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06 Sep 2010

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	What is a payment gateway ?

Solution A payment gateway is an e-commerce application service provider service that authorizes payments for e-businesses, online retailers, bricks and clicks, or traditional brick and mortar. It is the equivalent of a physical POS(Point-of-sale) terminal located in most retail outlets. Payment gateways encrypt sensitive information, such as credit card numbers, to ensure that information passes securely between the customer and the merchant.

How payment gateways work
A payment gateway facilitates the transfer of information between a payment portal (such as a website or IVR service) and the Front End Processor or acquiring bank; quickly and securely.

When a customer orders a product from a payment gateway enabled merchant, the payment gateway performs a variety of tasks to process the transaction; completely invisible to the customer. For example:

A customer places order on website by pressing the 'Submit Order' or equivalent button, or perhaps enters his/her card details using an automatic phone answering service.

If the order is via a website, the customer's web browser encrypts the information to be sent between the browser and the merchant's webserver. This is usually done via SSL (Secure Socket Layer) encryption.
The merchant then forwards the transaction details through to his/her payment gateway which holds the detail of the merchant account transaction. This is often another SSL encrypted connection to the payment server hosted by the payment gateway.

The payment gateway which receives the transaction information from the merchant forwards it to the merchant's acquiring bank.
The acquiring bank then forwards the transaction information to the issuing bank (the bank that issued the credit card to the customer) for authorization.

The card issuing bank receives the authorization request and sends a response back to the payment gateway (via the acquiring bank) with a response code. In addition to determining the fate of the payment, (i.e approved or declined) the response code is used to define the reason why the transaction failed (such as insufficient funds, or bank link not available).
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 and a relevant response then relayed back to the cardholder.
The entire process typically takes 3-4 seconds

At the end of the bank-day (or settlement period) the acquiring bank deposits the total of the approved funds in to the merchant's nominated account. This could be an account with the acquiring bank if the merchant does his/her banking with the same bank, or a scrape account with another bank.

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29 Nov 2006 11:16 AM

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