What is a Payment Gateway? Comprehensive Overview for Merchants

A payment gateway is an important techn­ology in the payments world, which allows busin­esses to accept and process debit or credit card transa­ctions, whether they are conducted online or in-pe­rson.

Although the term typically refers to the physical card readers we see in traditional stores, it also includes digital platforms utilised for online shopping. These gateways not only facilitate payments made with cards but have also evolved to support transa­ctions through QR codes, Near Field Commun­ication (NFC) techn­ology, and even cryptocu­rrencies like Bitcoin.

How Does a Payment Gateway Work?

The payment gateway infrastructure serves as a middl­eman, securely transm­itting trans­action details between the customer, merchant, payment processor and financial instit­utions. It can be thought of as a digital condu­ctor, meticu­lously guiding the trans­action process to its secure and efficient destin­ation.

 Here's a breakdown of how it works step-by-step:

1. Customer Initiates Transaction: The customer places an order and submits it, either by swiping a card at a physical store or entering details online.
2. Gateway Verification: The website or physical terminal directs the customer to the payment gateway, where they input their payment details. The gateway then verifies the customer's account balance.
3. Payment Processor: After the payment gateway sends the transaction data, it is received by the payment processor. They verify and confirm the transaction details before reaching out to the acquiring bank associate­d with the business or merchant. 
4. Card Network: From there, the acquiring bank forwards the transaction information to a card network such as Visa or Mastercard. This card network then communicate­s with the issuing bank, which is responsible for providing credit cards to customers. The issuing bank conducts checks on factors like account status, available balance, and potential transaction risks.
5. Bank's Response: The issuing bank checks for sufficient funds and any potential fraud. It then approves or declines the transaction.
6. Completion: Once approved, the bank settles the payment with the payment gateway, which then finalises the transaction with the merchant.

Payment Gateway vs Payment Processor

Payment gateways and payment proce­ssors serve different functions in the trans­action process. The payment gateway technology acts as a secure digital inter­face, colle­cting and encry­pting customer payment information before transm­itting it. It serves as the link between a merch­ant's website and the payment process.

On the other hand, a payment processor handles the movement of funds, conne­cting the custo­mer's bank to the merchant account and facili­tating money trans­fers. In simpler terms, while the gateway collects and sends payment data, the processor carries out the trans­action by executing fund trans­fers.

Example of a Payment Gateway

Let's say there's a merchant who wants to sell products on an e-com­merce platform. When a customer chooses an item and proceeds to checkout, they'll be asked to enter their credit or debit card information. That's where the payment gateway steps in. It securely captures and encrypts this data, ensuring it's trans­mitted safely to the appropriate financial institutions for approval.

Once approved, the trans­action is completed, and the customer receives a confir­mation. This seamless process, supported by robust security measures, demonstrates how crucial a payment gateway is in the digital commerce ecosy­stem.

What is Payment Gateway Integration?

Payment gateway integ­ration is an essential step in setting up an e-com­merce website or application. It involves establishing a secure connection between the e-commerce website and a payment gateway system. This conne­ction allows for the safe capture, encry­ption, and transm­ission of customer payment information to the relevant financial institution for proce­ssing and authori­sation.

Types of Payment Gateway

There are several payment gateway methods available in the digital commerce landscape to meet different business needs. Here is an overview of some notable types.

Hosted Payment Page (Pre-built UI)

One popular type of payment gateway, particularly for busin­esses that prefer not to handle payment data directly, is the redirect method. When a customer chooses to make a payment, they are directed to the payment gateway's platform. Once the payment is made, they are then redir­ected back to the merch­ant's website. This method is favoured for its simpl­icity of integ­ration and built-in security measures.

Server-to-Server Integration

Sometimes referred to as a direct gateway, this method enables customers to make transa­ctions without being redir­ected away from the merch­ant's website. The payment data is securely trans­mitted from the merch­ant's server to the payment gateway's server. Although it provides a smooth and uninte­rrupted user experience, merchants need to implement strong security measures.

Client-Side Encryption

In this approach, the customer's payment information is first encrypted on their own device (usually in the browser). Only then is it trans­mitted to the server. This added security measure ensures that even if a hacker were to intercept the data during transm­ission, they would not be able to decrypt and access the actual payment details due to the strong encry­ption.

Platform Integration

Certain e-com­merce platforms provide merchants with integ­rated payment gateways, stream­lining the process. Instead of having to integrate a separate third-party gateway, merchants can take advantage of the platf­orm's native payment gateway solution. This ensures compat­ibility and often provides access to negot­iated trans­action rates.

Security of a Payment Gateway Explained

In the world of digital commerce, ensuring secure transa­ctions is of utmost importance. Below are security features that payment gateway processes would typically use to safeguard both merchants and customers.

PCI DSS Compliance

The Payment Card Industry Data Security Standard (PCI DSS) is a colle­ction of security standards created to guarantee that companies accep­ting, proce­ssing, storing, or transm­itting credit card information maintain a secure environment. Compl­iance with PCI DSS means that a payment gateway follows these rigorous standards to protect cardh­older data from potential breaches.

Tokenisation

Tokeni­sation is a method used to protect sensitive data, like credit card numbers. It involves replacing the original data with a unique ident­ifier or "token." If interc­epted, this token is useless to malicious entities without a specific decry­ption key. By employing tokeni­sation, the actual payment details remain secure even if trans­action data is compro­mised.

3D Secure Authentication

3D Secure is an extra security measure implemented for online credit and debit card transa­ctions. It adds an addit­ional step where cardh­olders are required to enter a password or a dynamic OTP (One-Time Password) during the online purchase process. This added layer of security helps to verify the identity of the legit­imate cardh­older, ensuring that the trans­action is autho­rised by them.

How to Choose a Payment Gateway as a Merchant

Selecting the right payment gateway provider is crucial for merchants. Here are some considerations when choosing a service:

• Security: Ensure the gateway is PCI DSS compliant and offers features like tokenisation and 3D Secure authentication.
• Fees: Understand the transaction fees, monthly charges, and any hidden costs.
• Integration: Check how easily the gateway integrates with your existing e-commerce platform or website.
• Supported Payment Methods: Ensure the gateway supports a wide range of payment methods, catering to your customer preferences.
• Customer Support: Opt for gateways that offer robust customer support, ensuring smooth resolution of any issues.

By weighing these factors, merchants can select a payment gateway that aligns with their business needs and offers a seamless transaction experience for customers.

Payment Gateway with Noda

Elevate your business with Noda’s payments and open banking solution. Our all-in-one platform prioritises customer understanding, efficient operations, and growth.

Noda is a worldwide payment and open banking provider for a secure payment gateway and seamless business transactions. From payment facilitation to financial analytics, Noda has got you covered. Our platform uses cutting-edge AI and machine-learning technologies. Your payments are our priority.