Payment Gateway

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A Payment Gateway is a technology merchants use to accept debit or credit card purchases from customers.

It enables the secure transfer of payment information from a customer to a merchant and then to the payment processor.1

The payment gateway acts as an intermediary between the merchant’s website and the financial institution, ensuring that sensitive payment information is encrypted and securely transmitted.2

Visual Representation

payment gateway visual representation

Process Overview

  1. Customer Places an Order: The customer initiates a purchase on the merchant’s website.
  2. Data Transmission: The payment gateway encrypts and sends the payment information to the payment processor.
  3. Bank Authorization: The payment processor forwards the transaction to the customer’s bank for authorization.
  4. Approval or Decline: The bank approves or declines the transaction and sends this information back through the payment processor to the payment gateway.
  5. Transaction Completion: If approved, the transaction is completed, and the payment gateway notifies the merchant and customer. Funds are eventually transferred from the customer’s bank to the merchant’s account.3

Key Roles of a Payment Gateway

  • Data Encryption: Ensures that all transaction information passed between the customer and the merchant is encrypted.
  • Authorization: Requests authorization from the customer’s issuing bank to ensure the funds are available.
  • Order Fulfillment: Confirms order details and facilitates the finalization of the transaction.
  • Fraud Protection: Employs various security measures to detect and prevent fraudulent transactions.
  • Settlement: Works with the merchant’s acquiring bank to finalize and settle the payment into the merchant’s account.4

Common Features

  • Multiple Payment Methods: Supports credit and debit cards, e-wallets, and other digital payment options.
  • Recurring Billing: Allows for automated billing cycles for subscription-based services.
  • Mobile Payments: Optimized for transactions on mobile devices.
  • Reporting and Analytics: Provides detailed reports and analytics on transactions.5

Benefits of Using Payment Gateway

  • Enhanced Security: Using encryption and fraud prevention tools, payment gateways protect sensitive financial data like credit card numbers. This helps build customer trust.
  • Improved Customer Experience: Payment gateways simplify checkout, providing a familiar and secure payment method. This reduces abandoned carts and boosts sales.
  • Increased Efficiency: Payment gateways automate many payment tasks, saving businesses time and money and allowing staff to focus on other important tasks.
  • Supports Multiple Payment Methods: Payment gateways allow customers to pay with credit cards, debit cards, and digital wallets, catering to a wider audience and increasing sales potential.
  • Global Reach: Payment gateways support transactions in multiple currencies, enabling businesses to sell to customers worldwide and expand their market reach.6

Popular Payment Gateways

Some widely used payment gateways include PayPal, Stripe, Square, and Authorize.Net.

Each offers unique features tailored to different business needs.7

Related Terms

References:

1. Wikimedia Foundation. (2023b, December 10). Payment gateway. Wikipedia. https://en.wikipedia.org/wiki/Payment_gateway 

2. Fernando, J. (n.d.). What is a payment gateway? how it works and example. Investopedia. https://www.investopedia.com/terms/p/payment-gateway.asp 

3. DIGITAL BUSINESS: e-Book for MBA, 1st Semester, SPPU. (2023). (n.p.): Thakur Publication Private Limited. https://www.google.com/books/edition/DIGITAL_BUSINESS/5l3hEAAAQBAJ?hl=en&gbpv=0

4. N., S. (2023, October 2). The role of payment gateways in eCommerce: Fordeer explains. Fordeer Commerce Blog – The great tools for the best business. https://blog.fordeercommerce.io/the-role-of-payment-gateways-in-e-commerce/

5. Mastering transactions – 10 essential features every payment gateway must offer!. 10 Essential Features Every Payment Gateway Must Offer. (2024, January 12). https://www.linkedin.com/pulse/mastering-transactions-10-essential-features-every-payment-6qzve/

6. Payment gateway benefits for businesses. Stripe. (2023, September 1). https://stripe.com/en-lt/resources/more/five-key-benefits-of-payment-gateways-for-businesses

7. Kiskyte, A. (2023, December 7). What is a payment gateway and how does it work?. kevin. https://www.kevin.eu/en-lt/blog/what-is-a-payment-gateway/

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