eCommerce Glossary
This e-commerce glossary features over 250 essential terms every online seller should know to succeed in digital commerce.
A payment gateway is a service that authorizes and processes credit card payments for online and brick-and-mortar stores. It acts as an intermediary between the merchant and the payment processor, securely transmitting transaction information and ensuring the smooth transfer of funds.
How Does a Payment Gateway Work?
It operates through a series of steps to process transactions securely:
- Customer Purchase: When a customer places an order on a website and proceeds to checkout, they enter their payment details.
- Encryption: The payment gateway encrypts this data to ensure it is securely transmitted over the internet.
- Authorization Request: The encrypted data is sent to the merchant’s acquiring bank. The acquiring bank forwards the transaction details to the card network (e.g., Visa, MasterCard).
- Bank Communication: The card network routes the transaction to the issuing bank (the bank that issued the customer’s credit card) for authorization.
- Transaction Approval: The issuing bank verifies the transaction details and either approves or declines the transaction. This response is sent back through the card network to the acquiring bank and then to the payment gateway.
- Completion: The payment gateway sends the transaction status (approved or declined) back to the merchant’s website. If approved, the order is confirmed, and the merchant can proceed with fulfilling the order.
Security is a critical component of payment gateway
They must comply with the Payment Card Industry Data Security Standard (PCI DSS), which outlines strict guidelines for handling and storing card data. These measures include encryption, tokenization, and secure communication protocols such as HTTPS to protect sensitive information during the transaction process.
Payment gateways not only facilitate real-time transactions but also support various payment methods and currencies, making it easier for merchants to conduct business globally. They often charge a per-transaction fee for their services, covering the costs of processing and securing transactions.