Concept and Key Operational Principles of Payment Gateway

The payment gateway enables the payment ecosystem to function smoothly, as it helps companies and individuals to process payments on the Internet. If you have an online store, you don’t need to be a payment gateway pro, but it’s important to understand the basics of how an online payment flows from your customer to your bank account.

Let’s take a look at what a payment gateway is, how it works, what an online merchant is for, and how to determine which payment gateway service is right for your company.

Key Links in Online Payments

Before getting to the concept of a payment gateway, you need to identify the main players in online payments. When a customer clicks the “Pay” function on your site, the main players take part in the payment.

1. Seller: this is you, namely an Internet business that operates in any field (travel, retail, e-commerce, games, forex, etc.) that offers products or services to customers.
2. Customer: the cardholder who wishes to have access to the products or services marketed by the merchant and initiates a payment.
3. Issuing bank: An issuing bank is a client bank that produces a client’s credit or debit card on behalf of the schemes (Visa, Mastercard).
4. Acquirer: This is a financial company that maintains a merchant’s bank account. The acquiring bank transfers the merchant’s payments to the issuing bank in order to receive the transaction.

What Is the Main Concept and Characteristics of a Payment Gateway/Processor?

A payment prossesor is a technology that collects and transfers payment data from the client to the acquirer, and then confirms the acceptance or cancellation of the payment back to the client. The payment gateway carefully checks the details of the client’s card, guarantees the availability of finance and, as a result, enables merchants to receive payment. It acts as an interface between the merchant’s website and its acquirer. It encrypts sensitive credit card information, allowing secure data transmission from the customer to the acquiring bank through the merchant.

In general, the payment gateway is an intermediary between the buyer and the seller, ensuring that payment is made safely and quickly. An online payment gateway can make it easier for sellers to introduce the required software. As an intermediary in payment processing, the gateway regulates the security of confidential customer card data between the acquirer and the merchant.

Why Is a Payment Gateway Required?

One may wonder why a payment gateway is needed if it is an intermediary? An online payment is processed as a payment without presenting a card. The customer’s card cannot be physically passed through the POS terminal, as is the case in ordinary stores. Therefore, you can rely solely on the card data that the client writes on the payment page. However, how to be sure that the card used by the client belongs to him/her? In operations without presenting a card, the risk of fraud is the highest, and it is in these situations that the payment gateway helps a lot.

What happens if the payment gateway is removed from the flow of Internet transactions? Fraudsters will easily gain access to the data of the cards used to make payments, which will make any business vulnerable to fraud and reverse transactions. In addition, scammers will look for additional options for making illegal payments, which can damage the reputation of your company.

The payment gateway keeps your client’s privacy. The payment prossesor directs information from you, the merchant, the acquirer and the issuing bank using data encryption to prevent unwanted threats from personal card data. In addition to controlling fraud, the payment gateway also protects merchants from expired cards, not getting enough money, closed accounts, or exceeding credit limits.

How Does the Payment Gateway Work?

The client determines for himself/herself the product or service that he/she needs and goes to the payment page. Most payment gateways offer you different options for your transaction page. Such mechanisms offer you the following options for customizing your payment page, customized according to your business requirements.

Hosted Payment Page

A ready payment page where customers will be directed when making a payment. The payment prossesor securely receives the payment information before sending it to the acquirer. A hosted payment page minimizes the PCI load for online retailers as long as you don’t collect and store cardholder information on your own server.

Server-To-Server Integration

Server-to-server connection is also called direct integration, as the process connects 2 servers – the merchant with the payment gateway. By requesting card details on the payment-processing page, you can provoke a direct transaction. Customers can make a payment by card without being redirected to the payment gateway page, which will give a faster payment, a more user-friendly interface and more control over the design of the payment page from the merchant’s point of view. Server-to-server integration is fine if you need saved customer billing information before sending it to a payment gateway for further processing.

Client Side Encryption

Client-side encryption, also referred to as encryption at source, is confidential encryption on the client-side device before it is sent to the merchant’s server. This enables the merchant to facilitate PCI compliance requirements. In general, it enables you to accept transactions on its website while at the same time encrypting the card data in the browser using the payment gateway encryption library.

1. The client enters information from his credit card or debit card on the payment page. These are the cardholder’s name, expiration date and CVV number (3 digits on the back). This information is privately passed to your payment gateway, depending on the integration (hosted payment page, server-to-server integration or client-side encryption).
2. The payment gateway tokenizes or encrypts card information and checks for fraud before sending card data to the acquiring bank.
3. The acquiring bank then sends the data to the card schemes (Visa, Mastercard).
4. Card schemes also check data for fraud, and then send information about the payment to the issuing bank.
5. The issuing bank, after checking for fraud, authorizes the payment.
6. Confirmed or canceled payment messages are sent back from the card schemes and then to the acquirer.
7. The acquiring bank sends the approval or cancellation information back to the payment gateway, which then sends a message to the merchant. If the transaction is approved, the acquirer receives money from the issuing bank and holds the amount in your merchant account.
8. Next, the money is transferred to the seller’s account, this process is known as settlement; the actual settlement period depends on the agreement signed by the seller with his/her payment prossesor.

Based on the message, the seller can either confirm the payment or ask the buyer to try a different payment option.

How Does the Payment Gateway Work?

Both sellers and buyers benefit from using a payment gateway, although most of its operation occurs in the background of the transaction. All the steps mentioned above take very little time.

If you are interested in any commercial field, you can also see different offers of businesses for sale in various jurisdictions. In particular, you can pay attention to the following categories:

• AEMI/EMI (Authorized Electronic Money Institution license);
• Banking License;
• E-Commerce and many other.

Our specialists will help you to choose the best option among the proposed companies. Feel free to contact us anytime.