merchant account through a collection of software APIs called payment gateways that validate the encrypted values at both ends for a secure operation is important.

A payment gateway is an e-commerce application in the front-end or back-end that reads the customer’s credit card information and sends the payment information to the merchant’s acquiring bank for processing. The payment is then authorized after the merchant’s bank server communicates with the payment processor and the card issuer for validation.

The users of the card information must abide by certain rules and security standards laid down between different elements transmitting this card information in an encrypted format.

Payment Processor

The institution that handles the financial needs of online merchants to complete the payment processing of the transactions initiated by the buyers is called a Payment Processor. It forms the secure middleware with automated e-commerce processes in place, that optimally connects both the merchant account and the payment gateway by passing encrypted information between them. The payment processor which provides direct merchant services gets into a legal reselling agreement with the payment gateway or the merchant account.

Pay Pal is one such secure payment processors. It acts as the financial facilitator between the merchant account that is linked to the merchant’s account on selling sites like eBay or Amazon and the seller’s bank/banking service provider.

Merchant Account

A merchant account is a mandatory banking account that authorizes merchants to accept payments through different modes of online payment like debit or credit cards while integrating the payment gateways to process payments from websites. Merchant IDs are created when these accounts are allocated to merchants. These accounts are sometimes allocated either by the payment processor companies through Member Service Providers or by the payment gateway companies. The merchant is charged annually for these services and the connected transactions that are processed. It is used by the merchant to gain access to the transaction information that is securely sent to the acquiring bank in order to obtain funds from the customer’s card issuing bank after authorization. A network of proprietary processing platforms in a trusted partnership with banks are implemented to process payments online. A suite of online reporting ensures that proper information updates and transparency of processes prevail.

The process that includes these elements is delineated below:

  • The customer clicks the buy button on Merchant Website or E-commerce Website after which he is redirected to the checkout page where he/she enters the credit card information.
  • The personal details and related credit card information is sent to the payment gateway in an encrypted format which is verified with the customer’s bank. The transaction details are sent to the payment processor by the gateway with reference to the Merchant ID to the Merchant account.
  • A credit limit validation check is done simultaneously at the credit card issuing bank of the buyer to check if the transaction can be processed or it has to be declined.
  • The status information of approval or decline is relayed to the payment gateway by the payment processor which is saved by the gateway to complete the transaction.
  • After the transaction is approved on the merchant account, the merchant can ship the products.
  • Funds are released from the customer’s account to the merchant’s bank which then settles the amount to the merchant account.

High-Risk Merchant Accounts

Before applying for a merchant account, the business has to declare its sales volumes which should be tangible.

  • A high-risk merchant account is created if there is a risk of loss due to the company’s low credit or unprofitable financial standing.
  • If the charge-back liability period of the merchant’s product or service is longer with high rates or the volume of charge-backs are higher.
  • If the nature of a merchant’s business is not in high demand and their charges are higher.
  • If the merchants are blacklisted in the Terminated Merchant List.
  • If the merchant’s business delivers products or services post-payment processing.

What is the Difference Between Merchant Account and Payment Processor, Payment Gateway?

A Merchant Account facilitates payment acceptance to sellers from customers through multiple payment modes like debit, credit, and ACH payments. Based on the credit card/ debit card number, the authorization request is sent to the acquiring bank of the merchant, which then cross-verifies with the customer’s credit card issuing bank. The amount is then deposited in the merchant account from the customer’s account, and consequently to the merchant’s credit card account or banking account. It is important to have this account if the sellers sell through online and mobile platforms.

A Payment Gateway accepts transactions through secure forms at the host end or through integrated shopping carts. This information is encrypted and then sent to the payment processor to get the authorization from the customer’s credit card issuing bank. The payment gateway acts as the interface for both the merchant’s bank and the customer’s bank to pass on information between the two to confirm and authorize the transaction. It can be integrated with the other two components or be a stand-alone operating component.

A Payment Processor is an arrangement made by merchants to ensure that the payments through credit and debit cards are routed to their acquiring banks. They are connected to various card associations and provide authorization and settlement services to the merchant bank service providers. Several checks are conducted through payment processors to validate a transaction.

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