What Is a Payment Gateway and How It Works?
What Is a Payment Gateway and How It Works?
Simply put, a payment gateway is a middleman between the merchant and customer to securely transfer payment data. To understand what is a payment gateway and how it works, just suppose:
You’re running an eCommerce store or a nonprofit organization, and you’re not using a payment gateway. To get paid for your products/services or to collect funds for your charity, you’ll have to:
- Verify customer’s credit/debit card details
- Encrypt sensitive payment data
- Pass on encrypted data to the acquiring bank
- Get transaction authorized by the issuing bank
- Ask the acquiring bank to collect funds and deposit into your account
Doesn’t it sound so complicated? Well, this is what all the reliable & trusted payment gateways do for you.
What Is a Payment Gateway Definition?
A payment gateway can be defined as:
“An online payment processing technology that encrypts and transfers sensitive payment data from the customer to the acquiring bank (merchant’s bank) and then relays the data back to the customer about the payment acceptance or decline.”
Before proceeding to and understanding how a payment gateway works, you need to know what are the 6 key players in an online transaction that’s executed using a payment processor.
6 Key Players Involved in Online Transactions
When a credit/debit card-based online transaction is completed through a payment gateway, it involves the following major players:
1. The Merchant (Business or Charity):
An individual or an organization that’s entitled to receive the payment from the customer is called the merchant.
A payment gateway, a PSP (payment service provider), or any other financial institution can issue you a merchant account.
And if you don’t have a merchant account, you can’t accept payments from your clients or donors.
2. The Customer/Donor:
The customer is your client who has purchased your products/services or is making a contribution to your cause. Your customer will need to have an account with the issuer bank to make an online payment.
3. The Acquirer:
The acquirer is the merchant that is entitled to receive funds and deposit them into the merchant’s account.
4. The Issuer:
The issuer is the customer’s or donor’s bank that authorizes a transaction and issues payment from the client’s account to the acquirer.
5. A Card Scheme (Visa, Mastercard):
After getting information from the acquirer, the card schemes (Visa, Mastercard) perform a fraud check and pass it on to the issuing bank to authorize the transaction.
6. The Gateway Itself:
Acting as an interface between the merchant’s website and the acquiring bank, the payment processor securely relays sensitive information between other key players.
To integrate a payment gateway into your charity or business website, you’ll need the payment gateway extensions.
World’s top 15 payment gateway extensions include:
- Paypal Pro – Serves 200+ countries/territories and 25+ currencies
- 2Checkout – Present in 230+ countries/territories with 45+ payment methods
- Braintree – Works in 45+ countries/ regions with access to 260+ million PayPal users
- Authorized.net – For charities based in the US, the UK, Europe, Canada, Australia, etc.
- Stripe – Available for charities in 39+ countries. Supports 135+ currencies
- Amazon Pay – Accept voice-based donations from Amazon customers worldwide
- Bluepay – Especially for Canada and the US to collect funds from home and abroad
- Stripe with iDeal – 34+ countries and 60+ financial institutions supported
- Yandex – For Russia and CIS countries to collect donations from across the world
- Paymaster24 – Collect funds from 240 countries/territories
- Paystack – Africa’s economical payment gateway for worldwide donation collection
- Conekta – Mexico’s favorite payment gateway
- PayU – India’s fast and simple gateway with 250+ donation processing options
- Quickpay – Europeans’ preferred payment method with 20+ payment options
- Cardcom – Israel’s popular gateway to receive funds from anywhere in the world
How Does a Payment Gateway Work?
While it’s the matter of a few clicks for a customer to make an online payment and get a (payment) confirmation message, the payment gateway executes various complicated procedures in the background.
Here’s the simplified procedure regarding how a payment gateway works:
- Capture and Encrypt Customer’s Financial Data
As a customer feeds card or payment details into the online platform of a payment gateway (which may be on the merchant’s website), it captures and encrypts the data to safeguard it against theft.
- Perform Fraud Checks
The gateway verifies the card details of the customer and performs fraud checks to minimize the risk of an illegal transaction.
- Relay Data to the Acquirer
After the validation of the client’s data, the gateway relays the information to the acquiring bank.
- Send Data to Card Schemes
On receiving the data from the online payment gateway, the acquirer performs fraud checks and forwards it to the card schemes (Visa or Mastercard).
- Conveying Information to the Issuer
After performing another layer of fraud check, the card schemes convey the payment information to the issuer bank to authorize the transaction and issue funds.
- Authorize Transaction
After authorizing the transaction, the issuing bank sends the approval message to the card schemes. The card schemes then pass on the same message to the acquirer.
If the payment is approved, the funds are deposited into the merchant’s account. But the hectic job of a payment gateway does not end here.
- Send Approval/Decline to the Gateway
The acquiring bank sends an approval or rejection message to the payment gateway.
- Transmit Message to Merchant
The gateway conveys a message to the merchant about the approved/declined payment.
- Display Payment Confirmation
After receiving the payment approval message from the gateway, the merchant can display the same on the webpage for the customer. And, in case of a declined payment, they will ask the client to choose an alternative payment method and reinitiate the transaction process.
8 Key Advantages of a Payment Gateway
- A common method
- Fast, prompt payments
- Secure – minimize the fraud risk
- Multiple payment methods
- Customizable reporting
- Payments in local currency
- Protection from expired cards & closed accounts
- Keeps all the complicated procedures in the background
A payment gateway does a hectic job and involves various complicated procedures to complete it.