Payment Gateway Business Model - Full 2024 Guide - Akurateco (2024)

Payment Gateway Business Model - Full 2024 Guide - Akurateco (1)

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    It is no secret that the e-commerce business is growing insanely fast these days. According to the estimated value of global retail sales from 2021 onwards, e-commerce retail sales are expected to reach 8.5 trillion U.S. dollars on a global scale by 2025. Such a huge market growth implies a demand for the software infrastructure that will allow accepting payments on their websites.

    A Payment Gateway or a Payment Aggregator is a piece of vital infrastructure in the payment process that provides for the transfer of sensitive data from the client and the acquiring bank. The gateway is connected to an API inside e-commerce or payment accepting company. The aggregator charges a Merchant Discount Rate (MDR) on each transaction that goes through it. In this article, we present a full guide to a payment gateway infrastructure and its business model.

    Payment gateway: the basics

    A payment aggregator is an infrastructure company that provides software on a SaaS (Software as a Service) distribution model. To put it simply, the aggregator is a bridge between the client and the merchant. Its role is to transfer data between the major players involved in transaction processing: the customer, the merchant, the acquiring bank, the issuing bank, and the card network.

    Another important point is that the transfer of such sensitive information must be flawless and secure. Ensuring fast speed and security of data transfer is one of the payment aggregator’s main tasks. After checking card information for security, the gateway authorizes a payment.

    The operating principle of the payment aggregator proceeds as follows: a person places an order and enters his payment details either directly on the merchant’s website if he is PCI DSS certified, or on the payment aggregator’s page. Then, the aggregator receives them, encrypts sensitive data, and transfers it to the acquiring bank. Afterward, the information goes to the card issuer, followed by the issuing bank, which approves or declines the transaction, and then the message with the approval or rejection goes back to the site.

    How payment gateways make money

    In simple terms, a payment gateway earns income from each transaction by taking a percentage and/or fixed fee that is called Merchant Discount Rate (MDR). However, it is much more complex than that. To figure out what exactly a MDR is, you need to understand the Card Networks business model since it is the major player in online payments.

    Usually, when we talk about Credit Card Networks or Card Issuers, we mean either Visa or Mastercard. Have you ever wondered how they earn on their transactions? The majority of credit and debit cards all over the world are issued by Visa’s or Mastercard’s Network Participating Banks. To use the benefits of, let’s say, Visa, the bank should pay the Network Participation Fee, which is fixed and only paid once. The bank also pays the card network a fee for each transaction made.

    Payment aggregators earn money in a similar way. Let’s take a look at the example. To accept payments online, an e-commerce merchant needs payment providers. The services that enable that are the acquiring and the issuing bank, card network, payment processor, and the payment gateway. All of them have a fixed amount fee paid per $1 transaction. The total of these fees is called MDR.

    Calculating Transaction Discount Rate

    On average, the merchant is charged 1-3% of MDR for each transaction processing. MDR is a general amount of fees that a merchant pays for the transaction processing. Assuming that the whole amount of MDR a merchant should pay is 1,0%, how do we split it? It looks like this:

    1. 0.35% fee to the card network;
    2. 0.35% fee to the acquiring bank.
    3. 0.20% fee to the payment gateway service provider;
    4. 0.10% fee to the payment orchestration platform;

    For instance, a customer makes a $1,000 purchase at the online store by Visa credit card. From this amount, the merchant will pay $3,50 to the card network, $2 to the payment gateway, $1 to the payment orchestration platform, and $3,50 to the acquiring bank. Thus, a merchant would receive 990$ out of 1000$ paid by the customer.

    Payment Gateway Business Model

    Payment gateways generate most of their revenue from MDR, but the amount of charge varies depending on the mode of transaction. During the payment phase, the client chooses the preferred way to pay for the purchase. Depending on whether the client chooses a credit card or a debit card, an e-wallet, Internet banking, or a prepaid wallet, the MDR charge will differ.

    There is also a difference between the business models that the aggregator chooses. For enterprises that make large volumes of transactions, a payment gateway may charge a fixed fee per month in addition to the MDR (although the MDR will be lower in this case). If the payment aggregator has a business model with no fixed fee, the amount of MDR charge is higher.

    Additionally, international transactions that involve multiple currencies are charged an extra fee. If the merchant accepts the payment from the client in the same currency that he receives, there is no extra charge. But in case the currency in which the customer pays differs from the one that the merchant receives, there will be an extra conversion fee. Typically, the extra charge is about 1%.

    Also, the fee is determined by the country in which the acquiring bank is located and the client’s country. If the client and the bank are located in the same country, the fee is lower. If their countries are different, but they are located within the same region (Europe, for instance), the fee is higher. And, if the client and the acquirer are located on different continents, then the fee will be a lot higher.

    A setup fee is one more source of income for the payment gateway. It is a fee that a merchant pays only once for setting up a merchant account. All the costs associated with setting up a merchant account are included in the fee. However, not all payment gateways charge merchants a setup, some aggregators waive it.

    Another service a merchant is charged for is the maintenance and support of the gateway. The aggregator charges an annual fee to cover the operational cost and the costs needed to maintain the software, security, and technology of payments, although it is up to the payment gateway providers whether to charge a maintenance fee.

    Lastly, there might be an additional charge for InstaPay or One-click Payment. By choosing it as a preferred payment option, the client receives a link for payment in an e-mail or phone number in real-time. Clicking on the link or scanning a QR code, the client pays for the purchase without entering his payment data.

    Conclusion

    Nowadays, it is impossible for a merchant to accept payments on a website without payment gateways. The business model of a payment gateway is based on the percentage and/or fixed fee that the merchant pays from each transaction. The amount of charge depends on the transaction mode. Therefore, businesses that have ongoing transaction flow generate constant profits for the payment gateway. Additionally, payment gateway providers generate profit from setup and maintenance fees, and extra charges for international and InstaPay/One-click transactions.

    Do you have questions regarding a payment gateway business model for your business?

    Our experts are happy to answer! Contact us today for an in-depth consultation regarding payment gateway development or white-label payment gateway integration.

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    Payment Gateway Business Model - Full 2024 Guide - Akurateco (2024)

    FAQs

    What is the business model of a payment gateway? ›

    The business model of a payment gateway is based on the percentage and/or fixed fee that the merchant pays from each transaction. The amount of charge depends on the transaction mode. Therefore, businesses that have ongoing transaction flow generate constant profits for the payment gateway.

    How do payment platforms make money? ›

    Payment processors make money by receiving a commission. The fee is calculated as a percentage of the transaction between the customer and the merchant and relies on the last one. It also could be a fixed price per transaction.

    What is the payment aggregator business model? ›

    Merchant aggregation also known as payment aggregation, is a business model where a third-party payment provider signs up merchants directly under its own merchant identification number (MID) to process transactions through a single master account.

    What is the difference between payment system and payment gateway? ›

    A payment gateway is a network that collects, verifies and performs fraud checks on customer's credit card information before sending it to the payment processor. A payment processor is a service that routes a customer's credit card information between the customer's bank and the merchant bank.

    What is the difference between payment method and payment gateway? ›

    Payment Methods. You've probably heard of a payment gateway as a payment processor, but they are different, and both could be used in the transaction. While the payment gateway authorizes the transaction, the processor only transmits it according to the payment method selected.

    How do I start my own payment gateway? ›

    How to create a payment gateway
    1. Create your payment gateway infrastructure. You'll need a server to host your gateway, whether it's your own or via a third party. ...
    2. Choose a payment processor. ...
    3. Create a customer relationship management (CRM) system. ...
    4. Implement security features. ...
    5. Obtain required certifications.

    What is the difference between payment gateway and payment aggregator? ›

    A payment gateway securely transfers customer payment data from a website or an app to the payment processor. In contrast, a payment aggregator simplifies the payment process by consolidating multiple merchant accounts into a single account, making it easier for businesses to accept payments without individual setups.

    How long does it take to create a payment gateway? ›

    A. On average, it can take anywhere from several weeks to several months to build a payment gateway, depending on multiple factors. Still, some more complex systems can take longer to develop.

    Which payment app is most profitable? ›

    According to the latest UPI transaction value of December 21, the best UPI payment app in India are Phonepe (Rs 3,94,566 Cr), Google Pay (Rs 3,02,990 Cr), Paytm (Rs 88,094 Cr), Cred (Rs 13,817 Cr), and ICICI Bank (Rs 8,922 Cr).

    How much does it cost to start a payment processing company? ›

    The traditional way takes a lot of work, time, and money. You could develop and build your own payment processing software. For this, expect to easily invest $100,000 to $250,000 simply to create a minimum viable product (MVP). Plus, you've got to obtain numerous financial licences and adhere to dozens of regulations.

    What are the Big 4 aggregators? ›

    The four major data aggregators are Factual, Acxiom, Infogroup, and Localeze. It is noticeable that many listings sites and major directories rely on these data providers for their info. Data aggregators are the foundation of what builds structured citations on major sites.

    What is a white label payment gateway? ›

    A white label payment gateway is a solution that allows you to extend payment processing services to your customers under your own name. It has all the features of a traditional payment gateway—e.g. You can accept and process credit card payments in various currencies.

    Is PayPal a payment gateway or payment aggregator? ›

    PayPal is what is known as a payment aggregator; it has its own payment gateway called Payflow.

    How do I use payment gateway on the app? ›

    Step By Step Guide to Integrating Your Payment Gateway With Your Mobile App
    1. Set up a merchant account. ...
    2. Create an account with the payment gateway provider. ...
    3. Obtain the necessary API credentials. ...
    4. Configure the payment gateway. ...
    5. Implement the payment gateway into your app. ...
    6. Launch your app with the payment gateway integration.

    Is it easy to create a payment gateway? ›

    Since developing a payment gateway requires careful planning, technical expertise, and ongoing commitment to security and compliance, businesses may explore out-of-the-box solutions offering advanced technologies. White-label payment gateways rank among the most prevalent of them.

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