What is a Payment Gateway and How Does It Work?

A payment gateway is the online equivalent of a card machine or till – it processes cards and other payments. To keep the customer’s data secure all the payments are encrypted. This sounds easy but the processing behind it is quite complex. The software not only takes the information from the customer, it sends it to the bank or credit company for authorization and then responds to the store. At this stage the store will know if the transaction is successful or not.

How it Works

The payment gateway is the last step in an online sale. The gateway carries out a number of steps during which the customer’s data is always encrypted to maintain security. The main steps are:

  • The customer clicks ‘pay now’ and puts in their credit card details.
  • SSL (Secure Socket Layer) technology on the web browser makes sure the credit card information is encrypted and then sends it to the payment gateway on the merchant side.
  • The payment gateway sends the details to the payment processor who, in turn, sends it to the credit card company which evaluates it and sends its answer to the payment processor.
  • This answer goes back to the payment gateway which sends it to both the merchant and customer.
  • At this stage the transaction is either approved or denied.

At a later date the merchant will send all the approvals to the credit card company as a batch and the company will give the merchant the funds.

Why Do I Need It?

The main reason is that all online transactions are handled this way – there is no alternative. You must have one if you want to take online payments or you use a mobile phone to accept payments.

There are 2 types of payment gateways:

Hosted payment: The gateway sends the customer to a platform to enter their information. This type of gateway retains responsibility for security and is easy to set up. However, they are not favored in some countries and they can be slow. To use a hosted gateway you need to get an SSL certificate, a merchant ID, MWS access key and secret key. You can customize according to the look and feel of your own website if you wish.

Integrated Payment: These gateways use API (Application Programming Interface) which connects your business to the gateway service. These may also be known as non-hosted payment gateways. These provide an easy process for customers as they don’t have to travel from your website and they are very mobile friendly. However, your website takes on a lot of the responsibility for security. If there is a breach you could end up being audited so this will be the first challenge when considering this type of payment gateway. Some websites need work in order to support this type of gateway and you may need to work on making it mobile-friendly.

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