Sunday, December 7, 2008

Understanding Payment Gateways

Understanding the process of online payment systems requires some understanding of how payment gateways work. There is often a lot of confusion about what a payment gateway actually does.

This article is an attempt to hopefully demystify this subject.

When we buy an item in a traditional brick and mortar store and pay with a credit or debit card we are essentially entering into a digital transaction not unlike when you buy something online.

When you make an online purchase and click the buy now button for example it triggers a series of events that take place behind the scenes. A payment gateway works together with a merchant bank account during the processing of an online payment.

The brief seconds it takes to process a payment actually involves quite a few back and forth digital requests taking place in the background, which the user never sees nor is he ever aware of.

The customer chooses his items and usually places them in the shopping cart.

The shopping cart software is now responsible for tracking the details of this transaction. He enters his credit card information. The data is passed over to the payment gateway.

The payment gateway now receives this information and determines its validity in terms of the information needed to continue. An important fact to remember is that the information being transferred is being encrypted for security using what is known as SSL (Secure Sockets Layer). Next, the processor (gateway) then sends this request to the merchants bank.

That processor then sends that data to the credit card associated with it, (could be visa or mastercard for example) which then in turn directs the request to the card issuing bank.

The bank then checks to see whether there are sufficient funds available for the transaction to proceed. This could be either approval or a decline with a code to determine success or failure and the reason for failure.

When the payment gateway receives this info it then sends it back to the merchant and will display the info to the customer (via the browser) of success or failure. If the transaction is successful the processor (gateway) then sends a settlement request to the merchant account.

The merchant account doesn't actually hold any tangible funds but acts as an intermediary with the merchants' regular bank. Funds are transferred in batches and usually take 2-3 days for the funds to be available in the merchants' bank account.

This traversing of data takes an average of 2-3 seconds and the customer never sees what's happening. Below are a few points on requirements for an ecommerce site.

Basic Requirements:

  1. SSL (Secure Sockets Layer) : This is absolutely essential for transactions of this sensitive nature online. You want to keep credit card details and personal info secure and away from prying eyes.
  2. Shopping cart - Used to track customers choices for items to purchase and sends the encrypted data to the payment gateway/processor.
  3. Payment gateway - The intermediate communicator of sensitive data between the credit card processors, merchant account and the site.
  4. Merchant account - This account is a facilitator of transferring funds into your bank account associated with it.
Bare in mind that this is just a basic overview of the process involved in accepting payments online. There are instances where a professional merchant account and payment gateway may be overkill. A third party option like PayPal will handle all of this for free but it is not a good idea for a professional business doing larger volumes of transactions.

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