What Is a Payment Gateway and How Does It Work?

Introduction

If you are running a business, you must be accepting online payments. If you haven’t, you should consider it. Do you know how businesses accept these payments? They use a payment gateway—a technology that securely collects a shopper’s financial information and passes it onto the processor, which transfers money from their account to yours.

In this blog, we explore the vital role of payment gateways in tackling these challenges. We discuss its definition, functionality, significance, and their integration within the broader payment processing framework.

What Is a Payment Gateway?

A payment gateway is a technology that acts as an intermediary in electronic financial transactions, ensuring seamless processing of funds and securely authorizing transactions. It equips businesses to securely manage various payment methods, including digital wallets, debit cards, and credit cards.

By linking customers, businesses, and financial institutions, it consolidates these interactions into a cohesive platform. Typically, the payment gateway charges a fee for each processed transaction, ensuring the security and effectiveness of financial exchanges.

What Is the Role of a Payment Gateway?

Payment Gateways are essential for any website facilitating online purchases via credit card, debit card, or other payment methods. Apart from offering seamless transactions, they help in preventing fraud, reduce processing errors, accelerate transaction processes and simplify reconciliation. 

Given below are some of the benefits of Payment Gateways:

Encryption: During online checkout, the payment gateway encrypts customer payment data, safeguarding it from unauthorized access or theft as it travels between the customer’s device, the business’s server, and financial institutions.

Connection with Payment Processor: The payment gateway acts as a bridge between the checkout system and the payment processor, enabling transaction processing.

Authorization: The payment gateway transmits encrypted transaction data to the business’s acquiring bank, which then relays it to the customer’s issuing bank or relevant payment processor. Here, verification of transaction details, including account balance and payment method validity, occurs before approving or declining the transaction. The payment gateway promptly communicates the response back to the business.

Data Collection and Reporting: Payment gateways often offer businesses insightful data, including transaction history and refund management, enabling analysis and optimization of payment operations.

Fraud Detection and Prevention: Employing sophisticated security measures like fraud-detection algorithms, address verification systems (AVS), and card verification value (CVV) checks, payment gateways actively detect and block potentially fraudulent transactions, mitigating risks effectively.

How Does a Payment Gateway Work?

The payment gateway stands as a pivotal element within the electronic payment processing system. Acting as the forefront technology, it assumes responsibility for transmitting customer information to the merchant-acquiring bank. Subsequently, the bank processes the transaction through its system.

Here is a step-by-step explanation of how payment gateways work.

1. Transaction Initiation: The customer selects products or services on the business’s site or app and proceeds to checkout, entering payment details like credit card or digital wallet information.
2. Payment Data Encryption: Submitted payment data is encrypted by the payment gateway using SSL or TLS protocols, ensuring protection against unauthorized access during transmission.
3. Data Transmission to Business Server: Encrypted payment information is sent to the business’s server, securely stored and forwarded to the payment gateway for processing.
4. Forwarding Transaction Details: The payment gateway receives encrypted transaction data from the business’s server and forwards it to the payment processor and acquiring bank for processing.
5. Transaction Verification: The acquiring bank sends transaction data to the customer’s bank or payment processor for authorization, verifying details like account balance and payment method validity.
6. Transaction Approval or Decline: Based on verification, the customer’s bank or payment processor approves or declines the transaction. The response is relayed to the business’s server via the acquiring bank and payment gateway.
7. Communication of Transaction Status: The payment gateway communicates the transaction status (approved or declined) to the business’s website or app, prompting appropriate messaging to the customer. Approved transactions proceed with order fulfillment, while declined ones prompt alternative payment methods.

Types of Payment Gateways

Payment gateways can be categorized into several types based on their functionality and integration methods. Each type of payment gateway has its advantages and is suited to different business needs and preferences. Businesses should carefully evaluate their requirements and choose the type of payment gateway that best aligns with their goals and infrastructure.

 Some common types of Payment Gateways include:

1. Hosted Payment Gateways: These gateways redirect customers to a third-party website to complete the payment process. The customer is temporarily taken away from the merchant’s site to a secure payment page hosted by the gateway provider. Once the transaction is completed, the customer is redirected back to the merchant’s site. 

Examples: PayPal Standard and Checkout.

Self-hosted Payment Gateways: With self-hosted gateways, the payment process remains on the merchant’s website throughout the transaction. These gateways require merchants to have an SSL certificate to ensure secure data transmission. 

Examples: WooCommerce Payments and Magento Payments.

API Payment Gateways: API (Application Programming Interface) payment gateways allow for seamless integration of the payment process within the merchant’s website or mobile app. Merchants can customize the payment experience and have greater control over the checkout process. 

Examples: Stripe and Braintree.

Direct Post Payment Gateways: Direct post gateways combine elements of hosted and self-hosted gateways. Customers enter their payment information directly on the merchant’s site, but the sensitive data is transmitted securely to the payment gateway’s server, bypassing the merchant’s server entirely. 

Examples: Authorize.Net and CyberSource.

Mobile Payment Gateways: These gateways are specifically designed for mobile transactions, allowing customers to make payments through mobile devices such as smartphones and tablets. Mobile payment gateways often offer features like mobile wallet integration and QR code payments. 

Examples: Apple Pay and Google Pay.

Want to learn the difference between payment gateways and payment processors? Check out the difference between payment gateways and payment processors.

How Much Does a Payment Gateway Cost? 

Payment gateways usually charge a combination of initial setup fees, a fixed monthly charge, and a nominal fee per transaction. Certain gateways might also levy a percentage of each sale. For instance, Square imposes a 10-cent fee on most card transactions alongside 2.6% of payment volume.

Stripe, on the other hand, applies a 2.9% charge, coupled with an additional 30-cent transaction fee. Moreover, there could be supplementary fees for equipment and installation.

The Ultimate Solution for B2B Payments

HighRadius’ B2B payment gateway is the optimal choice for B2B payments due to its comprehensive features and robust security measures. It seamlessly integrates with various e-commerce platforms, ERPs, and financial applications, ensuring global electronic payment processing with enhanced efficiency and security.

One of its key modules, Card Tokenization, ensures PCI compliance by replacing sensitive card details with unique tokens, significantly enhancing payment security. Additionally, its AI-based Email Remittance Capture feature streamlines authorization and settlement processes, enabling real-time confirmation and funding of card transactions.

HighRadius’ payment gateway also supports multiple currencies and geographies, allowing businesses to accept and receive electronic payments in over 135 currencies. Its Data Intercept functionality ensures secure card acceptance in e-commerce and ERP systems without exposing sensitive card information to PCI risks.

Moreover, the inclusion of ACH Payments and SEPA Payments modules further reduces processing costs and expands payment capabilities, catering to diverse payment preferences globally. With support for over 200 alternative payment methods, HighRadius’ payment gateway offers unparalleled flexibility and accessibility for businesses operating on a global scale.

FAQs:

1) Which is the best payment gateway?

Determining the best payment gateway depends on specific business needs, such as transaction volume, international payments, and security requirements. Each payment gateway differs, offering unique features and pricing structures suited to different business models and preferences. Comparing features and costs helps in choosing the most suitable gateway.

2) Which payment gateway is mostly used in the USA?

In the USA, popular payment gateways include PayPal, Stripe, Square, and Authorize.Net. The choice depends on factors like business size, transaction volume, and specific needs, with PayPal and Stripe often favored for their versatility and widespread acceptance.

3) Which is the safest payment gateway?

Determining the safest merchant payment gateway involves evaluating factors like encryption standards, fraud detection, and compliance with industry regulations. HighRadius, Braintree, CyberSource, and SecurePay are recognized for their robust security measures and reliability.

4) What are credit card payment processing gateways?

Credit card payment processing gateways are essential components of digital payment systems, ensuring the security of transactions for both businesses and customers. These gateways, also referred to as credit card gateways or credit card payment processing gateways, empower businesses to accept credit card payments seamlessly across various channels, including online, in-store, and through mobile devices.

With a range of payment gateway types available, from basic integrations to feature-rich platforms with advanced capabilities like fraud detection and recurring billing, businesses can tailor their payment processing solutions to their specific needs. 

Popular examples of credit card payment processing gateways include PayPal, Stripe, Square, and Authorize.Net, each offering unique functionalities designed to meet the requirements of merchants. In today’s digital commerce landscape, these gateways are indispensable in facilitating smooth and secure transactions.