Payment gateway: what you need to know

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A payment gateway is the intermediary between your online store and the payment processor that receives the payment from your customer.

In other words, when a customer enters their payment details on your site, the payment gateway takes care of sending that data securely to the payment processor.

A payment gateway takes care of authorizing the payment and making sure that the data entered is sufficient to finalize the payment. The gateway protects the credit card details by encrypting all sensitive information in its possession. This process ensures that personal private details are passed securely between the customer and the merchant.

A payment gateway is part of the “magic” that occurs in the background when a transaction takes place on the web. By sending information securely between the website and the payment processor and then returning the transaction details to the website, it is a major component that enables e-commerce stores to function.

If you have a website (e-commerce) and are interested in accepting credit card payments online, you need a payment gateway. It is effectively the bridge between product sales and the customer. Payment gateways are the technology that keeps the transaction ecosystem active in your organization. These tools enable payment and checkout support for consumers. If you’re an online business, you need a payment gateway as part of your payment processing strategy.

To help you follow this definition, here are some of the terms you need to know when it comes to payment processing:

Merchants: merchants are the online businesses (you) that operate in the digital world. They offer services or products to customers all over the world.

Customer: customers, or cardholders, are the people who want access to your products and services, supporting the transaction.

The issuing bank: this is the customer’s bank, responsible for issuing the cardholder’s debit or credit on behalf of the card programs.

The acquiring bank: otherwise known as the acquiring bank, this is the financial institution responsible for maintaining the merchant’s bank account (merchant account). This bank passes transactions to the bank that issued the information.

What a payment gateway does is capture and transfer the payment information from the customer (cardholder) and migrate it to the acquirer. The result is that you can accept payments from your customers. Gateways validate a customer’s card details (securely), using tools such as Visa and Mastercard processing. This technology can also encrypt the card details, so the information remains secure.

he payment gateway acts as a crucial intermediary between the merchant and the customer, ensuring that the transaction is delivered in a timely and secure manner. An online payment gateway simplifies the way merchants integrate software. As an “intermediary” in payment processing, the gateway handles customer service details between the merchant and the buyer.

How does a payment gateway work?

The good news is that, as an ecommerce store owner, you don’t need to understand how a payment gateway actually works. Basically, all you have to do is choose a gateway and then integrate it with your online store via what is usually a user-friendly setup wizard. After that, it works and allows you to collect payments from customers.

But just to give you an idea, here’s a general look at the steps that take place:

  1. A customer places an order on your website. They enter the cart, proceed to checkout, and fill in the payment details.
  2. The payment gateway takes the payment information, encrypts it, and sends it through a secure channel to the payment processor.
  3. The customer is redirected to the payment processor.
  4. The payment processor takes the customer through the steps to finalize the payment.
  5. The payment processor verifies if the payment was successful and displays an appropriate message to the customer.
  6. The customer can return to the online store.

This basically means that the payment gateway is only responsible for allowing the customer to communicate with the payment processor. The gateway is just what the name suggests: a “gateway” that brings the customer’s personal information through a secure channel to the payment processor.

There are many vendors that can set up a payment gateway for you, so how can you choose the right one for your business? The first step is to research functionality, and when doing so, consider the following:

Network Security: a secure network should be the number one priority when looking for a payment gateway. Your customers need to be able to trust that their financial information will remain secure when purchasing from your store. Look for PCI compliance, as this is critical when accepting credit cards online.

Customer experience: in addition to being secure, the process for payments should be smooth and make buying from you convenient for your customers. If it becomes cumbersome, requires too many steps, too much time or too much personal information, the customer may abandon the purchase and go looking elsewhere. You should look for a payment gateway that allows you to accept all major credit and debit cards, as well as be integrated with all major shopping carts. In today’s world, it’s also crucial that the payment gateway is optimized for mobile users.

Internationally Acceptable: unless you plan to accept payments from your local market, you need to make sure your payment gateway allows for international acceptance. The Internet is global and crosses all borders, and your customers could come from any corner of the world. Don’t limit yourself to a payment gateway that doesn’t allow global payments.

Additional fees: the fee structure on each payment gateway will be different, so make sure it’s within your budget and not excessive compared to other payment gateway offerings.

Now that you understand how payment gateways work, let’s consider why they are so important. At first, payment gateways don’t seem “that” important. They’re basically just a middleman for the overall experience. However, payment gateways are more essential than you think.

Remember, online transactions are so-called “card nor gift” transactions. The cardholder can’t swipe a card to give you access to their bank account, so you need a different kind of credit card processing. With an online store, you have to rely on the card information a customer gives you on the checkout page.

It’s difficult to know for sure if the payment information provided is actually that person’s card. When card-not-present transactions occur, there is a much higher risk of fraud. With payment gateways, you have a solution. Fraudsters would have much easier access to your card information if you removed the payment gateway from your online experience. This would expose your business to more problems with chargebacks and fraud.

Fraudsters could also find additional ways to initiate transactions illegitimately, leaving you more exposed to reputation issues and fraud. Because a payment gateway is the custodian of customer payment data, it transmits information from you, to merchants, to the acquirer and the issuing bank, using data encryption to minimize the risk of sensitive information.

Gateways are also useful for protecting you from insufficient funds and accounts that can’t actually make payments.

Now that you understand the basics, let’s explore how this technology works.

The customer selects the service or product they want to purchase and enters the payment page. You may offer various payment options here. Some of the payment solutions available include:

  • Hosted payment page: where customers are directed to another page when they’re ready to enter their transaction details.
  • Server-to-server integrations: where you can request payment information on the same page using the right payment system.
  • Client-side encryption: the strategy that uses client-side encryption to send it to the merchant service to simplify PCI.

The customer then enters their credit card information on the service provider’s payment page. This transaction data might include the card’s expiration date, the customer’s name, CVV number, and credit card number.

The information is handed over to the payment gateway and the payment gateway will encrypt the card details as well as use fraud detection techniques. This makes the interaction more secure.

The acquiring bank sends the information to the card circuits such as Mastercard or Visa.

The card circuits re-check for threats and fraud in the payment card industry before sending the payment details to the issuing bank.

The issuing bank screens the payment and approves or rejects the transaction, with an approved or rejected message returning to the customer.

The acquiring bank then sends the reject or approve message to the payment gateway, which informs the merchant whether the payment service has been approved. If the payment solution is approved, the acquirer can collect the requested amount from the issuing bank.

The funds are deposited into the merchant’s account, in a process called “settlement,” and the merchant can view a confirmed payment message.

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