How a Payment Gateway Works

Put simply, a payment gateway facilitates the transfer of information between a payment portal (such as a website, mobile phone or IVR service) and the Front End Processor or acquiring bank. A typical transaction flow may look something like this

• Customer places order by entering in credit card information.
• If the order is from a Web site, the customer’s web browser encrypts the information to be sent between the browser and the merchant’s server.
• Once the payment is approved or declined from the bank or credit card company, the information is sent to a payment gateway.
• The payment gateway receives the response, and forwards it on to the website (or whatever interface was used to process the payment) where it is interpreted as a relevant response then relayed back to the cardholder and the merchant.
• The merchant submits all their approved authorizations, in a "batch", to their acquiring bank for settlement.
• The acquiring bank deposits the total of the approved funds in to the merchant's nominated account.
• The entire process from authorization to settlement to funding typically takes 3 days.

Functions of a Payment Gateway

There are three main functions of a payment gateway: authorization, settling and reporting.

Payment Gateway Authorization

Any purchase made by a credit or debt card through a payment gateway must be approved by the credit card company. The payment gateway will then check if the credit card is acceptable. The payment gateway will set up a secure link between the customer, the credit card processor and you. It allows for efficient and fast transaction processing and takes an average of 2 days.

Payment Gateway Settling

At the end of the day, the internet payment gateway groups all of your transactions together and sends them off to your bank in a single batch. This process passes the transaction to your bank so that you receive payment. This process is called settling. Once the funds settle, it normally takes two business days for you to see the funds electronically deposited into your bank account

Payment Gateway Reporting

This process records your transactions and allows you to view them using the payment gateway report facilities. From here you can review them, print them or download them to your computer for further processing. Some payment gateways are even compatible with Quickbooks, making accounting and reconciling a breeze.

Payment Gateway Advantages

Using a payment gateway has many advantages, most importantly, security. It is recommended that a payment gateway is used to process credit card transactions. Using a payment gateway is hacker-free. All credit card information is send directly to the bank for verification. No credit card details are ever stored.

Payment gateways also have other advantages, including:

• Credit card validation and real-time processing
• Less fraud
• Money is deposited into your bank account automatically
• Your or your gateway’s bank will charge a merchant fee for the privilege of allowing credit card purchases

Types of Gateways

There are 3 types of gateways: COM based gateway interface, form based gateway interface and XML transport gateway interface.

Form based payment gateway interface

• Most common type
• Does not require any extra software installed on your web hosting server
• Some require that you have your own SSL certificate

COM based payment gateway interface

• Install DLL software provided by the payment gateway company
• Many Web sites also require that you have your own dedicated SSL certificate

XML transport payment gateway interface

• Work similarly to COM based gateways but do NOT require a DLL install
• Use a facility that is already installed on most Windows servers
• A dedicated SSL certificate is also required

The advantage of COM/XML-based gateways over form-based is that it integrates with your store, and the customer will not be directed to an external server for credit card processing. However, the disadvantage of this is that credit card details will need to be sent over the Internet from your server to the payment gateway for processing and thus making it less secure.