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The Basics of Payment Gateways

There would be no digital marketplace if it weren’t for the sophisticated payment channels that keep it alive - according to Statista, the global transaction value of digital payments in 2020 was a staggering $5,204 Billion - and continues to rise daily.


On our end, however, this massive system is fairly simple to use, reliable, and a key part of any e-commerce venture. And it’s all made possible through the use of payment gateways.


In this article, we’ll cover just what a payment gateway is, how it functions, and some of the most well-known and successful examples on the digital market today.



What Is a Payment Gateway?


In simple terms, a payment gateway is the software that bridges the gap between a customer, the point-of-sale, and the customer’s bank account. This is what the vast majority of e-commerce businesses use to accept payments online, all over the world.


Payment gateways have slowly developed alongside the rest of the internet - first invented during the mid-1990s by an American company named CyberCash. Soon after, an arms race began between big names such as Visa, Mastercard, IBM, and more - culminating in the examples we see in use today, such as Paypal and Amazon Pay.


Payment gateways come with a host of important benefits, all of which have contributed to their immense popularity with modern businesses. Some of these are:


● They don’t need direct access to a user’s credit or debit card.

● They come with several layers of encryption and safety.

● They make the purchasing process easy and convenient for users.

● They can easily be used across borders, making it easier for companies to expand.

● The tech is also very mobile-compatible, adding to its ease of use.


Now that we understand just what a payment gateway is, let’s take a closer look under the hood.


How Do Payment Gateways Work?


While the process is simple on the user-end, there’s quite a lot of work that goes into each transaction. First, it’s important to understand the four key elements that take part in any payment gateway transaction:


● The buyer

● The merchant or seller

● The issuing bank, which holds the buyer’s account

● The acquiring bank, which holds the merchant’s account


The process begins when a customer has added their purchase items to a cart and initiated a checkout. Generally, this will direct the customer to a highly secure bank website, where they will have to add in credit card details or other bank information.


In recent years, this step also involves the input of an OTP or one-time password, an additional security layer where the payment gateway sends a password directly to the buyer’s email account or phone number.


Once the customer submits this information, the payment gateway then encrypts data on both ends of the transaction - making it tough for malicious elements to access important bank data.


A good payment gateway will also use separate measures to guard against fraud and data logging, and employ security configurations such as TLS (Transport Layer Security) which is used in everything from bank transactions to private messaging apps.


Once the transaction data reaches the issuing bank, it checks if the customer’s account has the required funds to make the purchase. If so, the acquiring bank then collects the purchase amount and settles it into the merchant’s bank account.


Finally, the merchant and customer both receive a confirmation message from the payment gateway - the transaction is finally complete!


What Happens if the Transaction Is Denied?


Generally, the payment gateway performs a check, and on confirming a declined or failed transaction, will allow the buyer to choose a different payment method.


This can occur for various reasons, such as having insufficient bank balance, bank limits on the merchant’s incoming transactions, network issues, and more.


What Makes for a Good Payment Gateway?


Out of 288 global payment gateways, Paypal is by far the most popular one - but that doesn’t mean that you don’t need to educate yourself over the various pros and cons of payment gateways.


When choosing a payment gateway for your e-commerce business, it’s important to keep the following points in mind:


● Put yourself in your customers’ shoes - what kind of checkout experience would they like to have?

● Make sure that all your analytics, inventory, and web portal systems play nice with your payment gateway of choice.

● Choose a provider that can work offline as well - this lets you freely expand into brick-and-mortar stores if you so wish.

● Finally, ensure that your payment gateway does not compromise on data security, and learn how its various security systems work to keep you and your customers safe.


The main ingredients of any payment gateway are threefold - it authorizes your transactions, settles payments into the secure accounts, and accurately reports this data to the right end users - all within the span of a few seconds.


We hope that this simple primer to payment gateways has helped you better understand how money flows into your business.


To learn how our payment solutions can help you run your business more efficiently, schedule a free consultation with our merchant services team today.

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