A payment gateway is an important part of any payment environment because it basically lets businesses and customers make online payments, resulting in the ultimate cornerstone in any transaction. But what is a payment gateway in detail? And how exactly does a payment gateway work? This article explains the answers to these questions and much more.
What is a Payment Gateway?
Payment gateways are a crucial service that helps businesses easily initiate and accept payments. Usually, a web server is connected to a business’s website or POS system, providing multiple payment channels such as online, in-app, or in-person. This convenience is a major advantage of payment gateways.
You have the option to select a payment gateway offered by a bank or one provided by a provider that can connect to one or more payment processors.
Types of Payment Gateways
Online payment gateways provide a flexible range of services for both websites and apps. While both serve the purpose of initiating payments, they can vary in terms of the functionalities, features, and channels they offer. This flexibility empowers businesses to select the option that best suits their unique needs.
For instance, businesses that offer subscriptions often require a payment gateway that can handle recurring payments. If you’re working with SaaS or marketplaces, you might need a payment solution that can be seamlessly integrated. Industries such as airlines and gambling may require a payment gateway that is willing to take on high-risk transactions.
How Payment Gateways Work in the Transaction Flow
Although payments are processed quickly, there are several steps that occur behind the scenes. The payment gateway plays a crucial role in the transaction flow as it initiates the payment process. So how payment gateways work? Here’s how.
Here is a simplified explanation of the payment process:
- Once a customer completes a purchase, the business securely transmits the customer’s payment information to the payment gateway.
- The payment gateway shares this information with the payment processor, who then passes it along to the card scheme.
- The card scheme shares this information with the issuer, who then conducts checks to determine whether the transaction should be approved or declined.
- The decision regarding the transaction flows through various channels, connecting the card scheme, payment processor, gateway, and ultimately reaching the business and customer.
- Once the payment is given the green light, the funds make their way from the customer’s bank to the acquirer (also known as the merchant account), which is a financial institution that processes credit or debit card payments on behalf of a merchant, and finally to the business’s bank account.
Advantages of Payment Gateways
There are many good things about payment gateways, some of which are:
- Better security
As we already said, there are several checks that happen during the payment process to make sure that the person using the card is actually the user. Payment platforms also need to be PCI DSS compliant, which means they have to follow certain security rules to keep cardholder data safe. This is an extra layer of defence against fraud. Besides this, payment gateways usually offer extra features such as Address Verification Service, tokenisation, and risk management tools (for example, speed checks, transaction counts, amount limits, device fingerprinting, negative database data, and more).
- Better Payment Experience
If you have a payment gateway, your buyers can buy things from you at any time. Tokenisation also lets customers safely store their payment information so they can use it again when they buy something from the same seller. By making it easy for your customers to pay, you can build brand trust and get them to buy from you again.
- Get into New Markets
A lot of payment systems can handle more than one currency and can connect to both local and international payment methods, such as credit cards, digital wallets, and bank transfers, so your customers can pick how they want to pay. You can also make your business available all over the world and change your payment method to fit the needs of different customers.
- Changeable Checkout Choices
You can add payment gateways to the website or shopping cart tool you already have, including a hosted payment page, server-to-server integration, client-side encryption, and links with well-known eCommerce platforms and shopping cart plugins (read our Frequently Asked Questions below to learn more). The payment flow can be changed to fit the needs of your business based on how you set up payments.
Why Payment Gateways Matter
In the simplest terms, a payment gateway provider ensures that payment transactions stay secure and reduces the recurrence and severity of credit card-related cyber attacks or fraud activities.
The current payment gateway providers are easily set up in a few hours, and taking care of it requires little effort from your side. The most of the time, users of payment gateway providers already know and have used payment gateways in their earlier online purchasing experiences, so there’s no need for you to put in an extra work to familiarise them with how it all works. What’s more, most present-day payment gateways support multiple currencies and offer multiple payment methods, which takes a huge load off your shoulders to meet your individual customer needs.
Based on the preceding statement, by accommodating the payment preferences of your international customers, you ultimately increase their satisfaction, which in turn boosts your conversion rates. According to a recent survey, approximately 50% of online shoppers stated that they would abandon their checkout process if their preferred payment method was not available. That represents a significant amount of potential revenue being left on the table.
