Everything About a Payment Gateway and How Does It Work?

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A payment gateway system is responsible for keeping the wheels of the entire ecosystem rolling to help customers and businesses make and accept online payments smoothly and seamlessly.

For an online merchant, it’s an extremely vital tool that helps scale and grow a business. Even though you don’t need to be a payment gateway expert since India’s best payment gateway will help set up the system for you, having an idea of the basics is essential.

Let’s help you get up to speed on what a payment gateway is, how it works and why you need one. Moreover, by the end of this piece, you would be able to choose the best service for your business requirements as you would be armed with the required know-how about the inner workings of a payment gateway integration.

So, without further ado, let’s begin with the basics first and then dive a little deeper to help you understand the complex world of a payment gateway system.

What is a Payment Gateway?

It’s the technology that’s used to capture payment data and transfer this data from the customer to the acquirer and then redirects that information back to the customer with the approval or decline status of the transaction.

It undertakes a range of operations, including validating a consumer’s card details, ensuring adequate funds, and facilitating merchant payments. In a nutshell, a payment gateway is an interface between a merchant website and its acquirer.

It also encrypts all sensitive data, such as credit card details, CVV, etc., to ensure that all information is communicated securely from the customer to the acquiring bank from the merchant. It’s a bridge to ensure that all data is routed safely and smoothly for the seamless transfer of transaction-related information between various parties.

Why is a Payment Gateway Required?

Even though you might think of a payment gateway system as a middleman and can’t figure out why it’s so important, let’s help you figure that out since online transactions happen without the use of a physical card, unlike in the case of an offline transaction using a POS machine to swipe and verify the card.

Therefore, an online store has to rely on the information entered by the customer; however, whether that information is correct or needs to be authenticated. There is always a risk of fraud; therefore, authenticating the information is crucial, and that’s where a payment gateway steps in.

Acting as a gatekeeper of the customer’s payment data helps securely communicate data between the merchant, the acquirer, and the issuing bank to prevent data and information leaks. Without a payment gateway, any information you process can be visible to fraudsters who can use that information to conduct frauds and chargebacks, causing a loss of face and revenue for the business.

Moreover, if customer data is compromised, it can expose your business to lawsuits and damage your brand’s reputation. A payment gateway system makes transactions much secure; it also helps detect expired cards, insufficient funds, closed accounts and prevents exceeding credit limits; thereby, helping customers and businesses seamlessly conduct transactions without any glitches.

How does a Payment Gateway Work?

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Now that you are familiar with what a payment gateway is and its importance let’s take a brief look at how it works.

1. The customer chooses a product or service, and they proceed towards the checkout page, where they would be required to enter all transaction-related information
2. The customer enters their card details on the secure payment page, including the cardholder’s name, the expiration date of the card, CVV, etc.; this information is passed onto the payment gateway
3. The payment gateway tokenizes the information by generating a random character string containing the information and is checked for fraud before being transmitted to the acquiring bank. Tokenisation makes it difficult for anyone to read into the data that is being shared
4. The information is relayed to the acquiring bank, which is shared with the card network
5. Another fraud check is performed by the card network, and if everything is OK, the information is relayed to the issuing bank
6. The issuing bank checks the information once again for screening against frauds and either approves or declines the transaction
7. The issuing bank relays this information back to the card network, which is then redirected to the acquirer
8. The acquiring bank shares the approval/decline status to the payment gateway, which is then shared with the merchant. If it’s approved, the acquirer collects the payment amount from the issuing bank, and the funds are held in the merchant account
9. From here, the settlement process starts, which sends the amount from the merchant account to the business account of the merchant
10. In case of a successful transaction, the customer is notified via the payment confirmation page or asked to use another payment method in case the transaction has failed

A payment gateway is a vital tool that helps you securely collect payments from customers. Digital payment processing is more of the norm than the exception these days, as it’s the most convenient way of shopping, and no business, whether big or small, can expect to grow and build a loyal consumer base without offering online payment options. It’s a business tool of extreme significance without which a business cannot expect to succeed.

So, if you are an online business owner and either already has a payment gateway in place or thinking of partnering with one of India best payment gateway, do ensure that you give your customers as many digital payment options as possible and talk to your payment gateway provider if they also have the option of enabling international payments, should you decide to sell internationally once you scale up.

Today’s consumer uses a multitude of payment methods such as credit/debit cards, UPI, net banking, BHIM, digital wallets, among others; therefore, the more options you enable, the better.

Now that you know everything you need to know about payment gateways, it’s time to give it a shot by partnering with a reputed online payment gateway provider and taking your business to the next level!