Skip to content
Home » Blog » What Is A Payment Gateway And How Does It Work?

What Is A Payment Gateway And How Does It Work?

As online transactions continue to see an upsurge worldwide, especially during the pandemic, customers are expecting their purchases to be made quickly, safely, and seamlessly. 

If you are a business owner with an online store, a payment gateway is a vital tool that will help you both accept and validate your customers’ purchases. 

The fundamental component that can make this happen is by implementing a payment gateway that not only delivers on offering your customer the most frictionless payment journey but offering it in a way that is absolutely secure, giving the merchant and the customer peace of mind. 

So What Is A Payment Gateway?

A payment gateway is a software that safely authenticates a customers’ credit card information to ensure that they have sufficient funds for a merchant to get paid. 

Payment gateways authorize credit card payments for both online and offline businesses. You could see it as something similar to a physical point-of-sale (POS) terminal found in a store or a restaurant. The system allows the customer to enter their credit card information for it to be sent directly to the merchant. From the merchant, this data is then sent to the bank. 

The payment gateway ultimately determines whether or not a transaction has been approved by the cardholder’s bank. The charges are then submitted for settlement. 

How Does It Work?

Let’s take a look at how a payment gateway works in reference to the payment journey:

  1. The customer chooses the item they want to purchase and goes to the payment page. 
  2. The customer then enters their credit or debit card information on the payment page. Some of that information will include the cardholder’s name, the card’s expiration date, and the CVV number (Card Verification Value). This sensitive information is securely directed to the payment gateway.
  3. The payment gateway then encrypts the card’s details and carries out fraud checks before the information is sent out to the acquiring bank. 
  4. The acquiring bank securely sends the information to the appropriate card network (e.g. Visa, Mastercard).
  5. The card network performs another level of fraud check and sends the data back to the issuing bank.
  6. After performing fraud screening, the issuing bank authorizes the transaction. Whether approved or declined, the payment decision is transferred back from the card network to the acquirer. 
  7. The acquiring bank sends the payment decision back to the payment gateway, which transmits the message back to the merchant. If approved, the acquirer collects the payment amount from the issuing bank and puts it into the merchant account (also called a settlement). When the settlement occurs depends on the agreement previously reached between the merchant and the payment gateway. 
  8. Depending on whether the transaction was approved or declined, a merchant can display a payment confirmation page or request another form of payment from the customer.

Choosing The Best Payment Gateway For Your Business

Seeking the right payment gateway provider can sound just as daunting as finding the right merchant account provider for your business. However, it does not have to be this way. 

It really comes down to knowing what to look for in a reputable provider. The most important features to look for are:

  • Having PCI Level 1 Compliance
  • Shopping cart integration
  • Alternative payment methods
  • Fraud screening services 

Closing Thoughts

Finding the right payment gateway is about providing your customers with a payment journey that is secure, quick, and easy. Seek out a provider that offers a full-service payment solution that allows you the flexibility and security necessary to deliver the best customer service for years to come. 


Share :