Home >> Topic >> What is a payment gateway and how does it work

What is a payment gateway and how does it work


What is a payment gateway?

A payment gateway is an online payment service when integrated with an e-commerce platform.

The procedure for receiving payment includes the customer needing to fill in the credit/debit card number, expiry date and CVV.

Afterwards, the customer proceeds to pay, which is then transferred from the buyer's account to the seller's (merchant's) account.

What is the role of a payment gateway?

The primary role of an online payment gateway is to approve the transaction flow between the merchant and the customer.

Authorizing transactions between merchants and customers plays a vital role in online transactions.

It helps e-commerce platforms provide customers with convenient payment services, thereby enhancing their existence value.

Furthermore, it has resulted in a solid reputation for e-commerce platforms that not only lead to fast, secure payments, but the same convenience and success every time.

Payment gateway services can be provided directly by the bank or by a bank-authorized payment service provider.

How does a payment gateway work?

Speaking of the operation of the online payment gateway, the payment procedure is followed every time.

When a customer orders a service/product from a merchant that supports a payment gateway.

The payment gateway needs to go through various steps from filling in the credit card information to the final payment into the merchant account-

Step 1: After the customer places an order online and pays, they need to enter the details of their credit/debit card.

Step 2: The card details are encrypted via Secure Sockets Layer (SSL) between the browser and the merchant's web server.

The payment gateway removes the merchant's obligation to comply with the Payment Card Industry Data Security Standard (pCIDSS), rather than diverting customers from the website.

Step 3: After that, the merchant forwards the transaction details to the payment gateway and encrypts it with the payment server hosted by the payment gateway with SSL.

Step 4: The payment gateway converts the information from XML to ISO8583 or variant information format (the EFT switch understands the format) and then forwards the transaction information to the payment processor used by the merchant's receipt bank.

Step 5: The payment processor forwards the transaction information to the card association (ie Visa/MasterCard/Americanexpress).

Sixth step. Next, the credit card-issuing bank receives the authorization request, verifies available credit or debit cards, and sends a response to the processor (through the same authorization procedure) with a response code (ie, approve or deny).

Response codes can also help communicate why a transaction failed, such as insufficient funds.

Step 7: The processor forwards the authorization response to the internet payment gateway, and the payment gateway receives the response and forwards it to the payment processing interface.

This process is called authorization or "Auth". Generally, this takes 2-3 seconds.

Step 8: The merchant then fulfills the order, the above process can be repeated, but this time the authorization is cleared by completing the transaction.

Typically, "purge" does not begin until the merchant completes the transaction (ie, the shipping order).

This will cause the issuing bank to "clear" the authorization (i.e. transfer the authorization hold to a debit) and prepare it for settlement with the merchant acquiring bank.

Step 9: Merchant submits all approved authorizations via batch (end of day) to acquiring bank for settlement through its processor.

If there is no explicit "clear", this usually reduces or "clears" the corresponding "authorization".

Step 10: The acquiring bank submits a batch settlement request to the credit card issuer.

Step 11: The credit card issuer pays the settlement amount to the acquiring bank (in most cases the next day).

Step 12: The acquiring bank deposits the approved total amount of funds into the merchant's designated account (the same day or the next day).

If the merchant is banking with the same bank, it may be an account with the acquiring bank or an account with another bank.