Payments 101: How Payment Gateways Work

From a customer’s perspective, the commerce and e-commerce processes are fairly simple. What most consumers do not realize, however, is just how complex the behind-the-scenes processes are to create that seamless, professional experience that inspires loyalty from them.

Payment gateways are software and servers that transmit transaction data to Acquiring Banks and responses from Issuing Banks. In essence, payment gateways facilitate the communication between banks. Payment gateway technology varies for e-commerce and brick and mortar merchants. Though the two may be constructed differently, the transaction process is still the same.

How Does a Payment Gateway Work?
Security is the key component of all payment gateways, since sensitive data, such as credit card numbers, need to be protected against fraud. The card brands have created a set of rules and security standards which must be followed by any person handling card information including gateways. This set of rules and standards is called the Payment Card Industry Data Security Standard (PCI-DSS) or PCI.

Processing the order is completed using HTTPS protocol, which communicates personal information safely through the parties involved in the transaction. Most of the payment providers enable merchants with added options with a cardholder purchases their goods or services. Aside from allowing the ability for real-time transactions, these providers can also help translate currencies between the two parties in different countries, and bridge language and payment methods. Payment gateways usually charge those who use through a transaction fee.

What Are the Components?
Online merchants require application programming interfaces (APIs) that plug into their online system through programming that enables their usability. For a brick and mortar business owner, they will need a point of sale terminal that connects electronically through a phone line or internet connection. The technology for POS terminals are always evolving. Terminals can accept contact and contactless payments, process chip cards, and can be mobile for use around the store. They can also be stationary and include a ton of features built into the system.

The payment gateways serve as the first step in the electronic payment transaction process. The payment gateway moves the customer’s card data to the merchant acquiring bank. The merchant acquiring bank then authorizes the transaction through communication with the processor and issuing bank.

Other Payment Gateway Functions
Payment gateways also process transactions with a number of helpful tools. The screening process helps to filter out as much fraud or chance of fraud as possible.

Here are some examples of the other tools that payment gateways employ:

  • AVS Check
  • Geolocation
  • Delivery Address Verification
  • Computer Finger Printing Technology
  • Velocity Pattern Analysis
  • Calculate Tax Amounts 

Payment gateways are part of the payment ecosystem to keep customer data safe and secure while processing transactions. The security of payment processing is crucial – which is why it is important for merchants to understand the ins and outs of each moving part.