Basic Facts about Payment Gateways

I have seen a ton of inquiries coming into our company's mail box over the past few weeks that convinced me that I need to offer a refresher on the basics of payment gateways. This article will detail what they are and do and go over the payment process.

Payment Gateway Basics?

Payment gateway is an internet-based service that transmits payment information from an e-commerce website to a processing bank. In short, it is the internet equivalent of the brick-and-mortar point-of-sale machines that is used by physical retailers in face-to-face payment processing settings. The so collected data are encrypted to make sure that the sensitive data is transmitted in a secure fashion.

Payment Gateway Transaction Process

Payment gateways connect the website's shopping cart (you need to have a shopping cart) with the acquirer's back-end system. The payment stages are as follows:

1. A visitor on your website places an order on an e-commerce website and provides his or her credit card account information.
2. The payment details is encrypted using a service called secure socket layer (SSL) and forwarded on to the merchant's server.
3. The payment gateway now collects the payment information and, after yet another SSL encryption, sends it on to the merchant account company's server.
4. The acquiring bank at this point forwards the payment information to Visa or MasterCard.
5. If the consumer has used a Discover or an American Express credit card, the card issuer also serves as a processing bank and makes a decision on whether or not to approve authorization of the payment and then sends its response back to the merchant.
6. The Credit Card Network (Visa or MasterCard) sends the payment data on to the card issuer.
7. The card issuer either approves or declines authorization of the payment and routes its response via a code (using the exact same channel) back to the acquiring bank. The authorization responses for declined transactions also offer details for the reason the transaction did not get authorized.
8. The acquiring bank now routes the response code (again through the payment gateway) to the e-commerce website where it is shown to the cardholder.
   

The process may sound complicated, but in its entirety, from submitting the payment to receiving the response code, only takes seconds.

The merchant now provides the service or ships the product and then deposits the payment. It is incredibly important that transactions do not get settled prior to the merchandise being shipped. If your customer sees the amount on her statement or payment activity log (now accessible online in virtually real time), prior to receiving the item, the sale may be disputed, setting in motion a chargeback process.