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What Is A Payment Gateway And How Does It Work?

Online transactions have become the fastest and most advantageous way for its users to settle their payments. Thanks to the Internet, customers can be reached globally and therefore users can both buy and sell throughout the world. 

The trickiest aspect of online purchases is that they are notoriously difficult to verify and can even be made in anonymity. In order to mitigate fraud, e-Commerce businesses must implement robust security systems to protect their payments. One of the primary ways to ensure the security of customer credit card data is through the use of a payment gateway. 

What Is A Payment Gateway?

A payment gateway is software used by e-Commerce businesses that authorizes payments for online merchants and brick and mortar businesses. It is considered the online equivalent of a point-of-sale terminal located within many retail stores. 

The greatest advantage of using a payment gateway is that it encrypts all sensitive credit card information. This guarantees that this information passes safely between the customer and the merchant. 

How Do Payment Gateways Work?

A payment gateway makes it easier to transfer sensitive data between a website or a mobile phone and the “Front End Processor”. Read below to see how payment gateways work:

  1. A customer enters their credit card information on an e-Commerce website and press submit to purchase the item.
  2. The customer’s web browser then encrypts the information sent between the browser and the merchant’s web server. All this is done through Secure Socket Layer encryption or (SSL).
  3. The merchant sends the transaction information to their payment gateway, via another SSL encrypted connection. Here the payment gateway forwards all transaction information to the payment processor by the merchant’s acquiring bank. Then the payment processor sends the transaction information to the card association (such as Visa or Mastercard).
  4. The credit card issuing bank receives the request for authorization and sends its reply back to the processor with a response code. Then the processor sends its response to the payment gateway. Once the payment gateway gets the response, it sends it back to the website for verification then it is relayed back to the cardholder and the merchant. This entire process takes an average of 2-3 seconds. 
  5. Finally, the merchant sends all approved authorizations in a batch form to their acquiring bank for settlement through their processor. Then the acquiring bank deposits all approved funds in the merchant’s account. The entire process that began with authorization and ending with the settlement to funding takes two days. 

Why Do You Need A Payment Gateway?

If you do not use a payment gateway, you will be inviting fraudsters to have easy access to your customer’s information. This will only open up your business as a target for fraud and chargebacks. Fraudsters will also seek new tactics to perform “illegitimate transactions”. This will endanger you to more fraud and eventually tarnish your brand reputation. 

A payment gateway is essentially a “gatekeeper” of your customer’s sensitive payment information. All information is heavily encrypted as it goes through the various channels. In addition, payment gateways guard merchants from expired cards, insufficient funds, and even closed accounts. 

Final Words

Finding the right payment gateway that fits your needs can be a challenge. However, it is a critical component that will protect your customer’s private information and can protect your business from fraud and chargebacks. Take time to research the best payment gateway, your customers and your bank account will thank you.