What is a payment gateway and how it works?

Tuesday, 13 Jul, 2021

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The business world is changing in the digital era and making a huge impact on how businesses work online. An online payment gateway is one of the important factors that maintain the payments ecosystem, as it not only enables online payments for buyers and sellers but also a useful tool to raise more sales. If you are an online merchant, you don’t need to become an expert in payment gateway, but having a deeper understanding of online payment will help you make a better decision on what online payment gateway to choose and further business plans. So, What is a payment gateway and how it works?

What is a payment gateway and how it worksWhat is a payment gateway and how it works?

This article will give a detailed explanation of what is a payment gateway and how it works? Why an online merchant needs one and how to choose the best online payment gateway for your business.

Before jumping into further details, there are some important “terms” that you need to understand. These terms are the key players which involved most of the time in the payment process:

  • The merchant:This is you (as called as the seller) - an online business operating in any field (i.e travelling, e-commerce, gaming, etc.) offering products or services for customers.
  • The acquirer:This is the merchant’s bank that passes the merchant’s transaction to the issuing bank to receive the payment.
  • The customer: This is the merchant's customer (as called as the buyer) - also a cardholder, who wants to purchase the products or services from merchants and initiates the transaction.
  • The issuing bank: This is the customer’s bank that issues the card holder’s credit or debit card in the name of the card schemes (Mastercard, Visa).

What is an online payment gateway?

The basic definition of an online payment gateway is the software that payment service providers use to transfer payments for online transactions. This technology processes and transfers payment data from the customer to the acquiring bank and transfers the payment acceptance or decline back to the customer. A payment gateway approves the card information of the customer securely, guarantees the funds are accessible, and eventually enables merchants to get paid.

In other words, the online payment gateway works as a middleman between the seller and buyer, ensuring the quick, simple, and secure transaction process. An online payment gateway can streamline how a merchant's site integrates with the platform and necessary program.

What is an online payment gateway?What is an online payment gateway?

Why does a business need an online payment gateway?

As a business owner, you might be thinking about why your business needs a suitable online payment gateway if it is just a “middle man”? To answer this question, we have to understand that an online payment gateway is a transaction-without-card. The buyer’s card cannot be swiped on POS terminals as the ordinary way if the purchasing process happened somewhere like the brick stores. For that reason, you can only rely on the card data that customers enter on the payment page. In this case, how might you be certain that the card customer is using is their own card? A transaction-without-card makes the fraud risk significantly higher, and this is the chance for the online payment gateway to get the job done.

So what would happen if we didn't have the existence of an online payment gateway? Fraudsters would have easier access to your sensitive data, exposing your business to fraud and chargebacks. Furthermore, fraudsters would likewise discover extra approaches to start illegitimate transactions, leaving you even more exposed to fraud and damaging your brand public image.

The online payment gateway is like a gatekeeper of your business and your customers. Aside from the protected encryption data, online payment gateways also protect merchants from expired cards, closed accounts, insufficient funds, or exceeding credit card limits.

Also read: Payment gateway for ecommerce business

How a payment gateway works?How a payment gateway works?

How a payment gateway works?

Now that you’ve understood why merchants need an online payment gateway. So let’s process to the next step and figure out how an online payment gateway works:

  • Step 1: The buyer chooses the product or service that they want to buy and proceed to the checkout page. Most online payment gateways provide different options for your checkout page but the most convenient and common is integration payment:
    Integration payment: Integration payment is also known as a direct integration as it creates a connection between two servers; the merchant’s server with the payment gateway’s server. By inputting the card details on the payment page, a transaction will be started. The purchasing process can be accomplished without redirecting to the payment page of the online payment gateway. This will result in a faster checkout process, more reliable buyers experience, and more authority over the look and feel of the payment page from the merchant's perspective.
  • Step 2: In this step, the buyer enters their credit or check card details on the payment page. These data include the card holder’s name, card expiration date, and CVV number (Card Verification Value). This data is safely passed onto your payment gateway, based on your integration.
  • Step 3: The online payment gateway uses a tokenization security system to encrypt the card’s data and perform fraud checks before transferring the card’s data to the acquiring bank.
  • Step 4: The acquiring bank sends securely the data to the card schemes (Visa, Mastercard).
  • Step 5: The card schemes perform another layer of fraud check and then send the payment data to the issuing bank.
  • Step 6: The issuing bank, after performing fraud scanning, authorizes the transaction. The approved or declined payment message is transferred back from the card schemes, then to the merchant.
  • Step 7: The acquiring bank sends the approval or decline message back to the payment gateway. If the payment is approved, the merchant collects the payment amount from the issuing bank and holds the fund into your merchant account.
  • Step 8: Deposits the funds into the merchant's account, a process which is known as the settlement; when the actual settlement will occur, depends on the agreement the merchant has with their payment gateway.
  • Step 9: Based on the send back message, the merchant may either display a payment confirmation page or ask the customer to provide another payment method.

Also read:

After having a deeper understanding of what is a payment gateway and how it works, we highly recommend PayCEC online payment gateway. PayCEC is one of the TOP 3 online payment gateways at the moment that offers a variety of payment methods, different currencies, newest technologies of fraud protection and 24/7 customer support.

For more information, please visit: Online Payment Gateway

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