How Do Payment Gateways Work?

Payment gateway are two words that every modern-day merchant should know about. Millions of people have credit cards and smartphones where they handle electronic transactions that are faster and easier than handling cash. Here is more about how payment gateways work.

When merchants need to accept payments on their e-commerce websites, they use payment gateways that authorize a credit card, debit card or e-check payments. Both traditional and online businesses use this service for payments made on their websites or mobile devices. Banks and special financial institutions provide this service to customers.

The Process When a Payment Is Made

The process begins once a customer makes a financial transaction on a website or mobile device. The transaction data is sent from the customer’s Web browser to the merchant or the gateway system. Along the way, the data is encrypted through an SSL (Secure Socket Layer) encryption system. If the merchant receives the data, the data is sent to their gateway, where it is converted to ISO 8583 or a similar format.

Once converted, the data is sent for payment processing to the merchant’s bank. The payment processor sends this data to the customer’s card association and issuing a bank that holds his or her money. The processor either accepts or denies the payment based on available funds.

If the payment is approved, the issuing bank places a hold on the customer’s funds for the amount of the transaction. Then, the processor forwards the result to the payment gateway. The result is then forwarded to the website or source of the payment and then forwarded again to the merchant and customer. Last, the issuing bank clears the transaction with the acquiring bank.

The entire process of approving a payment occurs in a few seconds or minutes, depending on if there are delays or difficulties in the process. The entire process of settling approved funds into the merchant’s account takes several days. Without the use of a payment gateway, no part of this process would work.

The act of swiping your credit card takes only a few seconds. Getting your payment approved or denied takes the same amount of time. Choosing the right merchant service is important, and you cannot choose anyone. How fast the gateway service is and how secure it is are important factors to consider. Make sure that your financial transactions are stress-free with no hidden terms or fees.