Wednesday, May 13, 2009
I have gotten this question frequently in recent months so I thought I would take a stab at answering it here. I worked at CyberCash which was the very first Internet payment gateway. (p.s. This was a very exciting time and I still have the receipt from my first transaction at Virtual Vinyards!!) The purpose for a gateway at that time was very clear. The only way to connect to your payment processor was through a dial-up or dedicated communication line known as a leased line. CyberCash acted as the protocol converter by enabling merchants to connect to us via IP and we translated that into the communications protocols that the processors were capable of supporting over leased lines out the other side of our systems. For the various start up companies that were pioneering selling over the Internet, the concept of not being able to use the Internet to connect to the processors was ridiculous and therefore a new business was launched. During the lead up to the bubble (& ultimate burst), new payment gateways came out of the woodwork on almost a daily basis. Eventually, as with most similar situations, there were too many and most are now gone. Eventually (about 5 years went by), the various payment processors began adding their own IP gateways and now all of the major payment processors have their own. Of course, the few remaining independent gateway providers were not standing still during these years. They added a variety of value added services to differentiate themselves such as fraud screening, sale tax calculation, alternative payment types, international payment support, FX capabilities, PCI compliance, etc... In today's market, often (as with Vindicia) the gateway function is there simply as a means to an end (delivering a comprehensive value added subscription billing and chargeback management service) rather than the defining capability. The other major reasons to use an independent third party is the fact that no one payment processor has everything a merchant typically needs and since most companies that have embedded gateway capabilities connect to multiple payment processors the merchant is empowered to switch (or as is sometimes necessary connect to multiple processors simultaneously) much more easily if for whatever reason their needs change.