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What Is A Payment Gateway? How Does It Function?

A payment gateway facilitates online payments between consumers and businesses.

A payment gateway is a service provided for merchants that processes debit and credit card payments for both eCommerce websites and brick and mortar retail stores. Another way of looking at a payment gateway is to think about it as the equivalent to a cash register for a transaction made online. In order for the payment gateway to work for both the merchant and the customer, it needs to be safe and easy to use. 

Many reputable and reliable payment gateways provide the following steps to ensure that the sensitive financial information is securely transported to its final destination.

  1. A payment gateway will encrypt (encode information for private use) information for the sole use between the seller and the buyer. 
  2. An authorization request happens when the payment processor gets permission from either the credit card company or financial institution to move forward with the transaction.
  3. The final step is the fulfillment, where the payment gateway receives the final authorization, it permits the website and interface to continue with the next operation. 

This was just a bird’s eye view of how a payment gateway functions and keeps customers’ financial data safe. Now, let’s dive into the particulars of how payment gateways actually work. 

How Does It Work?

As a merchant, it is important to become familiar with the mechanics of how payment gateways work. This will also help you identify which payment gateways will benefit both you and the customers so that the payment journey will be as secure and seamless as possible. 

Your customer will choose the product or service of their choice and move on to the payment page. Many of the payment gateways available today offer a variety of options for your payment page. Some options may include:

  • A Hosted Payment Page: This is a ready made payment page where customers are directed to when they are ready to purchase. The payment gateway acquires the financial data securely, before it moves on to the acquirer. The hosted payment page bypasses the PCI worry for merchants if you do not store your customers’ data on your server.
  • Server To Server Integration/Direct Integration: This facilitates communication between the merchant’s server and the payment gateway’s server. With the request of the credit card’s information directly on the payment page, a direct transaction can be easily established. Customers also have the advantage of not having to complete the credit card payment by being redirected to the payment page found on the payment gateway. This process results in a quicker checkout and a stable customer experience. This payment page is beneficial if you are a merchant that happens to collect or store the payment information before transmitting it to the payment gateway to be processed.
  • Client-Side Encryption: This involves the encryption of sensitive information on the “client-side device’ before transmitting it to the merchant’s server. It allows you to accept payments on your website as it encrypts credit card data on your browser with the use of the payment gateway’s encryption library.
  1. The customer proceeds to enter their credit or debit card information directly on the payment page. The information entered should include the credit card holder’s name, the card’s expiration date, and CVV number or (Card Verification Value). This data is then securely transmitted to the payment gateway in accordance with the type of integration you chose (hosted payment page, server-to-server integration, or client-side encryption).
  2. Then the payment gateway “tokenises” or encrypts the credit card’s information and carries out fraud checks before the information is sent to the acquiring bank. 
  3. The acquiring bank then securely sends the information to the credit card company (Visa or Mastercard).
  4. The credit card companies carry out another level of fraud check and then sends the payment information to the issuing bank.
  5. After screening for fraud, the issuing bank authorizes the payment. The payment message about whether it’s approved or declined is brought back from the credit card companies to the acquirer. 
  6. Next, the acquiring bank transmits the decline or approval report back to the payment gateway. This message then gets sent to the merchant. Once the payment is approved, the acquirer takes the funds from the issuing bank and places the money into the merchant account.
  7. A settlement, or when the funds are deposited into the merchant’s account, will happen depending on the type of agreement that the merchant has reached with the payment gateway. 
  8. The merchant can feature a payment confirmation page or request that the customer provide another form of payment.

The Benefits Of Having A Payment Gateway.

Because all payments performed online are considered card-not-present transactions, the risk for fraud is significantly higher. How can you tell if the one using the credit is the actual, legitimate owner of that credit card?  This is where payment gateway comes into play.

Just imagine what would happen if you didn’t have a payment gateway in place. The result would be that criminals would have greater and easier access to the card information you process. This will only leave you open to both fraud and chargebacks. Fraudsters will also find inventive ways to perform “illegitimate transactions.”  Once again, exposing you to more fraud and worse yet, a damaged reputation. 

A payment gateway is essentially a “gatekeeper of your customer’s payment data.” The benefit for online merchants is that the payment gateway transmits from you, as the merchant, over to the acquirer and issuing bank by using data encryption to ward off any threats against sensitive financial information. In addition to fraud management, the payment gateway guards merchants from expired cards, inadequate funds, accounts that are closed, or if they have exceeded their credit limit. 

The Constraints Of Payment Gateways

When it comes to choosing the best payment gateway for your business, you will discover that they do come with some restrictions. Here are a few:

  • Payment gateways don’t accept all forms of card and payments: In your search for a payment gateway, you will come across many payment gateways that advertise, claiming inclusivity of all cards and forms of payments. However, the opposite is true. The truth is that they will not be able to accept payments from certain card issuers and even processing portals. 
  • Shoppers overseas may not have a payment option: Merchants need to ensure that their payment gateway can support an international audience. See if you can get a payment gateway that can support multi-currency payments Otherwise, these international shoppers could be paying higher prices.
  • Security shortcomings: It has been found that over one third of consumers are reluctant to place an online order due to security worries. TLS encryption may help payment gateways to process sensitive card information, however, once the data is entered into the server, it officially becomes vulnerable to risk. For mobile payments, you might be able to monitor the security during the transaction, but you don’t have control as to who has your customer’s mobile phone. There is also malware that can read passwords and permeate user accounts. It can also send authentic-looking transactions through the payment gateway, although the transaction is a fraud. 

It’s Time To Open Your Own Payment Gateway

Now that you understand that payment gateways are a critical component to your sales and security, it’s time to do your research in finding your own payment gateway. Here’s what you should be looking out for:

  • Always make it a point to verify the PCI Compliance of the payment gateway to make sure it is truly secure. Also, make sure you research the “per-transaction prices” to get a feel for how this payment gateway will affect your business financials. 
  • Endeavor to know what your customers want. Take the time to analyze the buying behavior of your customers. You can determine what type of payment services they most prefer. Ask yourself what easiest way to deliver on these preferences.

Your Next Step

It may seem that there is so much to learn about payment gateways, and there is. However, this basic overview is enough to familiarize you with how a payment gateway works and why you need it to make sure you are running a secure and profitable business. Finding the right payment gateway can take some time so keep the pointers above in mind on your search. The right payment gateway will enable you to create a safe, streamlined payment journey that your customers will rave about and will encourage them to keep coming back.