As the world swiftly moves away from brick-and-mortar stores to online transactions, the significance of payment gateways becomes all the more crucial. Irrespective of your industry or product, venturing into the online realm necessitates the integration of a payment gateway. Let’s delve deeper and attempt to understand what is payment gateway with examples; how it works; who the main players are in the ecosystem, and how it can benefit your business.
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What is a Payment Gateway?
A payment gateway is an online service that allows businesses and individuals to accept payments from customers through their websites or mobile applications. It acts as an intermediary between a merchant and the financial institution processing the payment.
A payment gateway not only includes a physical card reading device or a point-of-sale terminal used at a traditional brick and mortar store but also a payment processing terminal integrated into an online store.
In simple terms, a payment gateway is a technology used by merchants to accept electronic payments such as credit or debit cards from online shoppers for their purchases of products or services.
Related Read: Learn in detail about types of payment gateway.
Main Features of a Payment Gateway
For starters, a payment gateway ensures the secure transmission of any payment data. A payment gateway also provides encryption for data protection, integration with various payment methods, and the real-time processing of transactions.
Essentially, a payment gateway works as a secure bridge between the merchant and the customer so that the financial transactions are completed seamlessly. It leads to the safe transfer of money from the customer’s bank account to the merchant’s account.
The Framework of a Payment Gateway
The framework of a payment gateway can be bifurcated based on whether it is used in an online payment portal or an in-store premises.
Online payment will require to be hosted on the website through a third-party service provider or by the merchant through an application programming interface (API) which will enable the website to work with the payment processing network and eventually receive a response from the issuing bank.
An in-store premises will use a payment gateway through a physical card reading device or a POS terminal that connects to the processing network using a secure internet connection.
The Players in the Payment Gateway Ecosystem
Merchant or Seller
The merchant is the business or individual selling goods or services online.
To accept online payments, the merchant needs a merchant account, which is a type of bank account that allows them to receive funds from online transactions. Integrated with the payment gateway, this account allows for the secure processing of transactions. In other words, the merchant account is where all the money comes in after settlement.
To open a merchant account, you will have to research and choose a provider that aligns with your requirements.
Customers make up the majority of participants in the payment gateway ecosystem. They make payments online through various methods such as debit or credit cards, net banking, UPI, or online wallets to purchase goods and services.
Acquirer and Issuer Bank
Two different kinds of banks operate in the payment gateway ecosystem.
The acquirer bank, as the name suggests, acquires the payment on behalf of the merchant. This means the merchant account is housed at the acquirer bank. This is the destination for financial transactions routed through the payment gateway. In other words, this is where the money ends up.
The issuer bank, on the other hand, is where the transaction originates. This account belongs to the customer who is making the payment to pay for the product. The issuer bank represents the customer and supports the various payment methods such as credit cards, debit cards, or net banking.
The payment gateway acts as the intermediary between the merchant’s website or app and the acquirer and issuer banks.
When the customer purchases on the merchant’s website, it is the payment gateway that allows the payment to go through. It facilitates the secure transfer of payment information and the authorisation and settlement of transactions.
The payment processor is responsible for managing the technical connections between the payment gateway, the acquiring bank, and the issuer bank. It validates and routes payment transactions securely. The payment gateway and the payment processor are vital components in handling online payment transactions.
How Payment Gateway Works?
Now that we have understood what is a payment gateway, let’s delve into the step-by-step process by which a payment gateway works.
Step 1: Adding a Payment Gateway
Once you have set up your online store, the first step is to add a payment gateway. Integrating a payment gateway with your online store ensures that all transactions are conducted safely and securely. This way, all the parties in the transaction, namely the merchant and the customer, have complete information about the process.
Adding a payment gateway to your website or mobile app involves selecting a suitable payment gateway service provider and incorporating the technology into your website’s checkout process. You can customise it to allow as many or as few payment methods as you want to accept.
Razorpay offers different types of payment gateway integration options for your enterprise’s needs.
API Integration: This allows for the maximum amount of customisation and is ideal for businesses with custom websites or apps.
Plugin Integration: This is ideal if you use platforms like WordPress, Shopify, WooCommerce, Wix, and others.
SDK Integration: This allows developers to create their own version of the payment gateway for their mobile app or website.
Step 2: Customer Makes a Purchase
With a payment gateway, the process of making purchases is a lot more secure and straightforward.
Customers pick products of their choice and clicks on purchase. They are asked to select a payment method of their choice and then enter their payment details. If they select a debit or credit card, for instance, they’ll be asked to provide their card number, cardholder’s name, expiry date, and CVV.
Step 3: Website/App Directs Customer to Payment Gateway
This is probably the most important step in the process for the customer.
When customers decide to make a purchase, they are navigated to the payment page to complete the transaction. They enter their payment information such as their card details or their UPI ID on the payment gateway page.
The payment gateway securely encrypts the card details, performs fraud checks and transfers the transaction details to the acquiring bank. The acquiring bank sends the information to the card provider (eg Visa, Mastercard or Rupay) and onwards to the issuing bank for authorisation.
One of the most important functions that the payment gateway performs is that it automatically checks for fraud. This is an integral part of the process and it is where payment gateways like Razorpay can make a vital difference. It verifies the payment details entered by the customer using methods like IP geolocation, pattern recognition, and velocity checks. Some platforms also provide advanced fraud detection methods like machine learning and AI.
Step 4: Authorisation and Bank Response
Once the acquiring bank receives the transaction details, it verifies several parameters to ensure that the transaction is authentic. Some examples include the customer’s identity and their bank details. In some cases, especially for large amounts, the customer’s spending patterns can also be considered.
Once the payment gateway receives a response from the issuing bank, it notifies the acquiring bank whether the transaction is approved or declined.
The merchant then redirects the customer to share the final status of the transaction. If the payment is approved, the customer will see a payment confirmation message with the details of their order. If the payment fails, they will be asked to retry the payment using different methods.
This step happens backstage. Only the results of this step are displayed on the website.
Step 5: Settlement
Once the payment is approved, the acquiring bank initiates the settlement process. The payment gateway receives the funds from the customer’s issuing bank and then settles the payment with the merchant, usually within a few business days.
Once this process is completed, the customer gets a confirmation message of the order being placed.
Payment Gateway vs. Payment Processor
A payment gateway works differently from a payment processor, which is a service that routes a customer’s credit card information between the customer’s bank and the merchant bank and enables the movement of money.
A payment gateway collects payment details like credit card information, authorises a payment through different payment methods while the payment processor contacts the customer’s bank and the merchant account which is housed at the acquirer bank. The payment processor works as a communication intermediary.
Read our comprehensive guide on Payment Gateway vs. Payment Processor.
How does a Payment gateway keep information secure?
A Payment gateway ensures the security of the information you put in by encrypting the data. Now that you have a pretty good idea of what is payment gateway and how it works, let us look at a list of things that a PG does to keep your data safe:
- Firstly, the payment gateway transaction flow occurs via an HTTPS web address, ensuring security.
- A hash function is used to validate the transaction request, utilizing a secret word known only to the merchant and payment gateway.
- The IP of the requesting server is verified to detect any potential malicious activity, securing the payment page result.
- Virtual Payer Authentication (VPA) is supported by acquirers, issuers, and payment gateways to enhance security. VPA, part of the 3-D secure protocol, adds an extra layer of authentication for online buyers and sellers.
How Does a Payment Gateway Benefit My Business?
Integrating a payment gateway into your online business can offer several advantages:
Security: Payment gateways lead to secure transactions, protecting against fraud and data breaches.
Customer trust: A payment gateway lends an air of security. If the payment gateway is the one that the customer recognises, it is the cherry on top. It can automatically foster feelings of trust in the brand, encouraging them to buy a product or service without worrying about data theft or fraud.
International reach: This allows merchants to expand the borders of their business and reach the far ends of the world. Payment gateways can offer a range of features like multi-currency transactions to enable your business to accept international payments.
For instance, you can accept payments from more than 100 currencies from all around the world. You can receive a T+1 settlement in Indian rupee. This means, no more worrying about currency conversions or exchange rates; your payment gateway will do these automatically in real-time.
Multiple payment options: Offering a range of different payment methods like credit cards, debit cards, net banking, UPI, and digital wallets allows customers a wide range of choices.
Faster transactions: Payment gateways enable swift authorisation and settlement of payments. This can go a long way to increasing conversions and reducing the cart abandonment rate.
Ease of Accessibility: Most platforms offer advanced dashboards that allow you to oversee and control the entire process.
You can get access to real-time data so that you can address any roadblocks directly. For instance, if you see that a particular product has been selling very fast, you can start the restocking process immediately to ensure it does not sell out.
You can also identify inefficiencies in your operational process. For instance, if you see that customers have been abandoning their cart once they get to a particular product, it could be an indication to optimise that product page.
Payment Gateway Security Features
- Tokenisation: In Card Tokenisation, the card details like the card number and expiry data are not transmitted directly through the system. Instead, they are first converted into tokens so that even if there is a data breach, the information will not be compromised.
- Fraud Prevention: Payment gateways use a range of advanced fraud detection tools that analyse transaction patterns and behaviours in real-time. This means that even if there is fraud, the system will be able to identify and prevent it.
- PCI DSS Wallet: These wallets stick to PCI DSS standards to ensure the cardholder data is stored securely for any recurring transactions.
- White Label Wallet: This feature is ideally meant for mobile wallets. Most payment gateways offer white-label integrations for any payment methods through mobile wallets. This secures the transaction and makes it more convenient.
- 3DS Authentication: 3DS or 3D Secure means there is one additional layer of security before the transaction is completed. Generally, this is done through an OTP delivered to the customer’s mobile or email.
- A payment gateway is a technology used by merchants to accept credit or debit card payments for purchases made by customers
- Payment gateway can collect payment details, authorise or decline transactions
- In an in-store premises, payment gateway can work through a physical card device or a point-of-sale system that can accept credit card payment through a card or a smartphone
- In online stores, payment gateway is the payment processing terminal used during checkout to process payments through multiple payment methods like credit card, UPI, or digital wallets
- Payment gateway encrypts payment details like credit card information and checks for fraud before sending the card data to the acquiring bank. The acquirer sends the information to the card schemes or banks which transmit the payment data to the issuing bank for authorisation
Frequently asked questions (FAQs)
1. Can a payment gateway be integrated with my website or mobile app?
Yes, payment gateways can easily be integrated with your website or mobile app. You can also integrate it directly with your CMS for easier order processing.
If you have a custom website and are looking for more flexibility, you can go for an API integration or SDK integration. Alternatively, if you’re looking for an easier solution, you can consider a plugin integration that fits directly with platforms like WordPress, Shopify, or InstaMojo.
2. How long does it take to set up a payment gateway?
It depends on which payment gateway you choose. If you go for an option like Razorpay, you can complete the entire integration process and deploy it on your website within a few hours. Other platforms, however, can take up to a few days, depending on how complex the integration is.
3. What are the key considerations when choosing a payment gateway?
When choosing a payment gateway, you should consider factors like transaction fees, setup and integration process, security measures, supported payment methods, compatibility with your e-commerce platform, and availability of customer support.
4. How to add a payment gateway to your website?
You can add a payment gateway to your website through a range of options. If you want more flexibility and customization of features, you can add the payment gateway through API or SDK integration. If you want another option, you can opt for a plugin integration, especially if you use platforms like Shopify or WordPress to host your e-commerce store.
5. Are there any transaction limits imposed by payment gateways?
Transaction limits can vary depending on the payment gateway provider and the type of account you have with them.
6. What are payment gateway charges?
Payment gateway pricing varies depending on the payment gateway but typically includes a initial setup fees, processing fee for each transaction and a monthly fee to be paid by the merchant.