Understanding the Costs of Merchant Gateways

Many business owners do not understand how credit processing works and why it is comparatively expensive.  The simple fact is that a lot goes on behind the scenes of every credit card transaction, and the merchant gateways must provide solid security, incredible organization and a fast response.  This is not something that is free to implement or manage.  Merchant gateways have considerable costs related to maintaining equipment and keeping records updated.  Interbank networks make the entire system possible, and merchant gateways must also pay them a portion of the profits from each transaction.  It may not be immediately obvious, but the costs of providing credit card transactions are considerable.

First, the merchant gateways must provide adequate security for transmitting data.  Since merchant gateways are for online transactions only, the security level is fairly intense.  Merchant gateways collect the account information and then transmit it via secured socket layer to the payment processor of the acquiring bank. Merchant gateways must provide the SSL security on both incoming and outgoing information.  This means that the selling merchant must be linked to the payment gateway for actual transaction processing, and the gateway must know the information for the specific merchant’s acquiring bank.  Then, the merchant’s bank forwards the transaction information to the payment processor. The payment processor then transmits the information to the issuing bank.  The issuing bank makes a determination and sends either an approval or a decline notice back through the chain until it reaches the merchant. 

The amount of cooperation and organization required to complete transactions with that level of complexity in a matter of seconds is incredible.   Given the amount of equipment and man power it takes to keep this system functioning properly, the fees charged for credit card processing are eminently reasonable, particularly for online transactions.  Merchant gateways allow businesses to run via a virtual storefront.  However, there are some concerns about how the process is currently carried out.  The physical distance between the merchant and the customer make it all but impossible to ensure the identity of the card holder.  While merchants ask a variety of questions in an attempt to verify identity, much of that information can be discovered via records searches.  One of the more common questions that credit issuers use to verify identity is a mother’s maiden name.  Unfortunately, that information is often a matter of the public record.  Anyone with enough time can find out the maiden name of a married person, particularly if they know the state where the marriage took place.  Even without that information, the Internet has made public records access much easier compared to a couple of decades ago.

Without face to face recognition and identification checks, it is impossible to guarantee that the person authorizing the transaction is the credit card holder.  However, interbank networks and credit issuers are working to find solutions to the security problems.  For in-store transactions, the addition of micro chips and readers is becoming an option, and for online transactions, 3-D verification is being considered.