What Is A Payment Gateway And How Does It Work?

The brokerage business is among the most promising ways to get profits, and the market experiences a real boom of newly created Forex and crypto brokers. Due to the exceptionally high competition level, newcomers demand something truly eye-catching to convince traders to remain on their platforms.

What Is a Forex Payment Gateway?

A payment gateway is the mechanism that reads and transfers payment information from a customer to a merchant’s bank account. Its job is to capture the data, ensure funds are available and get a merchant paid.

Online, a payment gateway is cloud-based software that connects a customer to the merchant. In person, it’s the software built into a point-of-sale (POS) system or card reader that processes a transaction when the cardholder uses their card to make a payment.

A forex payment gateway serves as a bridge between the currency trading platform and its users.

Forex merchants integrate the payment gateway directly into their platforms, allowing brokers to accept transactions from their clients.

While traders use the forex payment system to fund their accounts and withdraw money, the gateway transfers the sum collected from the users (e.g., trading fees) to the broker’s merchant account.

In exchange for the service, the forex payment gateway deducts a percentage-based or a fixed fee (or both) from each transaction before distributing the funds to the merchant.

How Payment Gateways Work

Payment gateways include these key stakeholders:

• Merchant: The business or any person making the sale.
• Cardholder: Your customer making the purchase.
• Issuing bank: The financial institution that holds the customer’s account, either a credit card account or a checking account connected to a debit card.
• Card schemes: The credit card companies that manage the card, like Visa, Mastercard or American Express.
• Acquiring bank: The financial institution that holds the merchant’s account.

Why Is it Difficult for Forex Brokers to Find a Payment Gateway?

When they first try to open a merchant account at a traditional payment gateway solution, forex businesses often find themselves with a rejected application.

But what is the reason behind this phenomenon?

Since forex brokers experience massive trading activity on their platforms, they process large volumes of transactions every day, which drives up the businesses’ chargeback rates.

As a result, payment processors have categorized forex service providers as high-risk businesses, meaning that brokers will likely face rejected applications at traditional gateway solutions.

Alternatively, forex brokers can open a merchant account at a dedicated payment gateway solution specializing in high-risk industries. However, these services often take advantage of the situation by charging excessive fees and holding customer funds for longer periods.

Fortunately, there’s a third option.

E-wallet solutions like STICPAY feature advanced security and anti-fraud features with strict KYC/AML monitoring, allowing them to offer payment gateway services to licensed businesses even in some high-risk industries like forex.

However, it’s crucial to highlight that the above mentioned payment solution only approves merchants that strictly comply with the regulatory laws of all nations they do business in.

How a Payment Gateway Works

Here’s how a payment gateway works to connect and navigate all those moving parts:

1. The cardholder initiates a purchase, for example, by clicking a “buy now” button on the merchant’s website.
2. The payment gateway goes into action, first checking with the issuing bank to make sure funds are available. It’ll ensure the transaction won’t exceed the customer’s credit limit or bank account balance.
3. The payment gateway sends encrypted card information to the card schemes to process the transaction.
4. The card schemes approve the transaction, and the payment gateway sends the information back to the merchant website to complete the transaction.
5. The payment gateway sends the information to the acquiring bank to move money from the customer’s issuing bank account into the merchant’s account.

It’s a lot of steps, but the whole process takes just a few seconds—and it keeps getting faster as technology improves.

Types of Payment Gateways

There are three main types of payment gateways:

• Redirect: The payment gateway simply takes a customer to a payment processor, like Stripe, to process the transaction.
• Hosted (off-site payment): The customer makes a purchase on your website or at your retail location, and the payment information goes to the payment provider’s servers for processing. This is how Stripe and Square POS systems operate.
• Self-hosted (on-site payment): The entire transaction happens on your servers.

What Should Merchants Consider When Choosing a Forex Payment Gateway?

Before choosing a payment gateway solution, forex businesses have to take multiple factors into account, such as:

• Speed: Forex traders have to act fast to discover opportunities and make a profit on currency movements. For that reason, merchants have to choose a payment gateway that processes customer transactions quickly. To keep cash levels high, foreign exchange businesses also need a provider that doesn’t hold merchant payments for longer periods.
• Fees: Since forex brokers make a profit from price spreads and other trading fees, a cost-efficient payment gateway is crucial to keep their business profitable.
• Currency exchange: High currency conversion costs can discourage traders from using brokerage platforms. For that reason, it’s essential to select a forex payment gateway solution that offers decent exchange rates. In an even better case, the service provides multi-currency accounts for both merchants and their customers to keep currency conversion costs at a minimum.
• Payment methods: While some customers prefer speed, others are willing to sacrifice time in exchange for saving money on deposits and withdrawals. For that reason, it’s crucial to offer multiple payment methods for traders and choose a gateway solution accordingly.
• Security: Since the forex industry faces increased risks of chargebacks and fraud, merchants need a gateway solution that keeps their customer funds secure.

Why do brokers need to connect with a payment provider?

Traders who’ve created an account on your trading platform expect to find a string of convenient options for deposits and withdrawals. Forex and crypto brokerage companies enable traders to experience no troubles and headaches related to financial issues.

On the other hand, international payment systems like VISA and MasterCard understand brokers as high-risk companies; this is why direct cooperation is impossible. The same situation concerns banking institutions. Payment providers play the role of mediators between payment systems and FX/crypto brokerage companies. Such providers process traders’ deposits and withdrawals, offering convenient and secure conditions.

As for payment providers, they suggest various solutions for Forex or the crypto broker business.

Which deposit and withdrawal methods are the most in-demand?

While looking for a top-rated provider, take the available payment options into account. The following methods are recognized as the most widespread:

• Debit and credit cards: About 70-80% of traders prefer to deposit and withdraw funds with the help of bank cards (American Express, MasterCard, VISA).
• E-wallets: Neteller and Skrill are the most in-demand options, but the more electronic wallets are available – the better.
• Wire transfers. About 5-10% deposit money through SEPA and SWIFT transfers from time to time.

Related: Forex Brokers Types: ECN VS Market Makers VS No Dealing Desk

Never limit the list of deposit and withdrawal options, as your traders need to access the most convenient option. Furthermore, take the geographical factor into account to empower your clients with the most matching methods.