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payment gateway

The following article will give you the overview of how payment gateway works.

Payment gateway is an e-commerce application service provider that automates the payment transaction between the customer and merchant. It is usually a third-party service that is actually a system of computer processes that verify, and accept or decline credit card transactions on behalf of the merchant through secure Internet connections.

The payment gateway is the infrastructure that allows a merchant to accept credit card and other forms of electronic payment.

By incorporating a payment gateway into your e-commerce website you can ensure you are providing the easiest and most streamlined buying experience for your customers.

We can tell you at least a few major reasons why payment gateway is beneficial.

Firstly, utilizing a payment gateway allows you not only to accept credit cards directly on your website, but also these credit card transactions are processed in real-time, so the merchant get paid immediately and that the customers get instant feedback as to whether their payment has been accepted or declined.

Secondly, a payment gateway saves time with the fact that credit cards are processed in real-time and funds are deposited directly into a merchant account. A payment gateway removes the need for manual card processing or third party account consolidation.

How does payment gateway work?

A customer places order on website by pressing the ‘Buy’ or equivalent button, or perhaps enters their card details using an automatic phone answering service. If the order is placed on a website, the customer’s web browser encrypts the information to be sent between the browser and the merchant’s webserver (done via Secure Socket Layer encryption).

The payment gateway may allow transaction data to be sent directly from the customer’s browser to the gateway, bypassing the merchant’s systems. This reduces the merchant’s Payment Card Industry Data Security Standard (PCI DSS) compliance obligations without redirecting the customer away from the website.

The merchant then forwards the transaction details to their payment gateway. This is another encrypted connection to the payment server hosted by the payment gateway.

The payment gateway forwards the transaction information to the payment processor used by the merchant’s acquiring bank.The payment processor forwards the transaction information to the card association (e.g., Visa/MasterCard/American Express).

The credit card issuing bank receives the authorization request and does fraud and credit or debit checks and then sends a response back to the processor (via the same process as the request for authorization) with a response code: the transaction can be either approved or denied].

In addition to communicating the fate of the authorization request, the response code is used to define the reason why the transaction failed (such as insufficient funds, or bank link not available). Meanwhile, the credit card issuer holds an authorization associated with that merchant and consumer for the approved amount. This can impact the consumer’s ability to further spend (e.g.: because it reduces the line of credit available or because it puts a hold on a portion of the funds in a debit account).

The processor forwards the authorization response to the payment gateway.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 as a relevant response then relayed back to the merchant and cardholder. This is known as the Authorization or “Auth”.

The entire process typically takes 2–3 seconds.The merchant then fulfills the order and the above process is repeated but this time to “Clear” the authorization by consummating the transaction. Typically the “Clear” is initiated only after the merchant has fulfilled the transaction. This results in the issuing bank ‘clearing’ the ‘auth’ and prepares them to settle with the merchant acquiring bank.

The merchant submits all their approved authorizations, in a “batch” (e.g.: end of day), to their acquiring bank for settlement via its processor.The acquiring bank makes the batch settlement request of the credit card issuer.

The credit card issuer makes a settlement payment to the acquiring bank.The acquiring bank subsequently deposits the total of the approved funds into the merchant’s nominated account (e.g.: the day after). This could be an account with the acquiring bank if the merchant does their banking with the same bank, or an account with another bank.The entire process from authorization to settlement to funding typically takes 3 days.

So, now you know more about payment gateway basis of working and if you have been putting off your ecommerce plans lately, it is time you gave it a serious thought again. After all, it is so easy to setup an ecommerce store today, get profit and be successful.

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