Recently we started getting inquiries from people who either want to build payment gateway of their own or partner with a bank that offers a retail-based solution to offer online payment gateway services.
In this article we are going to clarify some common misconceptions concerning payment gateways and analyze the mechanisms allowing a business to implement a conventional or online gateway solution and essential steps that need to be taken to fulfill this task.
Starting a payment gateway: common misconceptions in brief
The first major misconception is as follows. Some people, who use gmail or hotmail services, know that if they set up their own e-mail server, they will have their own e-mail service and won’t have to rely on Google and Hotmail any more. Similarly, people think that payment gateways work just like e-mail service providers, and if they set up their own payment gateway, they will be able to run transactions through it without involvement of any third parties, just like they could operate an e-mail service.
The second misconception is that people confuse acquiring banks with commercial banks. When asked about a banking relationship, such people say that they have it, assuming that they are asked about a bank account. A commercial bank just holds checking accounts (and every business has a relationship with one), while an acquiring bank issues merchant accounts (a special type of bank accounts required to process credit cards). Some commercial banks do have an acquiring division. But not every bank, where you can open a business checking or savings account, will be able to underwrite merchant accounts. So, when asked about acquiring relationship, you need to be certain that you are dealing with a bank that can issue merchant accounts.
Starting a payment gateway: business and technical aspects
If you want to start a gateway service (irrespectively of whether you want to build a payment gateway or use a white-label solution), you need to take care of two aspects: a business aspect and a technical aspect. Technical aspect is related mostly to your local setup, while business aspect concerns your connection to the outside world.
In case of e-mail service the technical aspect would require you to install an e-mail server. The business aspect would be to register a domain and setup appropriate MX records in DNS.
In case of a gateway service the technical aspect would be to install payment gateway software in the PCI compliant environment, but the business aspect would be to develop acquiring relationship or the entry point into the banking system of a particular country.
Technical aspect concerns the mechanism, allowing transactions to get from a merchant’s payment system to platforms of card brands (Visa, MasterCard). In order to build such a mechanism, you need to obtain respective technical specification from either your acquirer/processor or, perhaps, directly from card networks (Visa, MC).
Business aspect concerns establishment of an acquiring partnership. As we wrote in many articles, getting a merchant account requires certain financial commitments because of chargebacks, refunds, ACH returns, and potential fraud risks. Some large-size financial institution (usually, a bank) needs to assume the risks and related liabilities, i.e. become financially responsible for the merchant operations. The role of such an institution is, usually, assumed by an acquiring bank. That is why in order to build a payment gateway solution you, definitely, need to have an established acquiring bank partnership.
The first of the above-mentioned major misconceptions is that establishing an acquiring relationship is similar to registering of a domain (which can be accomplished within a day at a cost of $10 a year). In reality it is considerably more difficult and it is the first thing you have to start with.
Acquiring partnership goes first
Consequently, if you already have a signed contract with an acquiring bank (again, not an ordinary commercial bank), then you only need to obtain the respective specification in order to start implementing a payment gateway solution. However, if you do not have an acquiring partnership yet, then the first thing you have to do is find an acquirer.
In order to be able to work as a payment gateway provider in your own right (or introduce a new gateway service), you need to have an acquiring bank and a technical specification from this bank, indicating that you are authorized to provide your target services.
If the bank supports e-commerce, and you want to offer EMV solutions, you need the respective specification from your bank, clearly showing that they could handle EMV transactions you call for. If a bank has a terminal offering and you want to offer e-commerce service through them, you need a specification, showing that they could handle card-not-present e-commerce transactions.
If you are not satisfied with your current payment service provider or if you cannot get underwritten (as a merchant) by some particular payment system of your choice, then becoming a payment gateway provider is not an option. In case of e-mail service you can build your own e-mail server to become independent, but you cannot similarly build your own payment gateway. Building a payment gateway of your own is a costly process, and, moreover, without the appropriate banking relationships it becomes totally impossible. So if you cannot get underwritten as a merchant, you will, most probably, get rejected as a payment gateway provider as well.