What is a Payment Gateway?
Payment gateways are used to "settle" Internet based credit card transactions. Typically the credit card details are sent through a secure Internet transmission to a gateway. The gateway then processes the transaction with the issuing credit card company. Once the transaction has been either accepted or rejected, the gateway will send back a transaction code to the original web site which will indicate the status of the transaction.

Depending on your contract with the gateway provider, you will receive (usually by direct deposit) the funds from a succesful transaction from the provider or in some cases directly from the credit card issuer ( ie AMEX).

How much you will receive of the funds is determined by the terms and conditions of each provider but generally you will have a discount ranging from 1.5 to about 5 % that is either deducted from the funds or charged separately. In addition payment gateway companies will usually have additional monthly transaction fees, maintenance fees, setup fees etc. ( Just like the banks, there is a fee for every little thing)

Choosing a Payment Gateway
The very first thing you should consider in choosing a payment gateway is what country you are in and want to sell to. For example, many US based gateways will either not deal with Canadians or will require a US based Bank Account (not just a US funds account). Keep in mind when evaluating this, that you may inadvertently create a US point of presence for yourself. This issue of a US presence has caused some speculation as to the tax consequences ( ie you may end up having to file a US tax return). ( we are also seeing this on the hosting side, if your site is hosted in the US and you are selling into the US then are you a US business - walks like a duck tax theory)

Most people try to choose a payment gateway by comparing fees & other "benefits" published by the payment processing company. Here is a big GOTCHA. If you are using a shopping cart program you need to choose a payment processing company that is supported by the shopping cart software. The alternative is to hire web developers to customize your chosen software to work with that gateway. This is usually not a trivial task and can add significantly to the cost of launching your store.

Finally when choosing who to deal with, it is critical that the company has a good reputation in the industry. After all you are going to be trusting them with a big chunk of your money and the security of your customer's information.

The bank as payment processor?
Your bank may or may not be a good choice. We generally found that most banks outsource this to a third party anyway. So to get good support and quick turn-around it is best to contact the payment processing companies first.