What is a Payment Gateway and How Does It Work?
Online payments have become a part of our daily lives in no time. We’re transacting online not only through debit or credit cards but through numerous other modes like net banking, wallets, etc.
Online invoice payment helps companies save time, is faster and saves maximum efforts for the clients. It helps in reducing,
- excessive costs involved in physical transactions
- significant amount of paper invoices that will be printed and used to send invoices.
Online payments allow you to buy products and services from all over the world. If you are a seller, you can sell to anyone in the world with a decent internet connection. Your customer doesn’t even need to have a computer; a smartphone is enough.
But what exactly is a payment gateway? Is it safe to transact through a payment gateway? Does it make sense for your business to have a payment gateway integration? Let’s find out.
What is a Payment Gateway?
Payment gateways are software and servers that transmit transaction information to acquiring banks and responses from issuing banks (such as whether a transaction is approved or declined). Essentially, payment gateways facilitate communication within banks and plays the role of a third party that securely transfers your money from the bank account to the merchant’s payment portal.
How do payment gateways work?
The transaction flow is the same whether you’re using a physical or virtual payment gateway, but mobile and online payments use digital capture files for packaging the credit card information rather than output from a credit card reader:
- The buyer makes a credit card payment through the merchant’s credit card reader or e-commerce site.
- The payment gateway:
- Pushes the transaction information to the acquiring bank (the merchant bank or acquirer)
- Determines which credit card network (Visa, MasterCard, Discover, or American Express) issued the buyer’s card
- Routes the transaction information to the correct payment switch
- The payment switch routes the request to the bank that issued the buyer’s credit card (the issuing bank) and pushes the transaction information onto the correct credit card network.
- The issuing bank applies fraud detection procedures to determine the legitimacy of the transaction and confirms the buyer has sufficient credit in their account to accommodate the purchase.
- The issuing bank approves (or rejects) the transaction and sends this information back through the credit card network to the merchant bank and the payment gateway.
Security is an integral component of all payment gateways, as sensitive data such as credit card numbers need to be protected from any fraudulent parties. The card associations have created a set of rules and security standards that must be followed by anyone with access to card information including gateways. This set of rules and security standards is called the Payment Card Industry Data Security Standard (PCI-DSS or PCI).
Submitting an order is usually completed using the HTTPS protocol, which securely communicates personal information through the parties involved in the transaction.
Opening Your Payment Gateway for Business
Once you understand the importance of a payment gateway and its impact on your sales and security, it’s time to take the next steps:
- Research with key priorities in mind. Check the PCI compliance of your potential payment solution to ensure its security, and always look for per-transaction prices to get a sense of how a gateway will impact your bottom line.
- Understand what your customers want. Even if you don’t have a payment gateway, there are insights you may already have that you need to leverage. Which payment services do your customers prefer, and what’s the most convenient way to facilitate these preferences?
- Stack multiple gateways to fill gaps. You don’t have to commit to one gateway for the rest of your days. You can even stack multiple gateways at once to ensure maximum coverage for most customer needs.
- Like with almost any service, there are fees associated with them. You’ll have to pay transaction fees for your business — so pay attention to your gateway’s costs and do your research before integrating it into your site so you’re not slammed with surprise fees.
- Different fees charged can include transaction, statement, chargeback, merchant account fees, and likely more — such as fees to customers for using a certain payment method. And not surprisingly, customers do NOT like hidden costs so read the fine print.
With a better knowledge of price, function, and gateway security, your business will be in the position to choose the right option for your business needs and add a new level of security (and peace of mind) that customers need when making a purchase online.