What is a Payment Gateway?

April 8, 2019

A payment gateway is a service that securely transmits card information from an e-commerce website to the card payment network for processing then returns transaction information from the network back to the e-commerce website. A payment gateway works like a bridge or middleman between your website and your customer and it’s necessary to accept debit and credit card payments online or on mobile devices.

Once a customer places an online order, the payment gateway performs several steps to finalize the transaction:

  • Encryption. The browser encrypts card data while it’s sent back and forth between the web server. The payment gateway sends the data to the payment processor through the acquiring bank.
  • Authorization request. The payment processor sends the data to the card association. The card’s issuing bank approves or denies the authorization request.
  • Order fulfillment. The processor sends an authorization to the payment gateway. The payment gateway transmits the response to the website to process the payment.

A payment gateway also performs other functions to screen out as much fraud as possible. This is important as online payments have a much higher risk of fraud than card-present transactions. A payment gateway may offer fraud prevention tools like:

  • Geolocation. This tool checks the IP geolocation of the customer’s device against the shipping or billing address.
  • Delivery address verification. This tool verifies the provided address and corrects invalid city, state, and ZIP code combinations in real time. It can improve fraud detection and avoid shipment misrouting.
  • AVS check. The Address Verification System (AVS) verifies the billing address on the card matches the address provided by the customer.

Payment Gateway vs Payment Processor
In any credit card transaction, there are four parties involved: the merchant, the customer, the acquiring bank that provides merchant services, and the issuing bank that issues the customer’s card.

The payment processor is responsible for executing transactions by transmitting data between the merchant, the issuing bank, and the acquiring bank. A payment processor may also provide point of sale technology and credit card machines.

The payment gateway is responsible for securely transmitting online payment information to the payment processor to continue the transaction. A payment gateway works like an online POS terminal.

Why a Payment Gateway Is Important
A payment gateway secures online transactions so your business remains PCI compliant. The gateway gives customers a fast and secure checkout experience while dramatically reducing the risk of a data breach. Payment gateways also include technology and tools that reduce your risk of fraud and chargebacks to reduce payment processing costs.

Save Time, Money, & Resources

Categories

E-commerce

Contact HMS

Ready for the ultimate credit card processing experience? Ask us your questions here.