Understanding payments doesn’t have to be scary!
For many people, the mention of payment processors, gateways or tokens is scarier than a Halloween horror film. Before you run frightfully to your CFO or finance department, hear me out.
We all take for granted the ease and convenience of which we transact for nearly everything in our daily lives. From one-click “buy now” features to recurring payments for donations and utility bills, it is easy to forget the complex network of payment technology and services that allow for a seamless and secure experience in the blink of an eye.
With many physical locations, organizations and businesses shuttered or fully remote during the lockdown, it highlighted the importance of frictionless (and sometimes touchless) transactions. Around the world, consumers are increasingly comfortable with making purchases online (and COVID-19 only further enforced it). Whether you plan events, manage a membership-based organization, or run a nonprofit, revenue and cash flow will always be at the heart of any business. When those members, customers or supporters are ready to sign up, buy a booth or sponsorship at an event, or donate, they want to do it quickly, easily and securely. Organizations that cannot meet this expectation will be increasingly challenged.
In addition, the online payment service lets you know right away if the person making the online payment has sufficient funds to cover the transaction – rather than finding out a week later when the check bounces.
So, where should I start?
There are several terms that are used almost interchangeably when describing payments:
- payment gateway
- payment processor
- payment provider
- payment service or payment system
- merchant account
Though they are distinct, with subtle differences, they all refer to a company, service or application that acts as a financial middleman between you and your customer, and between both of you and your bank accounts. Each facilitates the completion of transactions and the processing of payments.
Here are Some Key Terms to Understand:
A payment gateway is a service that receives the payment request from your organization and directs it to the payment processor. You can imagine the payment gateway as the digital equivalent of the point-of-sale machine you’d put your card in at the grocery store.
A payment processor is a service that validates the purchaser’s credit card details (e.g. those of your member, donor or exhibitor/sponsor) and checks if they have sufficient funds in their account to cover the payment. If the customer has enough funds, the transaction is authorized, and the funds are transferred from the customer’s account. The transaction status is transmitted back to the payment gateway, which then sends a status message to your website. The payment processor company may also provide you with the equipment you need to accept in-person payments, such as a card swiper.
A payment provider (or payment service provider) is the company that operates the payment gateway or payment processor services. Some will operate both.
Payment service or payment system
A payment provider offers multiple payment gateways with different features and pricing – each type is referred to as a payment service or payment system.
A merchant account is another important term to understand. When a transaction is successfully completed, the funds are transferred from the purchaser’s account to your merchant account, a special kind of bank account used exclusively to hold funds received from credit and debit card transactions. To accept online payments, you usually need to set up a merchant account with your payment provider. Funds accumulating in your merchant account are transferred to your organization’s bank account regularly.
But what’s the difference between a payment gateway and a payment processor?
Although the terms payment gateway and payment processor are sometimes used interchangeably, they actually refer to different parts of the payments process.
In an online transaction, the payment gateway is what authenticates the customer’s payment, whereas the payment processor is the mechanism that communicates the transaction between the bank and the merchant.
This distinction is important because, in a physical transaction, only the payment processor is needed. In a virtual transaction, however, an extra layer of authentication is necessary.
However, to make it even more confusing, the payment gateway and payment processor are sometimes combined into a single service known by either name. Some companies will manage both sides of the process, whereas others only handle one.
I have heard about credit card tokens. What are they and why should I care?
Credit card tokens are a randomly generated value to replace the actual credit card number. In a growing era of credit card fraud and data breaches, tokenization is an excellent way to meet PCI compliance and keep your customer’s data safe. Learn more about this topic from our Vice President of Cyber Security and Compliance, Chris Xenos.
How do online payments work?
To fully understand how online payments work, let’s follow a transaction from start to finish. In this way, you can see how your website, your member or exhibitor, and your payment service provider all interact.
To get started with online payment processing, you typically need a merchant account and an account with a payment service provider and a web page with a call to action button (e.g. Join, Donate, Buy, Sponsor) that initiates the transaction process. Once you have set up your web page and connected it to an online payment system, visitors to your site will be able to pay online for products or services. The online payment process begins when the visitor clicks the button to pay online for membership fees or an exhibit booth or make a donation or purchase something from your online store. On the online payment form that appears, the visitor enters their credit card information and submits the transaction request. Depending on your online payment service provider, the form may appear on your website, or your purchaser may be redirected to a form on your service provider’s website. The transaction request, along with the credit card information entered by the purchaser, is securely transmitted to the payment gateway operated by your payment service provider. The information is encrypted so that no one – including you – can view the purchaser’s personal and financial information.
Suppose the purchaser’s credentials are valid and there are sufficient funds to complete the transaction. In that case, your payment service provider will initiate a transfer of funds from the purchaser’s bank account to the merchant account associated with your website and notify your website that the transaction has been approved. Depending on how your website is set up, that information can be used to update records on your site automatically (e.g. update your membership management or event management system). If the transaction is declined for any reason – such as invalid credentials or insufficient funds – no funds will be transferred, but status information will still be sent to your website.
Want to learn more? Watch our on-demand webinar!