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The Evolution of Internet Payment Gateway Solutions

By Peter Scharnell

Many merchants process their transactions over the Internet using a payment gateway. As an ISO or merchant level salesperson (MLS), it's important to understand exactly how this process works and to become familiar with all of the features available to merchants using this type of solution.

When processing a typical transaction via the Internet, the gateway collects a consumer's transaction information with a form that captures the necessary customer information (name, address, credit card number, etc.) from a merchant's secure Web site.

The customer's credit card information is encrypted using 40- or 128-bit Secure Sockets Layer (SSL) technology and is then sent to an Internet transaction server.

The server transmits the data through the authorization network to the appropriate card issuer's bank using a secure connection. When the authorization process is complete, the customer receives an approval or decline response, and the secure server stores the transaction.

On average, transactions take about three to five seconds. They are automatically settled each day and usually funded within two to three business days. Merchants can check the status of transactions or run reports on past activity by going to their individual gateway Web site. They simply log in to their own password-protected virtual terminal/administration site.

Merchants can also use the virtual terminal to enter payment information manually if customers prefer to provide their credit card or bank account information by phone, mail order or fax.

This is how a standard Internet transaction takes place; however, there are many great new features that you can help your merchants take advantage of to further enhance their business's payment acceptance.

Shopping Cart Integration

Incorporating a shopping cart within a merchant's Web site is perhaps the most common way to utilize Internet-based payment processing. All of the major gateways support shopping cart software, so they integrate fairly easily with e-commerce solutions.

Merchants create a "virtual checkout" for customers shopping on their Web sites. Since there are so many shopping carts to choose from, you might be a little confused in trying to determine which ones will work best for your merchants. Several of the better gateway providers will have a list of certified shopping carts or will have standardized one or more brands. Check with your processor or gateway provider to see which shopping carts they recommend.

Batch Processing

Merchants can take advantage of the batch processing option to upload transactions en masse to the payment gateway. This is an ideal solution if they have an internal application that collects transactions, and they want to process them offline and in bulk.

Merchants use Microsoft Excel or another program to create a "flat file" of data that conforms to the batch processing format. Then they automatically transmit the file for processing. The transactions are usually processed immediately, and most gateway solutions provide reporting to notify merchants of the status of each transaction. Merchants can also automate batch processing by scheduling it to run at preset times.

Not all gateways provide batch processing, so it's important to check with your provider to ensure that it supports this feature.

Recurring Billing

One of the most popular features that the majority of the gateway providers now offer is recurring billing. This feature allows administrators to set up scheduled payments and eliminates the need to re-enter the customer's credit card information each time a payment is due.

Membership dues, installment plans, subscription fees and charitable donations are all examples of services that merchants bill on a recurring basis.

Recurring billing features help eliminate the need for merchants to assume the risk of storing confidential payment data. This is extremely important for meeting compliance regulations for Visa's and MasterCard's security mandate. Once again, check with your provider to see about recurring billing availability.

Internet Check Payment

Let's face it: Paying by check is still the most popular method of payment in the United States. Internet check payment solutions allow merchants to accept and process payments from personal and business checking accounts directly from their Web site or via their virtual terminal.

Accepting electronic checks allows merchants to expand their payment options while increasing their revenues. Internet check services replace the need for paper checks. Customers benefit from an option that is as secure and as easy to use as a traditional paper check.

The best online check processing providers take advantage of fraud scrubbing through both negative and positive database searches as well as the address verification system (AVS). Check with your provider to see what check processing capabilities it offers.

Retail POS Transactions

Another popular feature of Internet gateways is the ability to support card present credit card transactions, PIN-based debit transactions and check conversion at retail locations.

By processing retail POS transactions, merchants take advantage of reduced card present merchant account transaction fees using a virtual terminal, an economical credit card swipe reader and a PIN pad for accepting debit transactions. It's important to note that you need to check with your processor to ensure that your network supports Internet protocol (IP)-based PIN debit.

Merchants can also begin to process check services over the Internet by attaching a paper check MICR reader to a personal computer. Check with your processor or gateway provider to see if its solution will support retail POS features.

Level-III Processing

Businesses that sell to other businesses, large corporate clients and the government have specific processing needs and requirements. Some Internet-based gateways now provide level-III processing programs that allow you to address the needs of these large corporate and government clients.

Level III line-item detail provides more specific purchase information such as item description, quantity, price, freight amount and other specific details. Visa and MasterCard have specific interchange rates that will significantly reduce the transaction costs by an average of about 30%.

Merchants that process level-III data with their transactions will realize considerable savings by always receiving the best available processing rate. Not all gateways provide level-III processing, so it's important to check with your processor to identify the best solutions for this market.

Fraud Detection and Prevention

One of the biggest concerns for Internet card-not-present transactions is fraudulent activity. We've all seen the news reports of identity theft and credit card fraud. Perhaps the most important new features that gateway providers are adding revolve around fraud detection and prevention.

The more sophisticated payment gateways all have fraud-detection features available. In addition to the standard AVS and card verification value (CVV2) features, some gateways offer rules-based fraud detection components that provide Internet merchants with filters and tools to identify, administer and prevent fraudulent transactions.

Merchants now have the ability to customize fraud detection filters to match their specific business needs and to control how they handle potentially fraudulent transactions. With several of the more advanced gateways, they even have the ability to hold the transaction for manual review.

Cardholder Authentication

Cardholder authentication programs are in place to reduce chargeback fees for Internet merchants while also reducing the potential for fraud. Gateway providers are rapidly implementing features that support the Verified by Visa and MasterCard SecureCode programs (3-D Secure standard).

The 3-D Secure component will validate the identity of registered cardholders during Web-based transactions by requiring a unique PIN at checkout. By implementing this additional layer of authentication, merchants protect themselves from the costs associated with fraudulent and disputed transactions.

Check to ensure that the gateway solution you provide meets the Visa and MasterCard compliance regulations.

Most processors offer several gateway solutions to choose from, and some will even provide integration and implementation services. This will allow you to approach larger and more complex customers who need an integrated solution with their existing POS software or hardware.

Whether you set up a small, Web-based merchant or a large business with many card-not-present processing needs, it's important to understand the options that each payment gateway provider has available and to make the best selections for your customers.

Peter Scharnell is Vice President of Marketing for Electronic Exchange Systems (EXS), a national provider of merchant processing solutions. Founded in 1991, EXS offers ISO partner programs, innovative pricing, a complete product line, monthly phone/Web training, integration services and, most of all, credibility. For more information, visit EXS' Web site at, or e-mail Peter at . EXS is a registered ISO/MSP for HSBC Bank USA, National Association.

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