What Is a Payment Gateway and How Does it Work?

A payment gateway is a software application that payment service providers use to process payments for online purchases, originating on a merchant’s web site.

It acts as an interface between the merchant’s web site and a payment-processing bank, known as an acquirer.

Generally, a gateway can be used for many types of payment methods. The gateway encrypts sensitive credit card details to ensure that information is passed securely between the customer, the merchant and the acquiring bank.

When a customer purchases a product or service on a web site that is connected to a payment gateway, the gateway performs a variety of tasks to process the transaction.

1. Once the customer places their order on the merchant’s web site, they choose to check out or pay and are then redirected to a payment page to enter their credit card details.

2. If the merchant is fully compliant with the necessary security standards, the payment page can be generated on the merchant’s servers, and the card information collected and passed on to the payment application in a secure way.

The payment page can also be generated by the payment gateway application itself and information can be collected there.

Either way the card and transaction details are gathered and stored on the secure servers of the payment gateway.

3. From there, the payment gateway processes the transaction and sends all the information to the issuing bank for approval, via the acquirer and relevant card scheme.

4. Once the payment has been confirmed by the card schemes, the payment gateway sends the approved transaction back to the merchant’s web site and then the merchant informs the customer that the purchase had been successfully completed.

Of course the payment gateway performs a lot of other tasks as well, but when it comes to credit card payments, these are the main steps to processing a transaction.

Can you believe that his entire process only takes around 3 seconds?! It took us about 10 times the amount of time to explain it to you!

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Payment gateways add a whole load of value throughout this process. Here are some of the key features:

• A payment gateway is the most common way for a merchant to connect to the payment system. Only the largest merchants are able to connect to an acquiring bank directly.
• Gateway transaction fees are very small compared to the advantages they offer in helping a merchant connect to an acquirer, manage their business and control the risks associated with accepting online payments.
• A good payment gateway will provide the merchant with many customization reporting options, which help the merchant to manage their business.
• A good payment gateway will be connected to and able to process many different payment methods that may not yet be offered by the merchant.

There are series of payment gateway companies, we have Inter-switch, Simple pay, Cashenvoy, Paypal, and many more.