What Is a Payment Gateway and How Does it Work?
The fact that online payments have grown recently shows how important payment gateways are to your company. Payment gateways are services that handle credit and debit card transactions for your company. They are beneficial to your company since they provide secure and easy transactions and lessen the losses brought on by late payments.
So what exactly is a payment gateway? Is payment gateway and payment processor the same?
As the premier app development company in India, we have answers to all your doubts along with explaining how they're used with online payments the various methods you can incorporate and how it benefits your business. Let’s get started!
What is a payment gateway?
To sum up it briefly, a payment gateway is a network that enables your clients to send money to you. The point-of-sale terminals seen in the majority of physical stores and payment gateways are extremely similar. To complete a transaction using a payment gateway, businesses and customers must collaborate.
The payment gateway confirms the card information provided by your customer and determines whether there is sufficient money in their account to pay you once they place an order.
How can a payment gateway benefit your business?
Convenience
Whether you're watching the store or not, your customers can make purchases whenever they want when you link with a payment gateway. You and your consumers will find it more convenient if you let them shop whenever they want.
Faster payments
You know that it is difficult to get paid at all as a business owner. Many clients would prefer to pay promptly to avoid the trouble of promising to pay on a specific day and then forgetting to do so. They may accomplish that thanks to payment gateways, benefiting both you and your clients.
Better security
Security is the main worry of customers when making payments online. In the United States, losses from credit card theft are projected to hit $12.5 billion within the next two years.
There are three key reasons why using payment gateways significantly lowers the risk of credit card fraud:
♦ The payment gateway receives the customer's card details securely. This implies that the only people who will have access to the customer's information are them and the bank that issued it.
♦ To guarantee that your customer's card information is processed safely, every payment gateway needs to be in compliance with PCI DSS standards. This implies that they must adhere to specific security guidelines.
♦ 3-D Secure is an extra security technology offered by card services. For each card that the consumer uses to make an online payment, they must set a password.
Are payment gateway & payment processor the same?
Although they have different purposes, payment gateways and payment processors are two essential elements of electronic financial transactions, especially in e-commerce. Here's why they differ from one another:
Payment gateway
♦ Role: During an online transaction, a payment gateway serves as a mediator between the client, the company, and their respective financial institutions. It makes transaction authorisation easier and securely communicates sensitive payment data.
♦ Main functions: The payment gateway records the transaction status and updates the website or app after receiving the transaction approval or decline response. It then encrypts the transaction data and forwards it to the acquiring bank or payment processor on behalf of the company.
♦ Security: Payment data is safeguarded as it enters the company's payment system through the use of security measures by payment gateways. Payment gateways accomplish this by protecting sensitive data and stopping fraudulent transactions with safeguards such as encryption protocols (SSL or TLS), AVS and CVV checks and fraud-detection algorithms.
♦ Integration: Payment gateways usually use prebuilt plugins or APIs to interface with websites, mobile apps, and e-commerce platforms.
Payment processor
♦ Role: A payment processor, also referred to as a merchant services provider, is an organization that oversees transaction processing. A payment processor, also referred to as a merchant services provider, is an organization that oversees transaction processing. This covers the authorisation and settlement of payments between the issuing bank of the client, the acquiring bank of the company, and the applicable payment networks (such as Visa and Mastercard).
♦ Main functions: When a transaction is approved or declined, the payment processor analyses the transaction details, examines the customer's account balance and the legitimacy of the payment method, and enables the transfer of money between the accounts of the client and the business.
♦ Security: Payment processors use security methods to maintain the highest levels of protection for payment data, whereas payment gateways concentrate more on transaction verification and stopping payment fraud at the point of sale. Payment processors are required to abide by PCI DSS regulations, which guarantee the safe processing and preservation of cardholder data.
♦ Relationship with the business: Payment processors and businesses frequently have a direct contractual arrangement that includes the latter giving the former a merchant account. Bank accounts of this kind enable companies to take and handle electronic payments.
A payment processor is a company that works with merchants to handle processing, including the approval and settlement of cash between the involved parties. A payment gateway is a tool that securely transfers and enables the authorisation of online transactions. For example, PayPal serves as a gateway for payments as well as a processor of payments. Together, the two parts guarantee efficient, safe, and seamless electronic financial transactions.
In what ways does a payment gateway facilitate online payments?
You should be familiar with the following terms before we move on to the real process:
Merchant Account
Businesses keep their receivables in a separate bank account called a merchant account. Your customer's payment is first sent to your merchant account during a transaction, where it remains until you move it to the ordinary bank account of your company. To take online payments, you require a merchant account in addition to a payment gateway.
Payment Processor
A payment processor is a service that validates a customer's credit card information when a business bills them for a purchase, ensuring that the consumer has sufficient funds in their account to cover the amount. Should they comply, the payment processor approves the transaction and funds are transferred to the company's account; if not, the transaction is declined.
Let's now examine how the online payment gateway operates:
1. Transaction initiation
The consumer goes to the checkout page after choosing the goods or services they want to buy from the company's website or mobile application. They input their credit card number or digital wallet credentials as payment information.
2. Payment data encryption
Using SSL or TLS protocols, the payment gateway encrypts the data once the customer submits their payment details. Sensitive data is safeguarded during transmission by this encryption against theft or unauthorised access.
3. Data transmission to the business's server
The company's server receives the encrypted payment information and securely stores it before sending it to the payment gateway for additional processing.
4. Forwarding transaction details
The payment gateway obtains the encrypted transaction data from the company's server and transmits it to the acquiring bank and payment processor, the financial institution in charge of handling the payment on the company's behalf.
5. Transaction verification
The acquiring bank sends the transaction data to the appropriate payment processor or the issuing bank of the customer for authorization. The transaction data, such as the customer's account balance and the authenticity of the payment method, are verified by the bank that issued the card or payment processor.
6. Transaction approval or decline
The transaction is approved or declined by the issuing bank or payment processor based on the verification. The response is sent via the payment gateway along with the acquiring bank back to the company's server.
7. Communication of transaction status
The payment gateway notifies the company's website or app—which then notifies the customer—of the transaction status—approved or refused. The company fulfils orders after the transaction is authorised. If rejected, the client is advised and can be asked to attempt a different payment option.
How to integrate with a payment gateway?
Depending on how you want to take payments from the clients, you can link with a payment gateway in a few different ways.
♦ Customers are redirected from your business's website when they pay using the first kind of connection. This is suitable for companies who don't see a lot of internet traffic. Your customer is sent to your website after clicking the payment link, where they enter their card information and complete the transaction. You can find your payment processor on this page. PayPal is an illustration of this kind of payment gateway. You can personalise these payment gateways by, for example, adding your company's name or logo to the checkout page. One disadvantage of this approach is that, because the gateway is external, your company will not have complete control over the user experience.
♦ In this case, your customer stays on your website the entire time while a payment gateway handles the transaction. When the consumer enters information on your company's website, the information is sent to the payment gateway's URL, where the actual transaction is completed. This kind of payment gateway is ideal for companies who get the majority of their revenue from online payments because it gives customers a better experience because they remain on your website during the purchase process and are not redirected. But, since you will be requesting payment information from your customers via your own website, you must take the appropriate security measures to ensure that their data is secure.
♦ An API (Application Programming Interface) is used by the following kind of payment gateway. Similar to the previous one, this one also uses an API to handle payments once users directly enter their card information on the company's online payment page. These payment gateways provide you with total control over the user experience and may be personalised with your company name and brand. Companies that use these must handle their own PCI compliance and SSL certification.
In general, payment gateways let you take payments more quickly, easily, and securely while streamlining the online payment process for your company. A payment gateway is what you need if you wish to improve the method you are currently utilising or are thinking about accepting payments online. Hope this information comes in handy for you. Stay tuned for tech updates with us!
