How does a Payment Gateway Work?
Understanding the logistics of online payments is beneficial if you are looking for credit card processing providers. The terminology used to explain online payment processing can appear baffling, but it really is a straightforward concept.
What is a payment gateway?
A payment gateway connects a business’s website on the Internet to the banking network. This enables a customer to enter their credit card on a website or application, and securely complete the transaction in real-time, immediately and automatically letting you and your customer know if the transaction was successful or not.
The step-by-step process of how a payment gateway works
The process is initiated when a customer places an order on a website by entering their card details and submitting the order. The customer’s web browser will use SSL encryption to securely encrypt the information and send it to the merchant’s server.
The merchant then forwards the information to their payment gateway. This connection is also SSL encrypted. The payment gateway forwards the transaction information to the payment processor used by the merchant. The payment processor then instantly transmits the information to the customer’s credit card association (for example Visa or MasterCard).
The credit card issuing bank will receive the authorization request and send a response back to the payment processor. This response will normally say either “approved” or “declined”, and if the transaction is declined, a response code will be included that will provide an explanation (for example “insufficient funds”). The payment processor then immediately forwards this response back to the payment gateway. The payment gateways relays it to the website where it is interpreted as a relevant response then relayed back to both the cardholder and the merchant. This entire process normally takes only about a second or two.
If the transaction is approved, the transaction is successfully completed. The merchant submits all their approved authorizations in a batch to their acquiring bank for settlement via their processor. The acquiring bank then deposits the sum of the approved funds into the merchant’s account. From initial authorization to final fund settlement, the process usually takes about two days.
The importance of payment gateways
The payment gateway is a fundamental component in online payment processing. Payment gateways and processors work together with merchant accounts and standard business bank accounts to efficiently and seamlessly process online credit card transactions. The encryption and security of payment gateways needs to be top-notch to ensure a safe transaction. Payment gateway transactions are often carried out through HTTPS protocol to protect customers’ personal details. A digitally-encoded passcode known only to the merchant is used to validate requests from the payment page result, and sometimes it is also required that the IP of the requesting server be verified. There is a growing support for Virtual Payer Authentication (VPA) by payment gateways, implemented as 3-D Secure protocol, which adds an additional layer of security to online payments.
How to set up a payment gateway
If you do sign up for a merchant account for your website, the payment gateway is normally included in their services and is set up for you.
To find out more about how a payment gateway works, or to sign up for a merchant account, please call (888) 924-2743 or go to Charge.com.