What is a Payment Gateway and How Does it Work?

When you make an online purchase, you have to go through a payment gateway to successfully pay the business owner with the help of different payment modes. And that simple online shopping transaction is always processed and secured by using payment gateway software which is offered by a third party. Payment gateways bridge the gap between a customer and a merchant. It enables the customer to make an online payment with ease and ensures that the exchange of information like their payment card details and bank details is secured.

Basically, a payment gateway is something that enables the communication between buyers, sellers, and various financial institutions. It determines whether to accept or reject the transaction. To know more about it, let us go through this blog and learn everything about both a payment gateway and its features.

1. What is Payment Gateway?

A payment gateway is a simple tool that securely validates your client’s payment mode details and ensures that the funds are available for you to pay the bills. With the help of a payment gateway, one can authorize both offline and online payments through cards. It is similar to physical POS (point-of-sale). You will find most used cases of payment gateway integration with ecommerce platforms hosted on Magento or Shopify.

With a payment gateway, customers can submit their payment mode details and then safely pass the information to various merchants. Basically, the payment gateway informs you whether the amount has been approved by the bank of the customer or not. And it also submits the settlement charges.

2. Types of Payment Gateways

Payment gateways are far more complex than it looks from the outside. These software solutions come with complications and this depends upon what type of service one uses and how someone organizes the virtual store of the business. There are three main types of payment gateways, so here we are going to have a look at the three types of it that every payment service provider in the market offers.

1. Off-site Payment Gateways

With this type of payment processor, when clients make a purchase, they will be redirected to a third-party server for payment. In such cases, the payment method system is responsible to handle all of the payment processing, ensuring compliance of PCI, and easy checkout for the clients of the business. Payment gateway providers like Stripe and PayPal are the best examples of off-site payment gateway.

2. On-site Payment Gateways

On-site payment gateways are just like off-site payment methods, but here the client gets to complete the checkout from the business website. Here, the payment processing is ended on the back end of the merchant’s payment services and it uses a third-party server to finish the payment. In an on-site payment gateway, the businesses can keep the checkout process local and don’t have to redirect the clients to another website that will accept online payments and enables them to make a purchase. This gives the businesses the benefits of a secure payment gateway service while controlling the checkout system for the buyers.

3. Local, Platform-based Gateways

This type of payment gateway is generally hosted on the merchant’s server. This is the best considered option when the business is big and has a high volume of purchases. Businesses use a local gateway and become completely responsible for processing online payments for clients. This type of payment processor can be costly to implement and maintain for any business but it also offers the most control over the multi-currency payment gateway.

3. How does a Payment Gateway Work?

An online payment gateway is an approach that follows a simple and straightforward procedure to settle the payment each time it is processed. This process starts when a client places an order for a product from a merchant who uses a gateway. The payment gateway process starts from filling in all the payment mode details to the final settlement. The gateways pass through the below-listed steps-

STEP 1: Once the customer places the order on the merchant’s site and proceeds to make payment, he needs to enter the debit or credit card details or any other payment modes if available.

STEP 2: Then the card details are securely encrypted. And this is done through Secure Socket Layer (SSL) encryption. And this encrypted data is sent between the web browser and the business owner’s web server. A payment gateway removes the merchant’s compliance obligations for (PCI DSS) Payment Card Industry Data Security Standard (PCI DSS) without redirecting the customers away from the eCommerce website.

STEP 3: Later, the merchant has to forward all the transaction details to their payment gateway. This connection is known as an SSL encrypted connection.

STEP 4: After the payment gateway gets the transaction details and it converts the transactional message from XML to ISO 8583. It may also transfer it to a variant message format and after that forward the details to the payment processor that the merchant’s acquiring bank uses.

STEP 5: Once the payment processor receives the data, it forwards the information to the card association like American Express, Visa, and MasterCard.

STEP 6: After that, the card-issuing bank receives a request for authorization. Once it verifies the card, it sends a response back to the processor with the help of the response code. This code also enables communication when any transaction fails because of insufficient funds or anything else.

STEP 7: The Payment processor then sends the authorization response ahead to the payment gateway, and the gateway then forwards it onto the interface that was used to process the payment.

STEP 8: After that, the merchant completes the order, and then the above-mentioned process is repeated but now to clear the authorization.

STEP 9: The merchant then submits all their authorization that is approved at the end of the day. They are submitted to the acquiring bank through a processor for settlement.

STEP 10: After the acquiring bank receives the authorizations, it makes the batch of all the settlement requests of the card issuer.

STEP 11: Then the card issuer has to settle the payment to the acquiring bank.

STEP 12: And at the end, the acquiring bank will have to deposit the total amount of funds to the nominated account of the business owner. 

4. Payment Gateway Features and Functionality

With so many payment gateways and payment service providers available in the market, knowing which is the right for your business is quite difficult? Therefore, here we are going to have a look at some important features and functionality a top payment gateway must deliver to help optimize payments services and offer a seamless payment processing experience.

1. Tokenization

Payment card security is very important as it helps to offer protection against vulnerable data from the time any user enters the information into your system and it is transmitted to the network of the card. This means that with the help of a perfect tokenization solution, the personal account number (PAN) can be replaced with an alphanumeric ID, that can be randomly generated.

2. Fraud Protection

With the evolution of technology, the skillset of the average cybercriminals has also emerged. And because of this, every payment gateway provider must have an innovative fraud solution that can deliver cyber security intelligence to businesses. This can reduce fraud rates and increase online payment options.

3. Recurring Payments

The recurring payment is a concept that is popularly known as automatic payments, subscription payments, or recurring billing. It is a type of payment that takes place when the client enables the merchant to repeatedly charge him for the service he avails from the merchant. This type of payment is on pre-arranged schedule which can be weekly, monthly, or yearly. The recurring payment is an approach that offers many different benefits for both the client and the customer. By scheduling the payment that works for both parties is very beneficial. It helps in increasing the flow of cash and improving customer retention. This is possible because of the convenience and flexibility that the customers get.

4. Hosted Payment Form

A hosted payment form is a concept that offers a way to accept payments through debit or credit card payments on eCommerce platforms. The companies host the form so that the sensitive payment data doesn’t pass through the payment system of the business. It also reduces the PCI scope and minimizes the liability. The hosted payment forms can be implemented with the use of customized or standard templates to fit the look and feel of the business website.

5. Software Integration

When it comes to going between various software programs and interfaces to handle online payments isn’t cost-effective. Therefore, integrating a payment gateway with your business software guarantees lesser transaction time, eases transaction reconciliation, and provides greater accuracy. The APIs enable applications to connect with each other while the plugin enables modification in the existing software platform.

5. Conclusion

As seen in this blog, online transactions are not going to stop anytime soon and neither does the software that supports these types of transactions. When clients purchase products, they trust the business to process the payment securely, quickly, and without any hassle. Therefore, having the right payment gateway can be a very beneficial and important part when it comes to delivering memorable customer service and protecting the business’s reputation. You can go through all the points discussed in this blog and find an online payment processing system that can be perfect for your business.