From the perspective of the customer, the process of paying for goods or services can seem simple. But after deeper inspection, there are a few more moving pieces than meets the eye. One of those pieces is a payment gateway. This technology is a payment service used by merchants to accept debit or credit card purchases from customers either through physical card-reading devices in-store or through payment processing portals found in online stores.
Payment gateways shouldn’t be confused with a virtual terminal which is a software that lets you take payments from any device by turning it into a point-of-sale terminal. Instead the payment gateway acts as the conduit, passing credit card transaction information from the merchant to the relevant banks either through credit card terminals in brick-and-mortar stores or through payment services and APIs for websites and mobile applications, as part of the payment process. It is the middleman between the customers and the merchant, helping secure a prompt transaction. Typically, having a payment gateway incurs an additional fee.
In order to understand how a payment gateway works, there are a few terms that you need to know:
Payment Processers – The entity that authorizes transactions, transmits transaction data to clear and settle the transactions for the merchant; in other words, the payment service that actually processes the payments with the card brands
Issuer – (Card Issuing Bank) The bank or financial institution that issued the buyers credit or debit card or other digital payment method
Acquirers – (Merchant Acquiring Bank) The bank or financial institution that holds the merchant account and settles the approved transactions
Merchant Account – The type of bank account needed for a business to accept and process card brand payments through credit or debit cards
Card brand association – Visa/Mastercard/Discover/American Express
The transaction flow is the same whether you’re using a physical or virtual payment gateway, but mobile and online payments use digital capture files to package the credit card information rather than output from a credit card reader. Now that you have the background, let’s take a look at all the steps involved in the payment process with a payment gateway:
- The customer presents their card through the merchant’s credit card reader or ecommerce site
- The payment gateway sends the transaction information to the payment processor
- The processor sends this information to the card brand association involved
- The credit card issuing bank receives the authorization request, verifies the credit or debit card in question, and sends back a response to the processor as either approved or denied; if denied, this code will include why the transaction was denied
- The processor forwards the authorization response to the payment gateway and the gateway will take it and forward it to the interface used to process the payment (either online or in-store); this part of the process is called the authorization and it generally takes between 2-3 seconds
- If online, the merchant fulfills the order and the entire process is repeated to ‘clear’ the authorization; this means the issuing bank moves the authorization hold to a debit and prepares to settle with the merchant acquiring bank
- If using batch processing, the merchant will submit all their approved authorizations in a batch at the end of the day to their acquiring bank for settlement through its processor