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What is a payment gateway?

Glossary definition

What is a payment gateway?

A payment gateway is an e-commerce service that processes card payments for online businesses and in-store.

Payment gateways facilitate these types of transactions by transferring key information between payment portals, such as a web-enabled mobile device on a website and the front end payment processor or bank.

A payment gateway handles three crucial tasks in the payment process:

  • Authorisation – confirming with the customer’s bank that the cardholder information is valid and the funds for the purchase are available in the account.
  • Settlement – transferring transaction funds from the customer’s bank account to the merchant account.
  • Reporting – detailing and recording all transactions including chargebacks, refunds, and declines.

How does a payment gateway work?

When a customer places an order online and enters their card information, it sets off a series of actions to verify, complete, and finalise the transaction in a matter of seconds:

Step 1

First, the web browser encrypts the payment data that is needed for the transaction. This means the data is translated into a code that’s undetectable by hackers or cyber criminals.

The gateway then sends the data to the business’ payment processing vendor or their bank.

Step 2

Next, the payment processor sends the transaction data to a card association (Visa, Mastercard, Amex, etc).

The customer’s bank then views the authorisation request and approves or denies it once it verifies the account is valid and has the funds available for the purchase.

Step 3

The results of the authorisation request are then sent back to the merchant.

If the request is approved, the bank sends the funds with through payment gateway and then the payment gateway sends the money to the merchant.

If the authorisation isn’t approved, the decline communication is sent to the merchant and then the customer (or the message appears on screen if making an online purchase).

The customer will be asked to try their payment method again or use another method.

This process happens within seconds and is seamless to the customer unless the payment is declined or there is an issue with the payment gateway.

The benefits of a payment gateway

One obvious benefit to having a payment gateway is it allows you to accept payments online without having to be present.

Your customers can enter their own payment information and the gateway handles the rest.

The other benefit is that it can help you cut down on queue times in-store.

If you have a POS (point of sale) system that is compatible with mobile devices, your staff can take customer payments from anywhere in the store, not just at the register.

This speeds up the payment process and eliminates your customers having to wait for service, which elevates their customer experience.

A reliable payment gateway is important during peak sales times such the holiday season and the likes of Black Friday.

Businesses that reap the most during seasonal selling peaks are those that pad their payments process with extra layers of support to handle elevated traffic at crucial moments.

Learn more about how to ensure your payments system can handle a busy selling season.