What Everyone Ought to Know about Payment Gateways

I have received a ton of questions and inquiries coming into my inbox over the past few months that ended up convincing me that I have to write a refresher on the basic facts merchants ought to know about payment gateways. This post will go over them and explain what these services do and how they work with merchant accounts.

Payment Gateway Facts

So payment gateway is a web-based service that communicates payment data between an e-commerce website and an acquiring bank. In essence, it is the web equivalent of the physical point-of-sale (POS) terminals that is used by brick-and-mortar retailers operating in face-to-face credit card processing settings. The data collected in this manner are encrypted to ensure that all sensitive information is transmitted securely.

Payment Gateway Transaction Cycle

Payment gateways link the website's shopping cart (the place where customers manage their purchases) with the processor's back-end system. The transaction stages are as listed below:

1. A consumer places an order on your website and provides his or her bank card account information.
2. The payment data are encrypted through a service called Secure Socket Layer (SSL) and sent on to the retailer's server.
3. The payment gateway now gathers the payment data and, after one more SSL encryption, sends it on to the acquiring bank's server.
4. The acquirer at this time routes the payment data on to MasterCard or Visa.
5. If the customer has used a Discover or an American Express bank card, the issuer in this case also serves as an acquirer and makes a decision on whether or not to approve an authorization request of the payment and then routes its response back to the retailer.
6. The Credit Card Association (Visa or MasterCard) sends the transaction data on to the issuer.
7. The issuer now either approves or rejects authorization approval of the payment and sends its response using a code (via the exact same channel) back to the merchant bank. The authorization responses for rejected transactions also provide details for the cause the transaction did not receive authorization.
8. The acquirer now routes the response code (through the retailer's payment gateway) to the website where it is displayed to the customer.

The cycle may seem complicated, but on the whole, from submitting the transaction to receiving the response code, only takes a few seconds.

The retailer now ships the merchandise and then deposits the transaction with its acquirer. It is crucial that payments do not get settled before the item is shipped, which may cause the transaction to be disputed.