Payment Gateways: What It Brings to The Table?
I’m a product manager for a payment gateway provider. I’m often asked by people what a payment gateway does. To keep things simple, I would always tell them to imagine a gateway like a physical terminal used by brick and mortar, but it is a virtual terminal for eCommerce.
Of course, transmitting payment data back and forth between merchants and acquiring banks is just the basic function. Aside from that, a gateway plays a vital role in providing wide network connections and offering value-added services. Conversion rate and approval rate are the two most important metrics in the payment processing operation. Therefore, many value-added services are bound to increase conversion rates and improve approval rates, hence driving more revenues for merchants.
1. Increase Conversion Rates
Conversion rate is the ability to convert potential and actual website traffic into a purchase. It is often measured in conjunction with the abandonment rate. There are many reasons why customers abandon the site or cart, such as lousy web user experience, hard to navigate, expensive shipping cost, etc. Gateways have little control over that. However, it could play a role in helping merchants to improve checkout abandonment. Checkout abandonment is when customers started the checkout process but leave the site before making the payment.
Some gateways offer fast-payment services, such as the 1-click feature on Amazon, to reduce checkout abandonment. Essentially, the gateway is using your stored credit card for a 1-click purchase (if you previously visited the site). Fast-payment services substantially reduce checkout frictions and lessen the times for potential “second thoughts.”
Another common reason for abandonment is the lack of trust. Imagine when you checkout, you are presented with a sketchy payment page requesting your card information. Payment gateways could offer a well-designed out-of-box payment page for less sophisticated merchants. It may substantially increase the conversion rates.
2. Improve Approval Rates
Comparing to the former, Gateway providers play a more significant role in improving approval rates. The approval rate is the percentage of the attempted purchases approved by issuing banks. Gateways charge merchants a set fee per transaction attempt, usually a higher price for an approved purchase. Thus, improving approval rates is a win-win for merchants and gateways.
In today’s payment processing, it is common that merchants leverage a multi-acquire strategy to improve approval rates. Merchants with an international presence especially may board with acquiring banks from different regions or countries. Meanwhile, gateway providers provide the integrations and platform, enabling merchants to route a given transaction through an acquirer where the issuer would most likely approve it. Here are some of the tactics:
a. Bank country or geolocation
An issuer from the United Kingdom may more likely approve a transaction from a European acquirer than a South American acquirer. The reason being, the issuer may see transactions coming from outside of Europe are riskier and more likely subject to fraud.
The credit card’s first 6 or 8-digit represents the issuer’s Bank Identification Number (BIN). Using a BIN database, merchants can identify the issuer and bank country of the cardholder. Thus, merchants may route an EU transaction through a European acquirer.
Fun Fact:
You can use the online tool offered by BIN Codes to identify the issuer behind a specific BIN. Try it out with the first 6-digit of your card!
b. Transaction currency
The acquirers underwrite bank accounts to merchants, and these accounts may only process certain currencies. Meanwhile, issuers may be more likely to approve a transaction with the local currency.
As an example, if a cardholder from India is making a purchase, the merchant has an account capable of processing the Indian rupee. In that case, the merchant would bill the cardholder in Indian rupee, then route the transaction through that specific account.
c. BIN routing
Location and currency are not the only factors that affect the approval rate of a transaction. There are many other factors, such as
- The relationship between the acquirer and issuer;
- The issuer’s fraud and risk policies;
- The records of fraudulent transactions from the acquirer.
With thousands of banks and financial institutions globally, it is impossible to keep track of the approval likelihood for each bank to another. For that reason, some gateway providers offer a sophisticated solution to route transactions based on card BINs dynamically. Using artificial intelligence (AI) and big data analyzes past transactions associated with the BIN, then selects an account with a higher chance of success.
Fun fact:
Each card scheme has specific BIN ranges that they can assign to the issuing banks. For example, your Visa card always starts with “4”, while Mastercard begins with “5” or “2”. View BIN ranges by card scheme at https://en.wikipedia.org/wiki/Payment_card_number
d. Retry declined transactions
When an issuer declines a transaction, the merchant may retry it with other acquirers before getting back to the cardholder. Thus, by the time cardholders see the decline message on the checkout page, it may have already been tried a few times, with each attempt routing through a different acquirer. All these happen behind the browser within a few seconds.
Each time an issuer declines a message, it also returns the reason code. Some common reason codes are: do not honour, over limit, invalid CVV, pick up card, etc. These reason codes can be either a soft decline and a hard decline. For hard decline, merchants cannot reattempt. While for some soft declines, merchants may immediately retry it with other acquirers.
Merchants would first route the transactions through an account with the highest success rate. If failed, to the second higher success, then third, and so on.
Fun fact:
Merchants receive decline reason codes from issuers. For fraud and risk reasons, merchants do not usually display the reason code to the cardholders as it could be misused by fraudsters.
3. Extend Customer Lifetime Values
Aside from offering a platform that leverages multi-acquirer strategy, gateways may also provide other services that allow merchants to maximize the lifetime values of their customers. Here are some examples:
a. Account updater service
Cardholders may change their credit card due to an expired card, lost or stolen card. The new credit card could have a different card number and expiry date. If you’ve encountered this situation, you may notice that some of your subscriptions failed to charge your card and thus, suspended your service. If you do not update the payment method, this leads to a loss of sales for the merchant. Not only one sale transaction but the lifetime value if you were billed each month until you decided to cancel your subscription.
To extend customer lifetime value, gateway providers may offer card updater services to their merchants, such as Visa Account Updater (VAU). Essentially, when a card number has been changed or expired, the merchant can retrieve the new number or expiry date from the card network. Then, perform the billing with the new card credential.
It might sound a little shady, but there’s a good reason behind it. Imagine if your card is stolen and you have 20 subscriptions tie to the card. Without the card updater service, you would have to go on each individual vendor’s website to update your credit card info.
b. Manage subscription billing
There are many reasons for declines, and some are temporary, such as insufficient funds, connection errors, locked cards, etc. Thus, merchants might not want to suspend those subscriptions right away. Because by doing that, they risk losing the customer and the remaining lifetime values.
Instead, merchants reattempt the billing in a few day’s intervals follow the retry schedule set forth. For example, retry every 5 days until the next subscription due date, then cancel the service.
Using the retry schedule can save merchants from losing some good customers. Of course, managing hundreds or thousands of subscription billing is a complex task; this is where gateway providers step in to provide a rebill engine and retry schedule solution.
To learn about the basic flow of a credit card payment, check out the article below:
