A payment gateway is a software that connects a merchant’s website to the payment processor and enables the merchant to accept electronic payments. It is an essential component of e-commerce and retail businesses that want to accept credit card and debit card payments online.
In e-commerce and retail, a payment gateway acts as an intermediary between the merchant’s website and the payment processor. When a customer initiates a transaction by making a purchase on the merchant’s website, the payment gateway collects the customer’s payment information and securely transmits it to the payment processor for authorization.
The payment processor then verifies that the customer has the necessary funds or credit available, and that the transaction information is accurate. Once the transaction is authorized, the payment gateway sends the merchant an approval message and the merchant can proceed with delivering the goods or services to the customer.
A payment gateway works with a merchant account to facilitate the process of accepting and processing payments. When a customer makes a purchase, the payment gateway sends the transaction information to the payment processor, which then communicates with the merchant’s merchant account to authorize the transaction and transfer the funds to the merchant.
As for merchant accounts, you do not need a different merchant account for retail and e-commerce. Generally, a single merchant account can be used to process payments across multiple channels (e-commerce, retail, phone, mail, etc.). Some payment processors do offer different pricing plans depending on the type of transaction (for example, card-present vs card-not-present), but generally one merchant account should be sufficient.
When a customer initiates a transaction by making a purchase on a merchant’s website, the payment gateway goes through several steps to process and accept the credit card payment:
- Data Collection: The customer enters their credit card information into the merchant’s website, which is then collected by the payment gateway. This information typically includes the credit card number, expiration date, and security code.
- Data Validation: The payment gateway checks the validity of the credit card information by communicating with the customer’s bank and validating that the credit card is active, hasn’t been reported as stolen, and has available credit.
- Data Encryption: To protect the customer’s credit card information and ensure secure transmission of data, the payment gateway encrypts the credit card information using a secure socket layer (SSL) or transport layer security (TLS) encryption.
- Authorization: The payment gateway sends the encrypted credit card information to the payment processor for authorization. The payment processor then communicates with the customer’s bank to verify that the customer has the necessary funds or credit available, and that the transaction information is accurate.
- Approval or Decline: After the transaction is authorized, the payment gateway receives an approval or decline message from the payment processor and passes it on to the merchant’s website.
- Settlement: If the transaction is approved, the payment gateway sends the funds to the merchant’s merchant account.
It is important to note that this process may vary slightly depending on the specific payment gateway and payment processor being used, and some might include additional steps such as fraud detection.
Also, depending on the merchant and their needs, some payment gateway providers offer additional features like recurring payment, fraud detection, and tokenization. These features can be used to improve the overall payment experience and to prevent fraud.
Payment gateways charge fees for their services, these fees can vary depending on the payment gateway but they typically include a percentage of the transaction amount and a fixed per-transaction fee. Some payment gateways also charge an additional fee to setup and monthly, quarterly, or annual fees. It is important for merchants to read and understand the terms and pricing plans of the payment gateway they choose to ensure that it aligns with their business needs. It is also common for merchants to compare pricing and services of multiple payment gateway providers before making a decision.