One of the more common questions business owners ask us is: what is a payment gateway and how does it work? A payment gateway allows customers to securely purchase products online. The customer enters their credit card details into the secure payment page, hits submit and this is then sent off for approval. Once approved, the order is processed and the customer receives their product or service. Then the merchant is sent a payment confirmation email along with details of the transaction that was just processed.
A payment gateway can also provide support for things like recurring charges, digital products and subscriptions. There are lots of great benefits to using a payment gateway for your business, but what you need to keep in mind is that not all payment gateways are created equal.
A payment gateway is a service that authorizes credit card or other payment transactions on behalf of the merchant, primarily for internet and telephone merchants and stores, but also can be used by regular (non-internet) businesses as well. It’s similar to an internet version of a POS point of sale system, where you swipe your card through a machine to pay for something. The difference is that online, the transaction is between you and the merchant, but it goes through a third party (the payment gateway).
The process of paying for something online starts with the customer typing their credit card number into a form and submitting it to the merchant. The payment gateway receives this information and forwards it to your bank or other institution responsible for managing money (i.e., credit cards). If the information is good and there is enough money in your account, then the bank authorizes the transaction, and a payment confirmation is sent back to the merchant through a gateway.
The merchant is also given the information needed to process the order, including a reference number. The customer does not need to be involved in this step other than typing their credit card into the form. This ensures that customers do not have access to each other’s credit card numbers, reducing liability for merchants and protecting personal data.
Every transaction processed through a payment gateway is assigned a “transaction ID”. This unique transaction ID can be used to track the status of that transaction. The format of the transaction ID depends on the type of gateway that’s being used.
For example, PayPal uses one or more of these identifiers:
- Internal order number
- IPN transaction ID
- Website Payment Pro transaction ID
- PayPal order number
The main difference between a traditional credit card payment and an online one is that, when you pay for something on the internet, your credit card information (and other personal data) is sent directly to the website you are buying from. Before you make a purchase online, it’s important to know where your data will end up, because this is the company that will have access to it.
It’s important to know that a payment gateway is not the same as SSL. When you shop online, your browser will typically indicate if it’s on a secure page by showing a closed lock next to the website URL and/or enabling encryption (https). Data sent between browsers and websites using SSL is encrypted, but this does not mean that the payment itself is secure. The merchant will still receive your credit card number, which can then be used for other unauthorized charges or money laundering.
While most online payments are slower than normal in-person payments, it’s important to remember that they are far more secure in relation to the amount of information that is shared with the merchant at purchase time.
For this reason, choosing a payment gateway is an important aspect of running any business. The main things to keep in mind when selecting one are how well the gateway works with your existing hardware and software, cost-effectiveness and security of your transactions.
Since different businesses have different needs, it’s best to compare several payment gateways by reading their terms of service, privacy policies and customer reviews before making your final selection.