Crypto Payment Gateway VS Traditional Payment Gateway. [A Complete Guide]
Written By: Arjun Patil
Contrary to what it seems, cash-less transactions are some of the most complicated transactions which occur in a couple of seconds. Processing the transaction and transferring the value from one entity to another involves 4 Essential Components or middle man. Each of them [Rightfully so] charges the service they are providing, which needs to be bared by the end merchant.
(The fees incurred by the merchant change from time to time and place, with many other factors, but the costs incurred are generally 2%. So, for a transaction of 100rs, 2rs needs to be divided among the intermediaries)
It might not seem a lot on a small revenue, but as the revenue scale, even 1% of the fees make a huge difference. Decentralized cryptocurrency transactions are a possible solution to this problem driven by necessity. Let's understand how.
How Does A Cash Less Transaction Occur?
For a transaction to be complete, there are 4 essential entities required which assist in the trades. These four entities are,
1. Acquiring Bank
2. Issuing Bank
3. Card Networks/Card Schemes/Payment Processors
4. POS Terminal (Offline Transactions) / Payment Gateway (Online Transactions)
These four entities work together in synergy to make a single transaction succeed.
This is how the cycle for a card transaction occurs,
Step 1: The consumer selects the products of interest and checks them out. For offline transactions, the customer goes to the POS terminal, swipes the card, and puts the card credentials at the payment gateway for the online trade.
(Payment Gateway: Payment gateway is software that relays the information between the entities mentioned above and is a software replacement to the POS terminal card swiping hardware. It is the interface that users see when they click "Buy Now")
Step 2: The POS hardware/ payment gateways encrypt all the vital information like the card number, validity date, and CVV/pin and send it to the acquiring banks, where the merchant's account resides.
Step 3: The acquiring banks transmit the data to the card schemes, sending the information to the correct issuing bank where the customer's account is.
(The reason acquiring banks can't directly send the information to the issuing banks is that they don't know who the issuing bank is. The Acquiring Banks knows the card credentials and not the customer entity who owns it)
Step 4: The network sends the information to the valid issuing bank, intimating it with the transaction details like the credentials and the value of the transaction.
Step 5: The issuing bank checks the balance of the consumer and sends the reply to the card scheme network regarding the transaction's validity [Yes/No].
(The issuing bank also checks for the consumer's previous patterns of purchase, the transaction's location, the amount of the transaction, and various other factors. If it determines and discrepancy, the issuing banks contact the customer to verify the transaction. This is why you receive a call from the bank when you exhaust the card's credit limit on a Play Station. If all checks out, the issuing bank freezes the value of the transaction from the account)
Step 6: The response shared with the card schemes is transmitted back to the acquiring bank, which is again shared with the hardware/payment gateway. It finally shows an approval/denial message at the merchant's end.
(This is where the transaction ends for the merchant and the customer. However, the money needs to be moved from the users issuing bank accounts to the merchants acquiring bank accounts. This all took a couple of seconds in real-time. It is when the users/customers receive the withdrawal message from the bank)
Step 7: At the end of the day/week/month, according to the terms with the merchant, the POS terminal/payment gateway transfers all the transaction data in batch to the acquiring bank, which it shares back to all the RESPECTIVE issuing banks. The issuing banks settle their dues with the acquiring bank when the transaction is complete.
How Does Cryptocurrency Transaction Work?
Decentralization, and hence having no dependency on intermediaries, is the USP of the blockchain-driven cryptocurrency transaction. It removes all the above-listed centralized entities and saves the 2% that the merchant lost as fees. Besides this, it introduces many benefits for the merchants, some of which being
1. Faster Transaction: Since there are no intermediaries and no specific requirement of settlement time (like the end of day/week/period), the transaction is instantaneous irrespective of the location & time.
2. Secure Transactions: The transaction of the traditional system are safe and are operated under heavy encryption. Similarly, blockchain-based transfers are also fast and have relatively less risk due to the nature of the blockchain.
3. Saves money: For international transfers, entities like ACH/SWIFT help the transaction to happen at the expense of the merchant's share of revenue and its time. But the blockchain transfers are direct P2P, and hence merchant is relatively profitable.
These advantages are why many merchants opt for crypto payments instead of the more traditional fiat currency-based payments. It has also led many countries to develop blockchain & FIAT-based stable currencies (Also known as CBDC, standing for central bank digital currencies), which could help in these international transfers.
How Does FIAT To Crypto Payment Work?
It is similar to the fiat cashless transfers we saw earlier, except for the significant dependency on card schemes like Visa, Mastercard, and Rupay. This is because the purpose of these intermediaries was to sort out transaction information and send it to the respective issuing banks.
But since there is no involvement of a credit card to crypto payment gateway, there is no need for a network equivalent to that of the card schemes. It's only the public key of the wallet which is required. It saves a lot of money for the users, as they won't lose that part of the considerably high commission.
The steps for a crypto payment are as follows:
Step 1: The Payment gateway takes in the information like the transaction amount and the public key for the user's wallets and transmits the data to one of the nodes of the blockchain network by using SSL.
Step 2: The blockchain network here verifies if the transaction is possible and either conducts it or denies it.
Step 3: After the transaction, the merchant can opt for instant conversion of deposited cryptocurrency into the local cryptocurrency/stable coin to protect the funds against volatility. An automated invoice can also be generated and sent to the customer by the payment gateway.
Best Crypto Payment Gateway:
There are two payment gateways, one accepting a single cryptocurrency and the other accepting multiple cryptocurrencies. Some of the famous crypto payment gateways which help in the transfer of funds via crypto payments are,
Coingates: Accepts more Than 70 Cryptocurrencies
Coinspaid: A bitcoin payment processing gateway and business crypto wallet
Coinpayment: Serving 100K merchants globally.
Bitpay: Has its own BitPay Card, which converts its crypto fast into dollars.
BitBatua: BitBatua, India's first payment gateway providing crypto transactions in Bitcoin, Ethereum, and USDT
If you liked this article and found it helpful to understand the crypto payments and how they are different compared to the traditional fiat-based payment gateways, please drop a like to this article. Also, follow our newsletter and our socials, the link for which is given below.