Payment Gateways: Standard Features

The purpose of this article is to discuss standard features to be considered during payment gateway selection.

If this is the first time you are reading our “Selecting a Payment Gateway” mini-series, please, start with the Introduction to improve your understanding of this post.

While people tend to look at a credit card as an ordinary peace of plastic with a magnetic stripe on it, cards can be of different types and there are many different features about cards. Based on what current and future needs are, a merchant might want to choose a processor offering payment gateway software capable of supporting these features.

Card processing levels

When cards are processed they can qualify for one of the three different levels (for more information check this article ). Consequently, if a business needs, for instance, level III processing, it is necessary to ensure that it chooses a payment gateway supporting that particular feature.

Industry-specific features

Some merchants operate within a specific industry with its special requirements or regulations when it comes to credit card processing. Examples of such industries with respective specific features include restaurants (tips), lodging (incremental authorization), healthcare (support for HSA/FSA accounts). Naturally, these merchants should deal with a processor/payment gateway specializing in their industry and providing support for the required features.

Card present vs card-not-present

All transactions can be viewed as card-present (retail) or card-not-present (CNP) (direct marketing\e-commerce). While many payment gateways support both, it is common for payment gateways and processors to specialize in one of these two types. Therefore, it is important to analyse the needs of a business with respect to transaction types that it has to support.

A business should keep in mind that the following types of transactions are only possible within card-present environment:

  • PIN-debit,
  • electronic benefits transfer (EBT),
  • EMV (Europay/MasterCard/Visa standard for integrated circuit or “chipped” cards).

On the card-not-present side it is appropriate to mention such features as

  • PIN-less debit,
  • 3D secure,
  • online fraud prevention.

Gift cards and loyalty cards support

Other categories of cards that a business might consider supporting are gift cards and loyalty cards. Both types of cards are rapidly gaining popularity, especially in the US, and that is why they should also be taken into account. If a business might require (now or later) support for either gift cards or loyalty cards, the decision-makers should keep that in mind while making a choice.

Merchant’s perspective

In the initial article of this mini-series a health club has been chosen as a merchant example, because it requires support of a variety of credit cards and features for its operations. Due to high competitiveness of the business, a fitness club might need to be able to quickly adopt to the new industry trends, such as, for example, gift and loyalty cards.

Example

To enhance customer experience and to improve member retention, a health club wishes to introduce a gift card program (a loyalty program). The program will enable people to get free personal trainings after a certain period of club membership or after they accumulate a certain number of points through purchases.
If the payment gateway the club is dealing with supports this feature, then the club’s tasks, as well as the whole reconciliation process, are considerably simplified. Otherwise, the club might need to deal with a separate processor (the one that supports gift cards) and reconciliation would involve two different companies.

Conclusion

It is desirable for a merchant to choose a payment gateway, supporting the broadest spectrum of cards and features, currently or potentially required by the business.

Reseller perspective

If a business’s goal is to resell merchant services, the rule is as follows. The more flexible and wide the spectrum of services is, the easier it is to offer and resell these services. Moreover, the ability to offer additional services, beside standard features supported by all other resellers, may provide a competitive advantage for a reseller.

Example

Having conducted a research, a fitness software company realizes that a considerable number of purchases are made online. Consequently, there is a need for a brandable mobile payment application that the software company could use to enable its customers to accept online payments. Partnership with a payment gateway, featuring the built-in support for mobile payments, allows the fitness software company to
grant the service to the clients without any complications, as well as consolidate all types of transactions under a single account and greatly simplify the reconciliation process for the company and its respective merchants.

Conclusion

The more features are supported by the payment gateway, the easier the service sales process will be, and the more money can be charged for standard features (retail, e-commerce), because beside them, additional ones (gift card support etc) will be available.

Our next post will cover fraud protection support as a payment gateway selection criterion.

Payment Gateways: Settlement (Capture)

The purpose of this article is to discuss adequate transaction settlement (capture) mechanisms as a criterion to be considered during payment gateway selection.

If this is the first time you are reading our “Selecting a Payment Gateway” mini-series, please, start with the Introduction to improve your understanding of this post.

Credit card payment processing involves two phases. The first one is authorization, when the card is verified (it is checked whether the necessary sum of money is available on the account) and the money is blocked (reserved for subsequent settlement). The second one, usually taking place at the end of the business day, is capture (or settlement), when the reserved amount is withdrawn from the card-holder’s account and transferred to the merchant’s account (the funds are settled). Therefore, to complete transaction processing, settlement has to be performed.

Settlement mechanisms

In general, there are two settlement mechanisms commonly referred to as terminal capture and host capture.
In the case of the host capture most of the work required to settle transactions is actually done by the host system (payment gateway). When host capture is used, payment gateway (the host) keeps track of all the authorizations and takes care of settlement on its own.

Settlement is generally done:

  • once a day at a fixed time
  • multiple times a day within fixed settlement windows
  • on demand when end-of the day settlement message is received.

Generally, no or minimum information is required from a merchant to use host capture. Terminal capture is usually done by sending a settlement message\settlement file with the full information about the transactions that need to be settled. Terminal capture puts all the responsibility for the settlement logic upon the submitter (merchant).

While terminal capture does provide more control over the settlement process, it is easier to deal with host capture whenever it is possible, because it is easier to implement and support.

From the global perspective all types of settlement can be viewed as belonging to one or two groups: merchant-initiated or time-initiated. Terminal capture and on-demand host capture are merchant-initiated. Settlement, performed daily at fixed time, or several times a day within fixed settlement windows, we are talking about time-initiated host capture.

When choosing the settlement approach, every business needs to consider, what the best option is: merchant-initiated versus time-initiated, and host capture versus terminal capture.

Merchant perspective

In each particular case it is important for a merchant to consider all the business needs while making a choice between terminal capture and host capture mechanisms, as host capture may not support certain features needed by the merchant.

Example

A fitness club, that works 24 hours, has three shifts of employees changing during the day. There is a common practice of settling out all of the transactions that were authorized during a shift when a shift is closed. In a situation like this, the scheduled settlement (without end-of-day message) is unacceptable for the merchant, as it has to be performed several times during the day, not necessarily at a specific time. Consequently, dealing with a processor\payment gateway, which supports only scheduled settlement, will be problematic for the fitness club.

Conclusion

While the preference is usually on the host capture side, merchants need to check if it fits their business model, and, at the same time, whether all the necessary features can be accommodated by the host capture system (as some features might be supported by payment gateways only under terminal capture).
If all of the features necessary can be accommodated by the host capture mechanism, it is really the preferred way of settlement.

Reseller perspective

As in the cases of other payment gateway selection criteria, while choosing a settlement mechanism, a reseller must carefully analyze the needs of the merchants it is dealing with.

Example

One of the potential problems to be addressed by a reseller may be that each merchant might need some business specific logic. Particularly, if a payment gateway can perform settlement for a merchant at the same predefined time during the day, and merchants are situated in different time zones, it might be difficult to adjust time settings for each merchant individually to ensure proper settlement time for each timezone. Consequently, in such cases it may be easier for the reseller to delegate control of the settlement process directly to the merchant (terminal capture), than to adjust time settings to every merchant’s time zone (host capture) with the payment gateway.

Conclusion

While making a decision concerning settlement mechanism selection, a reseller should consider all the aspects, which are critical for a merchant. However, if resellers accept some limitations in order to simplify the integration process, they need to understand that any problems resulting from these limitations will be multiplied by the number of the merchants the resellers are dealing with.

Our next post will cover standard credit card features to be considered during payment gateway selection.

Payment Gateways: Integration Process

The purpose of this article is to discuss ease of integration with a credit card processor’s payment gateway software as a criterion to be considered during payment gateway selection.

If this is the first time you are reading our “Selecting a Payment Gateway” mini-series, please, start with the Introduction to improve your understanding of this post.

While some processors/payment gateways offer good rates to merchants, the cost of integrating with them might offset the savings on going with the “lower-rate” processor/payment gateway. This is especially relevant in cases when there is an already-established merchant relationship and a new player comes in with an alternative option.

The two aspects of integration

When it comes to integration, the things to be considered are the connectivity method and the format of the integration specification.

Communication Protocol

What matters is not only how the message itself is formatted, but also how it is communicated. Some of the processors may still use older (pre-HTTPS) technology and might require low-level socket communication. Virtual private network (VPN) connectivity might be needed, and it takes both time and money to put in place. At the same time, the cost of putting the VPN in place, as well as the time frame that it takes, might not be in line with what a business can afford.

Message Format

In terms of message format, many newer payment gateways support XML/JSON-based formats (web-services/direct post) for real-time processing and simple delimited file formats for batch processing (real-time vs batch processing will be covered in one of the next posts). These modern formats are a lot easier to deal with than the ones used on legacy platforms.
On the older legacy platforms businesses may be required to deal with ISO-8583 or other older formats, which are a lot more difficult to understand and implement. For instance, an integration with a payment gateway using XML message format can take as little as 3-4 days (or more, depending on the features to be implemented), while an integration with a payment gateway using ISO-8583 format will take at least 2-3 weeks.
Beside that, the skills of a developer (and consequently the integration cost) will be higher for the projects that deal with legacy platforms and older standard based technology.

Merchant perspective

It is important for merchants to analyze the scope of integration works, their cost and time frame before making any decisions affecting their existing processing mechanisms and infrastructure.

Example

A health club is already processing cards with payment gateway “SuperPayments”. Then it gets an offer from another payment gateway “SaveOnPayments” allowing it to save $5,000 annually on processing if the club switches to its services. But the cost of conversion (integration with “SaveOnPayments” gateway) might end up being $10,000. While the club would start saving money in the year 3, the first two years would go at loss. Consequently, the club’s management has to think carefully about whether it makes sense to do this.

Conclusion

With all of the above taken into account, the recommendation for merchants is as follows: choose the processor/payment gateway that uses modern communication technology communication and easier-to-deal-with message formats, i.e. go with someone who is new and not archaic.

Reseller perspective

In general, problems faced by a reseller are very similar to concerns of a merchant. However, a single merchant’s inconvenience in day-to-day operations, arising from legacy platform usage, might be multiplied 200 times in the case of a reseller dealing with 200 merchants. That is why in some situations it is more reasonable for resellers to invest money in modernization, in order to reduce future operations’ support cost.

Example

A fitness software company is successfully dealing with a processor\payment gateway using a legacy platform operating ISO-8583 format. Once the term of the contract with this processor comes to an end, the software company decides to consider alternative options and, possibly, go with another payment gateway, which uses modern technology. Initial estimates show that integration process will take about two weeks and cost $8,000, but after the integration is done, fewer development resources will be required, so that in a month or two savings on maintenance will compensate the integration expenses.
Beside that, usage of a modern technology makes it easier to research various types of customer inquiries that might occur during day-to-day operations.

Conclusion

Just like merchants, resellers are recommended to select processors\payment gateways, which use modern communication protocols and provide simple integration APIs. At the same time, while it is important to consider integration costs, resellers need to take into account the cost of operations’ support as well.

Our next installment will cover settlement (capture) mechanisms.