What are the advantages, challenges, and opportunities of creating a payment gateway?

Introduction

According to a Deloitte report published in March 2022, the total global transaction value of digital payments is expected to grow at a CAGR of 13% and reach $11.3 trillion by 2026. This represents a significant opportunity for entrepreneurs to create a payment gateway and be part of this monumental shift. The online payment system, which involves multiple stakeholders such as merchants and consumers, has become the backbone of the globalized world.

By participating in the online payment ecosystem, startups and enterprises can benefit from the increasing digitization of payments. Payment gateways are a crucial component of this near-flawless digital payments system, serving as digital point of sale (POS) terminals that perform several vital functions. Before delving into the process of building a payment gateway, it’s essential to understand how payment gateways work.

Payment gateways: what are they and how do they work?

When making a non-cash transaction in a physical store, we swipe our card on a point of sale (POS) terminal that captures our card information and shares it with relevant parties to complete the transaction. Similarly, in digital storefronts, the payment gateway acts as a POS terminal to capture the consumer’s card information while serving other crucial functions. Here’s a step-by-step process of how digital transactions take place:

Step 1: After the consumer adds the product or service to their cart and proceeds to checkout, they are directed to the payment gateway, either on the merchant’s server or third-party servers. The consumer selects their preferred payment method, such as a credit card, enters their card details, and clicks on ‘make payment.’

Step 2: The payment gateway tags the transaction as ‘card-not-present’ (CNP), encrypts and secures the data, and verifies and authenticates the card details.

Step 3: The encrypted data is sent to the payment processor, which communicates with banks to settle the payment.

Step 4: The payment processor communicates with the acquiring bank (merchant’s bank) and the issuing bank (customer’s bank), which evaluate the transaction.

Step 5: The issuing bank and the appropriate card network (Visa or Mastercard, typically) approve or decline the transaction. This status is communicated to the payment processor, which sends it to the payment gateway.

Step 6: The payment gateway communicates the transaction’s status to the merchant’s website, and it’s displayed to the consumer. The transaction is now complete.

Remarkably, this entire process occurs within three seconds. By understanding how payment gateways work, startups and enterprises can benefit from the increasing digitization of payments and become a part of the online payment ecosystem, which is the backbone of the globalized world.

Payment gateways: how do they work?

To provide a step-by-step guide on developing a custom payment gateway, let’s take a snapshot of the process:

1. Research and ideate: Begin by identifying your business objective and target audience, and conduct thorough research before building the gateway.
2. Develop the infrastructure: This includes creating the necessary systems and networks for processing, authorizing, and settling payments securely. A reliable payment gateway software development company like Revinfotech can help build the infrastructure.
3. Implement fraud detection measures: It’s crucial to prevent fraudulent transactions, so implementing measures to detect and prevent fraud is essential.
4. Obtain licenses and certifications: As discussed, there are various compliance requirements to meet. So, you’ll need to obtain all the necessary certificates before launching your product with the help of a payment gateway development services company.
5. Integrate with the payment processing network: Your gateway needs to communicate with the payment processing network to authorize and settle transactions.
6. Test and launch your payment gateway: Thoroughly test your gateway to ensure its proper functioning and security before releasing it to the public.

Depending on the gateway’s requirements and the developer’s expertise, various programming languages like PHP, Java, Ruby on Rails, Python, and .NET can be used to create a payment gateway. If building a website or web application, PHP or Ruby on Rails might be a good choice, while Java or Swift might be a better option for a mobile application.

Here are some reasons why your business should create a payment gateway

Digital transactions have become a crucial aspect of the globalized world, and creating a custom payment gateway offers several benefits for enterprises and startups. Some of these advantages are outlined below:

• One-time development cost: Third-party payment gateways like PayPal and Stripe charge a fee for each transaction, which can accumulate to a considerable amount over thousands of transactions. In contrast, a custom payment gateway requires a one-time investment in development, and there are no ongoing fees for the service.
• Save up to 3% on every transaction: By using a custom payment gateway, businesses can save up to 3% on every transaction, which would otherwise be paid as a gateway fee.
• Easy refund and query management: Third-party payment gateways can cause delays in refund processing, but a custom payment gateway enables businesses to manage refunds and receive real-time updates on the status.
• Enter the payment collection business: Custom payment gateways can also generate passive income by allowing other merchants to use the gateway for their transactions. By charging a fee of 2-3% on each transaction, businesses can enter the payment collection industry.

Despite the benefits, the mass adoption of digital payment systems is hindered by several challenges deeply rooted in the industry.

Making a payment gateway secure - the biggest challenge

According to a report by the Federal Trade Commission published in February 2022, digital transactions were the most common method of fraud reported in the United States in 2021. The majority of reported fraud incidents involved digital payments, with cash, checks, and money orders accounting for a small percentage.

This highlights the need for robust security measures in the digital payment landscape to protect consumer and merchant data. Governments worldwide have mandated that payment gateways must comply with the Payment Card Industry Data Security Standard (PCI DSS) to ensure security standards are met. The PCI Security Standards Council is responsible for monitoring compliance to keep digital transactions secure across various platforms and interfaces.

Another security measure is the Three-Domain Secure protocol (3DS), which adds an extra layer of security with two-factor authentication for each transaction. Services like Visa and Mastercard use 3DS for most transactions, and the one-time passwords (OTP) we receive on our mobile numbers every time we make an online purchase is an example of 3DS in action.

Tokenization is another security measure that involves replacing card details with tokens to protect customers from fraudulent activities or data breaches. In July 2022, the Reserve Bank of India mandated that all card details should be tokenized, and the actual card details stored with entities (excluding card issuers and networks) would be purged. The US and European markets have already adopted tokenization on a large scale, especially on the blockchain.

Payment gateway types

Payment gateways can be classified into three categories based on their positioning, which are explained below:

1. Hosted Gateways: Hosted payment gateways redirect the customer to the payment processing website away from the merchant’s website. The transaction takes place on the hosted gateway, and this option is suitable for merchants who don’t have the necessary resources to meet the required security standards for hosting the payment gateway on their server. However, this approach limits the merchant’s control over the payment experience and results in the customer being redirected from the merchant website, which can impact the transaction time.
2. Self-hosted Payment Gateways: Self-hosted payment gateways are placed on the merchant’s servers but send the information to a third-party payment gateway URL for processing and authentication. This option provides the merchant with greater control over the customer’s payment experience.
3. API-hosted Payment Gateways: API-hosted payment gateways are highly desirable for merchants of all sizes because they provide complete control over the buying and payment experience. However, this approach requires merchants to be PCI DSS compliant because their servers will store every customer’s payment information.

Can you tell me the features and cost of your payment gateway?

In order to carry out hundreds of thousands of transactions, a payment gateway must be fast, efficient, and secure. You can expect to pay between $150,000 and $250,000 for the construction of a payment gateway, or an MVP version. But that’s just the cost of developing a primary gateway. It will cost more to develop the one that is most popular.

A payment gateway development company can assist you with numerous features, including the following.

The landscape of payment methods has evolved beyond just credit and debit cards, with mobile wallets and other digital payment methods becoming increasingly popular. Therefore, when developing a payment gateway or mobile wallet app, it is essential to ensure it can accept a wide range of payment methods to meet customer expectations.

Payment gateways are expected to operate 24/7, and any downtime can lead to a significant loss of revenue. Hence, it is crucial to develop a stable and scalable payment gateway that can handle surges in usage.

Real-time transactions are also in demand, and payment gateways should aim to provide this feature without compromising security.

To improve user experience, payment gateways should have a user-friendly interface that can be easily navigated by all consumers.

Fraud detection mechanisms are crucial for payment gateways, utilizing rule-based systems, machine learning algorithms, and behavioral analytics to identify patterns and anomalies indicative of fraud. This feature protects merchants and consumers from financial loss and safeguards the integrity of the payment ecosystem.

Scalability is another critical factor to consider when developing payment gateways, as merchants often experience spikes in transactions during certain periods. Payment gateways should be built with scalability in mind to meet these demands.

Lastly, digital transactions are not confined to one country, and payment gateways should support multiple currencies to be as inclusive as possible.

If you are developing a payment gateway, how can Revinfotech help?

The best product requires technical expertise and business intelligence, as a payment gateway is a complex piece of technology. Revinfotech, a FinTech software development company with nearly a decade of experience, has helped thousands of our clients take advantage of digital technology.

We have the technical know-how and the mastery of the concepts that can enable you to build a P2P Payment App and integrate a payment gateway to help your business grow. Get in touch with our team to learn more about creating a payment gateway. Our team will be happy to help you.