hen a product or service is purchased online, the credit card transaction is transmitted through a complex network of routers, switches and servers. To simplify this process, a payment gateway works behind the scenes to facilitate the transaction between the cardholder, merchant and the card Association/banks involved.

A payment gateway is a software application that handles the formatting and routing of a transaction to various payment networks. It typically runs on servers accessible via the Internet, so merchants who have Internet connections can enter transactions and access reports from anywhere in the world.

Following are factors ISOs and merchant level salespeople (MLSs) should consider when selecting a payment gateway vendor.

Security

One of the most important aspects when dealing with a payment gateway is security.

Two years ago Visa's Cardholder Information Security Program was favored. Now the Payment Card Industry (PCI) Data Security standard is required for card industry security compliance.

Many payment gateway applications are still not yet PCI-compliant. Any payment gateway you do business with must be certified as a PCI Level 1 service provider. Otherwise, you're playing Russian roulette. If an acquiring institution or processor discovers the gateway you are using is not compliant, it will refuse your business. For a list of PCI-compliant vendors, visit Visa's Web site: www.visa.com/cisp

Fraud/risk management

As Internet merchants conduct more and more business globally, fraud is becoming more prevalent. It's crucial that payment gateway applications detect and stop fraud in the card-not-present environment.

The various tools available come in all shapes and forms, from general fraud-scoring applications (which rank the likelihood of fraud based on internal databases and artificial intelligence) to powerful fraud-scrubbing, rule-based systems that allow merchants to configure various parameters.

When ISOs and MLSs create relationships with domestic and offshore banking institutions, entire portfolio liability is a concern. Payment gateways offer portfolio-level fraud and risk analysis tools.

By looking at potential fraudulent transactions in an entire portfolio of merchants, ISOs and MLSs can better manage risk. Without global fraud management tools, ISOs and MLSs are at the mercy of each merchant or must attempt to control fraud on a per merchant basis.

Methods of submitting transactions

There are multiple ways to handle transactions of varying types. When selecting a payment gateway, examine the ease of use as well as the functionality for each method.

Virtual terminal

A virtual terminal is a software application that simulates a hardware POS terminal. It enables merchants to key transactions into the software application, which can run directly in any standard Web browser. Many merchants use virtual terminals to perform manual authorizations, captures, sales and refunds. Recurring transactions

Merchants have come to expect payment gateways to handle recurring transactions. Not only should the software complete the recurring transactions, but the payment gateway should also provide flexible billing plans and extensive reporting on approved, declined and expired transactions.

Batch upload transactions

To optimize performance, some merchants (such as telemarketers) collect sales during the day and then process them at night. This allows a sales group to quickly move from sale to sale. Payment gateways should be able to accept and quickly authorize a large quantity of transactions while providing real-time detailed reports on the results of each transaction.

API/shopping carts

To compete in today's marketplace, a payment gateway must have a robust backend connection method, usually referred to as an application programming interface (API). An API gives the merchant who requires custom software applications or shopping carts the ability to submit transactions directly into the payment gateway. Thus, the payment gateway immediately relays Web site-based transactions to the bank.

It's important to have an API that is flexible, yet easy to integrate. Additionally, a payment gateway needs to have an extensive network of third-party shopping carts that support its processing interface. This gives merchants a variety of options when looking at packaged shopping carts.

Retail/card swipe

An increasing number of payment gateways offer card-present retail solutions. And with the widespread use of the Internet, more retail storefronts can accept transactions over the Web. By connecting a card swipe to a PC or using an Internet-protocol-ready terminal, transactions can be routed to payment gateways. This provides faster transaction times, lower equipment costs (and/or more income to ISOs and MLS) and consolidated reporting. While these card-present devices are relatively new, retail support should now be a part of your decision when choosing a payment gateway.

Reporting

In addition to entering transactions, a payment gateway should provide simplified and complete reporting. Merchants use reporting to view transactions and access summary data such as decline percentages, breakdowns by card type, and so forth. Reports must be easy to generate, intuitive and simple for merchants to access.

Also, ISOs and MLSs must be able to access merchants' transactions to assist with customer service. Some payment gateways now offer expanded reporting capabilities that include statistics, trends and even marketing strategies.

Integrity/non-compete

Another major component often overlooked when evaluating payment gateways is integrity. First, find out if a gateway that you're considering is feeding your competition. Many payment gateways have incentive-based relationships with merchant acquiring institutions and have no loyalty to the ISOs and MLSs they serve. It's important to know that if you place your business with a payment gateway, it will not steal your customers.

Payment gateways should not accept merchants directly unless their retail rates are significantly higher than yours. You do not want your merchants to contact the payment gateway for support and be up-sold on merchant acquiring. Ask around. Make sure that a payment gateway you partner with will operate with your best interests in mind.

Looking ahead

I've just shared some primary factors to consider when choosing a payment gateway partner in this evolving segment of our industry. With new regulations, new tools and the transformation required by an exploding marketplace, payment gateways are becoming essential components in the complex sphere of transaction processing. I hope this information will be of use to you in helping customers use gateways to their best advantage now and in the years to come.

David H. Press is Principal and President of Integrity Bankcard Consultants Inc. Call him at 630-637-4010, e-mail dhpress@ibc411.com or visit www.ibc411.com .