How Payment Gateway works?
This article will give the brief knowledge about payment gateway and how does it works.
A payment gateway is a service or facility provided by “e-commerce application” that authorizes credit card payments for e-businesses, online retailers, etc. it is equivalent to physical point of sale terminal located in most retail outlets. These gateways encrypt and store sensitive data including credit card number, account number, CVV number, etc. This ensures that the sensitive information is kept safe while a payment is processed. Gateways are also responsible for transferring payment information to the customer’s acquiring bank. Payment gateways reduce a business liability and ensure that payments are processed safely.
Payment processing can also be automated by having a secure software vendor communicate with the payment gateway and the acquiring bank to ensure seamless payment processing.
The payment gateways captures credit or debit card transaction, encrypts the transaction information, routes it to credit or debit card processor and then return with either an approval or a decline notice. This is a seamless process and customer does not directly interact with the payment gateway as data or information is forwarded to the gateway via shopping website and a secure connection.
There are three vital things that play an important role in online payment gateway when a customer attempts to make a purchase from any website using credit or debit card. Those three things are as following:
When any order is placed by customer using credit or debit card via payment gateway, it must be first authorized by the card issuer to check that the card is acceptable or not. Then the gateway affords a link between customer, shopping website and card processor. It also allows for fast and efficient transaction processing with an average response time of 2 seconds only.
At the end of each and every working day, payment gateway collects all your information of transaction together and sends them off to your bank in a single batch. This process is known as “settling” and being done so that you can receive your payment. If there are no transactions pending in the batch, it is not closed and no batch fee is generated or charged. Once the funds settled, it generally takes working days for customer to see the funds electronically deposited into your bank account.
All these processes record your transactions and allow the customer to view the payment gateway report facilities and can review them, print them, download them to your system or device for further processing or use.
Today payment gateways are connected to unlimited customers at the same time, unlike a terminal or software solution where only one customer at a time can check out or only one operator can enter transaction at a time. Now a day, we can have multiple users entering transactions from various locations all at the same time.
The payment gateways provide you with a virtual terminal where you can manually enter transactions you receive via other methods other than your website. This extremely useful for entering orders you may take over the phone or through e-mail.
Reduce fraudulent transactions
As we all know that there are unlimited users associated with the transactions at the same time, so there is also a chance of fraudulent transactions. But payment gateways provide “fraud screening tools” to reduce fraudulent transactions and it includes the address verification and card code value (CCV) or card verification value (CVV) to ensure that the payments made via your internet payment gateway are legitimate orders and not from fraudulent use. It also helps prevent fraud by storing the credit or debit card transactions in the internet payment gateway rather than on your website which reduces your liability as you won’t have to store any card information.
How does it work?
These are the steps followed to achieve safe and secure payment process while paying through payment gateway enabled merchant.
- Customer places an order on any website by providing all the credit or debit card details and submitted to proceed further.
- Now if the order is placed via a website, the customer’s web browser encrypts the information which is sent between the browser and the merchant’s webserver. The encryption can also be done via SSL (secure socket layer). The encrypted information is sent directly from browser to merchant’s system which reduces the merchant’s “payment card industry data security standard (PCI DSS)” compliance obligations without redirecting the customer away from the website for the sake of customer’s liability.
- Afterward the merchant forward the transaction details to their “payment gateway” which is another encrypted connection to the payment server hosted by the payment gateway. The payment gateway then forwards it to “payment processor” used by the merchant’s acquiring bank.
- Now the payment processor forward the information to the “card association” or “issuing bank” which directly provides the response of approved or declined to the payment gateway.
- The card issuing bank receives the authorization request and credit or debit checks and sends a response back to the processor with a response code (response code with reason in case of transaction failure). Meanwhile, the card issuer holds an authorization with that merchant and consumer for the approved amount.
- The processor forwards the authorization response to the payment gateway which then receives the response and forwards it onto website where it is interpreted as a relevant response then relayed back to the merchant and cardholder. This entire process typically takes 2-3 seconds and is known as “authorization or auth”.
- The merchant then fulfil the order and above process is repeated but this time is to “clear” the authorization by consummating the transaction. The clear is initiated only after the merchant has fulfil the transaction which results in the issuing bank to clear the “auth” and prepare them to settle with the merchant acquiring bank. Then the merchant submit all their approved authorization in a batch to their acquiring bank for settlement via its processor and this entire process is known as “settling”.
- Now the acquiring bank makes the batch settlement request to the credit or debit card issuer which the makes a settlement payment to the acquiring bank.
- The acquiring bank subsequently deposits the total approved amount into the merchant’s nominated account.
The entire process from authorization to settlement to funding typically takes 3 working days to complete safely and securely.
Thank you for your patience 🙂