What Is a Payment Gateway?
“A payment gateway is the service that sends all of your credit card transactions to your credit card processors,” “It also sends you a message from your credit card processor that lets you know a transaction has been authorized. There are even some payment gateways that will automatically add tax and screen for fraud.”
In other words, a payment gateway is simply a software application. It’s basically a conduit between an eCommerce website and the bank that authorizes (or declines) a customer’s credit card payment.
Credit and debit cards, eCheck (ACH), and even cryptocurrencies like bitcoin are all processed through payment gateways.
Ultimately, a payment gateway is the final step of the sales process on an ecommerce website. Without it you won’t be able to securely charge your customers when they purchase items from your website.
What is the Role of a Payment Gateway?
Payment gateway services are required for all online credit card processing. It’s the same exact process as a point of service (POS) device does when you pay for your lunch at restaurant.
The Payment gateways works with your purchase items from a brick and mortar retailer. So, the main role of a payment gateway is to authorize transactions between you and your customers.
Remember, without a payment gateway approving the transaction process cannot go move forward and you won’t receive your money.
Do I Need a Payment Gateway?
If you run a strictly eCommerce site, which means that you’re processing payments online, then the answer is absolutely, yes. There’s no other way to accept credit cards through the internet without a payment gateway.
Keep in mind that since transactions are processed over a payment gateway they are processed as “card-not-present” transactions. This means that the merchant is simply relying on the credit card information that the customer enters. The merchant doesn’t actually see the customer’s credit card.
During the card-not-present sale, there is no way to run the data on the card’s magstripe or EMV chip. The result is that there’s potential for higher instances of fraud. As a result, you may be charged a higher rate than card-present transactions.
How Do Payment Gateways Work?
As a customer, a payment gateways seems simple and straightforward. You visit an eCommerce site, select the items you want, add them to your cart, and checkout.
You enter your payment information and confirm your order. Now you can sit back and relax until your item arrives at your doorstep. Behind the scenes, however, it’s a little more complex.
The gateway process follows these six steps.
Step 1: The customer places an order and enters their payment information. An online the transaction will be processed as a “card-not-present” transaction. Again, this may result in a higher processing rate. Once this info has been submitted, it’s encrypted, and then sent on it’s way.
Step 2: The encrypted data is first sent to the merchant’s processor, which is simply the company that actually processes the transaction.
Step 3: The processor routes the transaction data to the credit card association. Visa, MasterCard, Discover, or American Express are credit card associations. These card associations charge an interchange fee for each transaction.
Step 4: The next step is where the transaction is approved or denied. The card will obviously need to be valid and have enough funds.
Also in the fourth step the authorized user must also not have any holds or freezes and the transaction will be authorized. What’s amazing is that these first four steps take place in a matter of seconds!
Step 5: The transaction becomes authorized. The issuing bank then transmits the authorization back to the parties in the payment processing network.
The authorization starts with the credit card association, then with the merchant’s business. Finally, back to the ecommerce site through the payment gateway.
Step 6: Although the transaction only takes seconds, it can take between 24 to 48 hours for the funds to be available in your account.