With the advance of electronic payment industry and online payments in the world, and with the increase of online payments’ percentage in the total number of payments, more and more companies are redefining their online payment processing strategies.
In order to become a payment service provider, a business needs to consider three aspects of the payment processing sometimes referred to as creation, conveyance and collection (this is the subject of our previous article).
When a business has established relationships with customers and banks, the question becomes – what particular payment gateway solution should be implemented?
The purpose of this article is to review the available payment gateway solution options as well as analyze advantages and disadvantages of each one of them.
While we previously published an article that reviewed payment gateway solutions on higher level, this time we are going to take a more in-depth look, adding another option to the “mix”. The three options we are looking at are:
- Hosted gateway solution (“Hosted solution”)
- Development of a payment gateway software system using internal resources (“In-house yourself”)
- Licensing of a payment gateway software product from a third party (“Licensed solution”)
Hosted payment gateway solution
Under this option a merchant utilizes a third-party payment processing gateway, the gateway software product is hosted within the data-centers owned by the gateway service provider; per-transaction fees (and, usually, some monthly fees) are charged to the merchant.
The advantages of a hosted solution are:
- Absence of significant upfront cost involved
- No need for PCI-compliant infrastructure
- Out-of-the-box high availability support
- Overall ease of operation
The disadvantages of a hosted solution are:
- Per-transaction and, potentially, monthly subscription fees that are felt sharply as volumes grow
- Limited control over the processing environment
- Lack of control over the feature-set and inability to add new features quickly
- Potentially high cost of adding new features
- Inability to keep specialized knowledge (such as solutions for your business-specific needs) in-house (as it becomes the property of the “host”)
For these reasons many people decide to have there own in-house solution. Here there are two options available. Solution can either can be built by an internal team (from scratch), or it can be licensed.
Self-developed payment gateway solution
The idea of a self-developed (in-house) solution is that the entire gateway software product, as well as the hosted environment is designed, built and maintained by the internal team.
The advantages of a “do-it-yourself” solution are:
- Tailored system architecture. The system, from its “point of conception” is going to be built around the business model specific to you, and, therefore, is going to accommodate your various business needs
- Uniqueness. The system is going to be unique to you (nobody else is going to have it, so specialized knowledge can be kept in-house as a “know-how”; features, functionality and APIs remain yours exclusively)
- Full control over the development cycle and overall payment eco-system
The disadvantages of a “do-it-yourself” solution are:
- A need for a group of specialized developers. Development of this type of systems, due to their complexity, requires a group of people with highly-specialized knowledge of payment processing and architectures of payment systems, as well as development skills.
- Long initial development cycle. Depending on the complexity of the software that has to be written, it can take from 1 month (in extremely basic scenario) to 2-3 years (in case of an enterprise-level system). One to five full-time developers with specialized knowledge (see above) will have to be engaged during that period.
- Complexity of cost forecasting. Modern payment gateways, generally, provide a multitude of features around integration APIs, on-boarding, integrations, reporting, terminal support etc. The overall scope of works is quite significant. Therefore, it might be difficult to forecast the actual cost from the very beginning, as development efforts tend to extend beyond initially allocated limits.
- De-concentration of efforts. Quite often companies requiring payment gateways also develop and maintain their own core software product, so if payment system development is undertaken internally, some part of the internal development team has to be dedicated to payment processing as opposed to core product functionality.
- Complexity of operations. All aspects of development and deployment have to be considered and closely monitored (core functionality, general architecture, technologies to use, high-availability deployment (clustered configuration, fail-over configuration), card storage solutions, PCI compliance)
For those that find themselves in a situation where they can’t wait to get an internal development team or they don’t want to get involved in complex development process, licensed solution can be a more suitable option.
Also, in many cases companies in need of payment processing are purely financial services companies, and for them software development services is simply an “alien” type of activity.
Licensed payment gateway solution
In a licensed solution payment gateway software is licensed from a third-party software development company, which deploys and maintains the product to a PCI environment owned by the licensee. The environment can be cloud-based servers or the licensee’s internal data center.
The advantages of licensed solution are:
- Out-of-the-box functionality. A ready-to-use solution available on Day 1 with pre-defined set of functions. The product is already developed, and most of the aspects are already thought through (APIs already defined, general architecture is designed, there are integrations available out of the box, the approach for PCI audit is already defined, and high-availability deployment configurations are already provided). Beside that, licensed offering, usually, comes from a software company which provides professional services, including customized development. Consequently, you don’t need an internal development team, while you still benefit from the contributions that are made by other people because of the overall development of the product
- Availability of development resources. Under licensed solution your own development team can concentrate on your core product, while payment processing related works can be outsourced.
- Fixed initial cost. The initial cost is not only fixed, but also, generally, lower, than the cost of building equivalent functionality in-house.
- Benefit of collective contribution. The product is based on feedback from multiple companies using the solution, therefore, if some feature becomes popular, it might get implemented in the product without the explicit investment of the licensee (paid by someone else)
The disadvantages of a licensed solution are:
- Reliance on a “third party”. Choosing a third-party product you assume the software providers to be there for you when you need them. If the product is sunset, you are no longer getting any product updates or might not even be able to use the product
- Excessive feature set. The product might come with numerous features that are not necessarily needed, and, because of that, it might be difficult to use
- Inability to leave the know-how in-house. Like in case of a hosted solution, if you have something highly specialized “for yourself”, you’re obliged to share it with the external development team (licensor)
- Potential inconsistency with the business model used. Some features might be conceptually incompatible with the current business model your company is using, and you are not necessarily in the position to change them
For those, whose budgets are limited, hosted solution is a preferable option. Those, who already use a hosted solution, may consider the option of switching to a licensed one, but in this case they need to choose from among commercial open-source products, as these reduce some risks, because the source code is available for purchase.