Chapter
3

How Do Online Payments Work for a Business


WHAT IS A PAYMENT GATEWAY?

A payment gateway facilitates a payment transaction by the transfer of information between a payment portal (such as a website, mobile phone or interactive voice response service) and the front end processor or an acquiring bank.

In simple steps, a payment gateway:

  1. Captures the credit card transaction
  2. Encrypts the transaction information
  3. Routes it to the credit card processor and then;
  4. Returns either an approval or a decline notice.

This way, your customer knows immediately whether or not their credit card was approved.

This is a seamless process and a customer does not directly interact with the payment gateway as data is forwarded to the gateway via your shopping cart and a secure connection.

HOW DOES A PAYMENT GATEWAY WORK

PAYMENT gateway process for a merchant

The payment gateway process kicks off when a customer orders a product from a payment gateway-enabled merchant. The payment gateway performs a variety of tasks to process the transaction.

1. A Customer Places An Order

Either by clicking ‘Buy’ or an equivalent option or by entering the card details on the merchant website or application.

2. Encryption of Information and Forwarding to Merchant’s Site

If the order is via a website, the customer’s web browser encrypts the information to be sent to the merchant’s web server. And in other cases, this is done via the Secure Socket Layer (SSL).

3. Forwarding Information from Merchant’s Site to the Payment Gateway

This is an SSL encrypted connection from the merchant’s server site to the payment server hosted by the payment gateway.

4. Payment Gateway sends transaction information to the Payment Processor used by the Merchant’s Acquiring Bank

5. Payment Processor forwards transaction Information to the Card Association

The card association also acts like the issuing bank and directly provides a response of approval or declination to the payment gateway.

6. The Card Association receives the authorization request, verifies the request and sends a response back to the processor.

It conveys the success or failure of the request as well as the reason.

7. Payment Processor forwards this information to the Payment Gateway. 

8. Payment Gateway forwards it to the Merchant Website. 

This process is known as Authorization and it takes about 2-3 seconds, altogether. The merchant then fulfills the order and the above process can be repeated.

9. At the end of the day, the payment gateway performs a process known as Settling.

During which it groups all your transactions together and sends them off to the Merchant’s Acquiring Bank in a single batch via the Processor for Settlement.

10. Payment gateways also record your transactions and allow you to view them using the payment gateway report facilities. This completes a single payment gateway process.

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