What is a Payment Gateway and how can it Help Your Online Business?

By Michael Hanna

A payment gateway is an e-commerce application service provider solution that authorizes payments for e-businesses and online retailers. It is the equivalent of a physical 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.

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. When a customer orders a product from a payment gateway enabled merchant, the payment gateway performs a variety of tasks to process the transaction. This process is explained in more detail below.

Internet Payment Gateways make real time online credit card processing possible. The data is sent to the gateway via shopping carts and a secure server. When a credit card transaction is made, the payment gateway checks for validity, encrypts the transaction details, ensures its departure to correct destination and decrypts the responses that are sent back.

How an Internet Payment Gateway works:

The internet payment gateway automates the transactions between the customer and the merchant. The payment gateway performs various tasks for the transaction process. Some of them are given below:

•Encryption – once a customer places an order through a website, the browser encrypts that information through a secure server encryption.

•Payment Server – the information sent back by the merchant is sent to a relevant bank which acquires that information and then sends back the transaction information for authorization to the card issuing bank.

•Authorization – that bank then sends back an authorization request, either acceptance or denial, to the payment gateway.

•Confirmation – the internet payment gateway then sends back the relevant information to the website and the customer respectively.

•Fund Deposit – the acquiring bank then deposits the funds into the merchant’s account.

•Reporting – because of the internet payment gateway facility, the merchants can view their fund report online or download it for their convenience.
Many payment gateways also provide tools to automatically screen orders for fraud and calculate tax in real time prior to the authorization request being sent to the processor. Tools to detect fraud include geolocation, velocity pattern analysis, delivery address verification, computer finger printing technology, identity morphing detection, and basic AVS checks.