What is a Payment Gateway and How does it work?

Ashish M. Shaji

21 Sep, 2020

In the last few years, we have seen a rapid increase in the use of digital payment methods. This has increased all the more after the Covid-19 pandemic. So do you know how the online payment gateway process work? In this article, we will provide you rich information on it.

What is a Payment Gateway?

It is a merchant service that authorizes and processes debit or credit card or PayPal payments for online merchants and traditional businesses. Simply speaking, it is a middleman between your online store and the payment processor that receive payment from your customer.

It facilitates these transactions by encrypting sensitive data and transferring it between a payment portal and back/front end processor.

If we look at the process, the gateway:

• Collects the credit/debit card information;
• Encrypts the transaction information;
• Routes it to the credit/debit card processor; and
• Sends either an approval or a decline.

Is Payment Gateway (PG) process secure?

PG can be integrated with most websites and virtual shopping carts to streamline online credit card processing. This shopping cart is often used before the PG. It allows your customers to choose various items that they wish to buy, and at the checkout, the shopping cart sums the things that are bought, adds tax and collects the customer’s shipping and billing information.

When the shopping cart process is completed, the PG encrypts and stores sensitive data like credit or debit card numbers, CVV, and CVV2 information. These sensitive data must be protected from any fraudulent activities.

Security is the topmost critical part of this process; the card associations have created rules and regulations which has to be followed by the person who has access to the card information. These rules are called the Payment Card Industry- Data Security Standard^[1].

To ensure more protection, online order is completed by using an HTTPS protocol that communicates personal information securely through the parties to the transaction. It safe keeps that sensitive information while the payment is processed.  A PG service company ensures that a PG process is safe and secure.

How does a Payment Gateway work?

It facilitates communication between your website or brick and mortar store, the payment processor, and the bank that issued the credit or the debit card being used to complete the purchase.

The process of its working is mentioned in step by step manner below:

• The process begins when a customer orders a product from a PG enabled merchant. The customer starts the process by placing the order by clicking buy or an equivalent option or by entering the card details on the app or merchant website.
• In case where the order is made through a website, the customer’s web browser encrypts the information to be sent to the merchant’s web server. In other cases, it is done through the Secure Socket Layer.
• Then the information is forwarded from Merchant’s site to the PG.
• PG sends the information of the transaction to the payment processor used by the acquiring bank of the merchant.
• An authorization request is received by the card association, which verifies the request and sends the response back to the processor. It sends the response as success or failure of the request and also provides the reason for the same.
• The payment processor then forwards this information to the PG.
• Then PG forwards it to the Merchant website. It is called authorization and just takes 2 to 3 sec. The merchant then completes the order, and the above process can be repeated.
• At last, the PG performs a process called settling during which it groups all your transactions and sends them to the acquiring bank of the merchant in a single batch through the processor for settlement.
• It also records your transactions and allows you to see them using the PG report facilities. This completes the single PG process.

What are the benefits of using a Payment Gateway (PG)?

The main benefits of using this are mentioned below:

• Security

The most significant advantage of using PG is the security that it provides to your e-commerce store, which ensures that your customers can shop with ease. It takes care of all the security-related aspects of the transaction and ensures that the funds reach its destination safely.

• Easy integration

PGs are easily integrated with popular e-commerce platforms. For example, Shopify integrates with more than 100 PGs. They also have their own out of the box payment system, thereby avoiding the routine of you having to sign up.

• Works 24*7

One of the biggest advantages of selling online is that there is no need to be in front of the computer when sales are taking place. It works on autopilot.

It is similar to PGs as they function round the clock and can process the payment of the customer irrespective of the time they make the purchase.

• Availability of multiple options

The PG accepts both debit and credit card transactions at the base level, but one may want more sophisticated things that can support PayPal payments and gift vouchers.

• Insightful reporting

It can also provide real-time reporting, which allows you to know how your business is doing. This is an added benefit if you are willing to understand how you can increase sales or something alike. 

Conclusion

Read our article:How to Start Payment Gateway in India