What is a Payment Gateway and How Does It Work?

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What is a Payment Gateway?

In the true sense, a payment gateway is a mechanism that ensures the safe transfer of payments. It reads payment information from customers and transfers it to the merchant's bank account. A payment gateway reads or captures the data to ensure availability of the funds are available so that a merchant can get paid.

Businesses and merchants use different payment gateways to accept credit or debit card payments from their customers.

A payment gateway can be an in-person card reading device that is normally found in brick-and-mortar retail stores. Often it is a card reader or software built into a point of sales (POS) system. When the customers swipe or attach their cards, the gateway processes the transaction to make a payment.

The eCommerce gateways or online payment processors connect customers to the merchant through cloud-based technology. These payment portals can be integrated with different eCommerce platforms. Once connected, an online payment gateway works as the channel to make and receive payments. For this, customers have to provide details like card number (credit or debit), card expiry date, and CVV.

Retailers can get payment gateways for both brick-and-mortar and online stores to streamline their cash flows. You can acquire payment gateways from an authorized payment service provider or bank.

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Role of a Payment Gateway - Why Do You Need It?

Payment gateways not only approve transactions but also simplify the transfer of payments between merchants and customers. These are essential for businesses that want to strengthen their financial data and avoid manual processes.

Besides, a gateway for online payment is nothing less than a financial authorizer. It approves payments by circulating the financial data around to the necessary entities. Online stores can make their businesses more agile by providing quick secure payments and instant transaction notifications.

Payment Gateways For Ecommerce Businesses In Pakistan

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How Does A Payment Gateway Work?

A gateway for online payment is the central piece of the puzzle that streamlines your payment processing system. At the front-end, it collects customer information to authorize payment transfers. The gateway matches the information in real-time with the merchant’s bank. Once the authorization process is completed, it processes the transaction.

The payment gateway then notifies the customer whether the transaction has been completed or declined. If the transaction has been made, the gateway settles the funds in the merchant's account. Payment gateways often deduct or keep track of service fees during this process.

Below is a simplified flowchart of the payment gateway process.

We have broken down the payment gateway process for a better understanding. The step-by-step process will give you a detailed look into the gateway for online payment.

STEP 1: Once the customer has selected desired items or products, he/she makes the payment. The customer must provide or enter debit/credit card details at the checkout.

STEP 2: Online store encrypts the details with a Secure Socket Layer (SSL) to ensure data privacy. The card information is sent between the browser/app (which the customer is using) and the merchant’s web server.

The Payment Card Industry Data Security Standard (PCI DSS) compliance obligations of the merchant are then removed by the payment gateway. This is done smoothly without redirecting the consumer/customer away from the site/app.

STEP 3: Next, transaction details are forwarded to the payment gateway by the merchant. The information is sent to the payment server which is SSL encrypted and the payment gateway service provider hosts it.

STEP 4: The information is then converted from XML to ISO 8583 by the payment gateway. It can be converted to any format which is easily understood by EFT Switches. The transaction information is then forwarded to the payment processor that the merchant's bank uses.

STEP 5: The transaction information is then sent to the card association by the payment processor. It can be sent to Visa, MasterCard, or other recognized and authorized card associations.

STEP 6: After that, the card issuing bank verifies the debit or credit card after getting the authorization request. It then sends back the response (approved or denied) through the same route to the processor. The response also communicates the reason (insufficient funds, or any other) in case the transaction is denied.

STEP 7: Once the authorization response is received, the processor sends it to the payment gateway. It is then forwarded to the interface that the customer has used to process the payment.

This process does not take more than 2 to 3 seconds and is called Authorization or “Auth.”

STEP 8: If the payment has been approved, the merchant completes the order. The above procedure is then repeated to “Clear” the approval by completing the payment transfer.

However, the “Clear” response is usually sent when the merchant has completed the transaction. This enables the issuing bank to ‘clear’ the ‘auth’ and allows it to settle with the merchant’s acquiring bank.

STEP 9: At the end of the day, all approved authorizations are submitted by the merchant. This is usually done in a “batch” and then sent to the merchant’s bank for settlement. This procedure eliminates the “Auth” that has not been “Cleared” yet.

STEP 10: Once the authorizations are submitted, the merchant’s bank then sends the batch settlement request to the card issuer.

STEP 11: The card issuer (usually the customer's bank) then makes the settlement and pays the merchant’s bank. This process may take some time and normally completes on the next business day.

STEP 12: The merchant’s bank deposits the received and approved amount into the account. 

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Payment Gateway vs Payment Processor

Retailers often confuse the term “payment gateway” with the “payment provider/processor.” These two are interlinked and interwoven but represent totally different concepts.

A payment gateway is where the customers provide information or enter their card details. The gateway for online payment is on the merchant's website or application. It verifies whether the information is correct and legitimate once the customer's card details are provided.

Whereas a payment processor transfers the information from POS to card networks. It also transmits card data between the customer’s bank and the merchant’s bank. The payment processor is involved in the transaction process but depends on the payment gateway for communication.

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Main Types of Payment Gateways

In case you are wondering, there are different types of payment gateways. Below are the basic details on the main types of payment gateways that retailers can acquire.

On-Site Payments

These are the payment gateways that large-scale enterprises or retailers use. Such businesses usually use their own servers for checkout and payment processing. Since they are handheld, they are also called self-hosted payment methods. These gateways provide businesses more control over the data but also increase responsibility.

Every variable counts when you have an on-site payment gateway. Any changes done to the shopping experience can greatly affect your bottom line. This becomes crucial especially when you are running a high-volume sales business.

Checkout on Site, Payment Off-Site

As the name gives it away, this is slightly different from the on-site payment. In this type of payment gateway, the processing is done on the payment provider’s servers. That’s why off-site payment gateways are also known as hosted payments.

The customer will enter details and the check-out will occur on your website. But the processing of payment will happen through the back-end of the gateway. This increases data security since the whole process is done on the back-end and simplifies the process for retailers.

However, you cannot control the entire payment process or the customer experience. So make sure that you have got a trustworthy and secure payment gateway when you choose this type.

Redirects

This is exactly how it sounds because payment processors are involved in the process. To complete the transaction, customers are redirected to the payment processor. This way businesses can also provide an alternate payment method like PayPal.

Redirect payments are suitable for small and medium businesses and retailers. It simplifies the process and takes the burden off since you don’t have to manage the data security. However, this can disturb the customer experience on your online store as there will be a second step involved. You’ll also have less control over the payment gateway process. 

Payment Gateway FAQs

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Difference between payment gateways and payment solutions?

A payment gateway refers to the mechanism that authorizes payment processing for eCommerce stores and brick-and-mortar businesses. Payments gateways manage and monitor transactions from customers to merchants and between banks. Whereas payment solutions are software and systems that only process payments. These include mobile payment systems, POS software, and other solutions. 

Is Visa a payment gateway?

No, Visa, American Express, or MasterCard are not payment gateways but processing networks. These manage cards (credit and debit) and only approve or decline payment requests during the process.

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How much does a payment gateway cost?

The cost of a payment gateway depends on your business needs and service provider. Payment gateways charge merchants and retailers transaction fees or monthly service fees. You can choose to pay your payment gateway provider per transaction. Some service providers also charge businesses extra for setting up fees.

Are payment gateways secure?

Yes, payment gateways are secure as they employ fraud detection and data encryption measures. So your customers’ information and details will remain secure and well protected. However, nothing is 100 percent certain as there is always some degree of risk in the online world.

What is a multi-currency payment gateway?

A multi-currency payment gateway allows retailers to receive payments in more than one currency. This allows merchants to sell worldwide and accept payments across the globe. The payment gateway will ensure transactions and you’ll receive payments in local (selected) currency.

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Takeaway Words

Payment gateways are crucial for retailers and businesses that accept online and card payments. Any merchant that wants to become a true brick-and-click business needs a good payment gateway. The payment gateway process makes your store ready for the digital economy while securing your online transactions.