Payment Gateway Business Model: How Do They Make Money?

The process of purchasing the desired item has come a long way. Gone is the time when people counted and carried cash. Multiple payment methods have emerged, and payment gateways are responsible for that. 

Payment gateways serve as a bridge between organisations and retailers, guaranteeing safe and easy transactions. These services let companies accept payments from various sources, such as electronic payments, online banking, and credit or debit cards.

Payment gateways make money from different sources. In this article, we will break these methods down to understand their revenue streams. We will also discuss crypto payment gateways in particular and see their similarities and distinctions. 

Understanding the Business Model of Payment Gateway 

Payment gateways accelerate transactions by serving as a middleman between financial institutions and retailers. They securely process payment data to ensure that money is transferred from client accounts to merchant accounts. Payment gateways handle various payment methods, such as credit or debit cards, online banking, crypto, and other electronic payments.

Payment gateways are classified according to their operational environments and areas of focus. The primary function of the online payment gateway business model is to enable digital transactions on websites and e-commerce platforms. They assist companies in receiving payments over safe internet gateways. On the other hand, physical gateways would allow merchants to accept card payments directly at physical locations, usually at points of sale (POS).

Conventional payment gateways process payments in fiat money, like dollars and euros. These gateways collaborate with financial institutions to complete transactions, such as issuing and acquiring banks. Let’s take a look at what happens behind the scenes of the transaction: 

1. The Client initiates the Payment

The procedure starts on an online business’s checkout page or at a physical point of sale when a consumer decides to make a purchase and selects a payment method.

2. Data Transfer and Security

The payment gateway captures the customer’s card number, expiration date, and CVV. Secure socket layer (SSL) technology encrypts this data to prevent unwanted access. The encrypted data is then sent to the payment processor.

3. The payment processor’s function

After receiving the encrypted payment data, the payment processor transfers it to the appropriate card network (Visa, MasterCard, etc.). The processor also verifies the transaction details and performs basic fraud checks.

4. The issuing bank and card network

The bank that issued the customer’s credit or debit card is the one to which the card network forwards the transaction request. The issuing bank conducts additional fraud checks besides verifying that the customer’s account has enough money. If everything checks out, the issuing bank authorises the transaction and returns an authorisation code to the payment processor via the card network.

5. Authorisation Reaction

After the payment processing services obtain the authorisation number, it is sent to the payment gateway, which subsequently delivers it to the merchant account or point-of-sale system. After receiving confirmation that the payment has been approved, the customer considers the transaction to be finished.

Revenue Streams of Payment Gateways

The payment gateway revenue model uses different methods to maintain business operations and profitability. If you are wondering how payment gateways make money, continue reading.

Transaction Discounting Rate (TDR)

Payment gateways mostly rely on the TDR (or MDR) as their revenue source. It refers to the cost assessed as a proportion of the total number of transactions handled by the gateway. This charge pays for network fees, transaction security, and administrative costs associated with processing payments. Transaction volume, the kind of card used (credit or debit), and the transaction’s level of risk are just a few examples of the variables that can affect TDRs. For the hypothetical example, if you pay $100 through a payment gateway with a TDR of 2.5%, the gateway deducts $2.50 as its fee. 

Some Additional Fees

Along with TDRs, payment gateways may charge various transaction processing fee:

• Setup cost is the one-time fixed fee merchants must pay to create their accounts and incorporate the payment gateway into their backend systems.
• Recurring costs are imposed monthly or annually to keep the merchant’s account active and their access to payment gateway services operational.
• International transactions fees are charges associated with processing payments in currencies other than the gateway’s default currency. These charges offset foreign exchange risks and pay for currency conversion expenses.
• Maintenance costs occur regularly to guarantee the payment gateway services’ ongoing operation. They also support continuous security improvements, system upgrades, and compliance with changing legal requirements.
• Payment gateways may impose fees to offset the administrative expenses associated with handling and settling chargebacks filed by consumers who dispute transactions. For example, if someone disputes a $50 transaction and starts a chargeback, the payment gateway may charge $15 to handle the dispute process, no matter how the result turns out.
• Specific payment service provider may use functionality or API access to customise payment processes or integrate with third-party apps. Additional fees can be associated with using these APIs depending on usage or the amount of access allowed. Let’s say a software company wants to incorporate the API of a payment gateway so that clients can make easy in-app purchases. The payment gateway charges $100 per month for basic integration and $300 per month for premium access, which includes advanced data analysis and support. Various levels of API access are available. Although the premium option has a higher API access charge.

Role of Cryptocurrency in Payment Gateways

Crypto Payment gateways simplify transactions. By serving as middlemen, they let companies accept cryptocurrency payments from their clients. Above, we discussed how conventional gateways function. Now let’s break down what happens behind the scenes of crypto gateways:

• The procedure starts when a consumer chooses to pay with a cryptocurrency after deciding to make a transaction.
• The payment gateway creates a unique payment request, usually in the form of a payment address or QR code. According to the current exchange rate, this request includes the payment amount translated to the chosen cryptocurrency.
• The transaction is broadcast to the cryptocurrency network by the wallet software.
• The transaction spreads throughout the network, where nodes pick it up. Miners, also known as validators, validate the transaction by adding it to a new block uploaded to the blockchain.
• Once the transaction is added to a block and sufficient confirmations have been obtained, depending on the merchant’s policy, the payment gateway is informed that it has been successful. Confirmations are crucial since they strengthen the transaction’s security and immutability.
• The payment gateway notifies the merchant that the payment has been received and verified. The retailer can then start completing the customer’s order.

Crypto gateways generate revenue differently from typical gateways. Cryptocurrency gateways may generate income from other sources, such as transaction fees on blockchains, wallet administration fees, and conversion costs between cryptocurrencies and fiat currencies, in contrast to traditional gateways mostly earn their income from transaction fees.

• Crypto payment gateways impose transaction fees for handling payments on the blockchain, just like regular gateways do.
• Conversions between different cryptocurrencies or from cryptocurrencies to fiat currencies are charged with fees.
• Blockchain Network Fees pay for the network’s transaction processing and validation expenses.
• When converting cryptocurrencies to fiat or vice versa, gateways may place a markup or spread on the conversion rates.
• Volatility management services are additional services that merchants who hold cryptocurrencies might use to hedge against price volatility.

Integrating cryptocurrency payments using conventional gateways presents numerous advantages, such as decreased transaction expenses, expedited overseas transactions without currency conversion, and increased safety via blockchain technology. Widespread adoption is still severely restricted by issues like price volatility, regulatory uncertainty, and limited acceptance by mainstream retailers.

Last Remarks

After understanding the payment gateway infrastructure, we now know how they generate income. Payment gateways make money by setting up fees, maintenance fees, and other expenses like chargeback and foreign transaction fees. We anticipate that payment gateway models will continue to evolve due to technological improvements. 

Written by

Otar TopuriaWriter

Reviewed by

Tamta SuladzeLead Author