What is a payment gateway? A payment gateway is the technology responsible for authenticating and securely transmitting payment data between parties involved in the payment process. Essentially, a payment gateway is the “virtual” equivalent of a physical credit and debit card reader. It transfers the data between the point of entry (terminal, website, or mobile device) to the payment processor to continue the payment lifecycle.
With the increase in fraud, payment gateways help minimize your risk and protect your business by encrypting transactions, verifying addresses or other personal information, and analyzing particular patterns. The best payment gateways can help you simplify payment processing, consolidate vendors, and generate valuable reports!
What does a Payment Gateway do?
Encryption
When a customer submits their payment information while checking out online, the payment gateway encrypts the data. This is crucial because it protects it from unauthorized access or theft while it is transmitted between the customer’s device, the business’s server, and the financial institutions.
Payment processor connection
The payment gateway connects a business’s customer-facing checkout and the payment processing provider.
Authorization
The payment gateway sends the encrypted transaction data to the business’s acquiring bank, which then sends the information to the customer’s issuing bank or the relevant payment processor. The transaction must be verified by the issuing bank or payment processor beforehand. Then, the payment gateway receives the response and sends it back to the business.
Data collecting and reporting
Payment gateways can provide businesses with valuable data that can help them analyze and manage their transactions. This refers to transaction history, refund management, and other data points to help businesses identify trends and improve payment operations.
Fraud detection and prevention
To lower the risk of fraudulent transactions, payment gateways use advanced security measures. These help to identify and block potentially fraudulent activity before they can be processed.
5 Benefits of a Payment Gateway
1. Enhanced security
There are many steps that take place during the payment process to ensure the person making the purchase is indeed the cardholder. Payment gateways must also be PCI compliant, which means they have to follow specific security standards to safeguard cardholder data. In addition, payment gateways typically support features like tokenization, Address Verification Service, and risk management solutions.
2. Improved payment experience
Having a payment gateway means customers can make purchases anytime and anywhere! Also, they can choose to securely save their payment information for future purchases, which makes the checkout process much easier! By creating a seamless payment experience for your customers, you can cultivate brand loyalty and encourage repeat purchases.
3. Expand into new markets
As a business, it’s important to expand into new markets! Many payment gateways support multiple currencies and have the option to integrate with local and global payment methods, letting your customers decide how they want to pay.
4. Customizable checkout options
The best payment gateways can be integrated with your existing website or shopping cart platform. Based on your payment setup, the payment flow can be customized to suit the needs of your business!
5. Minimize transaction errors
Automated systems in payment gateways reduce the errors made by customers or businesses, such as incorrect entry of transaction amounts or account numbers, which are both very common!
Payment Gateway vs. Payment Processor
As mentioned, a payment gateway is a place on a merchant’s website where customers securely enter credit card information and verifies that a customer’s card is legitimate. A payment processor transmits card data from a merchant’s point-of-sale system to card networks and banks involved in the transaction.
Payment gateways and payment processors each play different roles in completing credit card transactions between merchants and customers. A payment gateway is the technology that encrypt and transmits the payment details from the point of entry to the payment processor. It also communicates the approval or decline back to the merchant or the customer. A payment processor is responsible for relaying transaction details to and from the customer’s card-issuing bank and the merchant’s acquiring bank.
Payment gateways are commonly used for eCommerce transactions, but also can be used to accept payments with a credit card reader, POS system, or software integration. On the other hand, payment processors are necessary for all card-based transactions, whether the sale is online, in-person, or through a mobile app.
Payment Gateway vs. Payment Terminal
A virtual terminal is software that accepts credit and debit cards, along with eCheck and ACH payments. Merchants can use a computer, smartphone, or tablet with an internet or data connection for secure payment processing.
The main difference between a payment terminal and a payment gateway is that a payment gateway is typically used for eCommerce transactions, which means there’s a customer-facing interface. Virtual terminals are typically used by merchants only. However, certain businesses use both means to accept credit cards if they have a brick-and-mortar store and an online presence.
Both solutions offer their own advantages. A payment terminal simplifies the payment process for mail and telephone order sales, as well as off-site events. Additionally, it can help save merchants money without the need for any upfront hardware costs. A secure payment gateway allows merchants to accept credit cards, debit cards, and ACH payments online. It can enable recurring billing, an accounting software integration, and more!
Who is Involved in the Payment Gateway Process?
Merchant or Seller
The merchant is a business or individual selling goods or services online. To accept online payments, the merchant needs a merchant account, which ensures secure transaction processing. Essentially, the merchant account is where funds are deposited after a settlement.
Customer
Customers are the chief participants in the payment gateway ecosystem. They can make payments through various methods to purchase goods and services: debit or credit cards, net banking, UPI, or online wallets.
Acquirer and Issuer Bank
The acquirer bank obtains the payment on behalf of the merchant. The merchant account is housed here, serving as the destination for financial transactions routed through the payment gateway. The issuer bank originates the transaction and belongs to the customer making the payment. It represents the customer and supports various payment methods.
Payment Gateway
The payment gateway acts as the intermediary between the merchant’s website and the acquirer and issuer bank. When someone makes a purchase, the payment gateway facilitates the secure transfer of payment information and manages the authorization and settlement of transactions.
Payment Processor
The payment processor manages the technical connections between the payment gateway, the acquiring bank, and the issuer bank. It validates and securely routes payment transactions.
The 7 Step Payment Gateway Process
1. Transaction initiation
The customer decides to make a purchase on the business’s site or app and proceeds to the checkout page. They enter their payment information.
2. Payment data encryption
Once the customer submits their payment information, the payment gateway encrypts the data using strict protocols. This encryption guarantees that sensitive information is protected from unauthorized access or theft during transmission.
3. Data transmission to the business's server
The encrypted payment information is sent directly to the business’s server, which securely stores and forwards the data to the payment gateway for further processing.
4. Forwarding transaction details
The payment gateway receives the transaction data from the server and forwards it to the business’s payment processor and acquiring bank. This is the financial institution responsible for processing the payment on behalf of the business.
5. Transaction verification
Next, the acquiring bank routes the transaction data to the customer’s issuing bank or the appropriate payment processor for authorization. They verify the transaction details, including the validity of the customer’s account balance and payment method.
6. Transaction approval or decline
Depending on the verification, the issuing bank or payment processor approves or declines the transaction. The response is sent back through the acquiring bank and payment gateway to the business’s server.
7. Communication of transaction status
Finally, the payment gateway sends the transaction status (approved or denied) to the business’s website or app, which then displays the appropriate message to the customer. If approved, the business proceeds with order fulfillment. If denied, the customer is informed and may be prompted to try a different payment method.
The Bottom Line
Overall, any business that accepts online payments need a payment gateway to facilitate the process! With the increase in fraud, payment gateways help minimize your risk and protect your business by encrypting transactions, verifying addresses or other personal information, and analyzing particular patterns. The best payment gateways can help you simplify payment processing, consolidate vendors, and generate valuable reports!
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