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Glossary - Payment Gateway

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A payment gateway is an e-commerce application service provider service that authorises payments for e-businesses, online retailers, bricks and clicks, or traditional brick and mortar Merchants. It is the equivalent of a physical point of sale terminal located in most retail outlets. Payment gateways encrypt sensitive information, such as credit card numbers, to ensure that information passes securely between the customer and the merchant.

A payment gateway facilitates the transfer of information between a payment portal (such as a website or IVR service) and the Front End Processor or acquiring bank.

When a customer orders a product from a payment gateway enabled merchant, the payment gateway performs a variety of tasks to process the transaction:

  • A customer places order on website by pressing the 'Submit Order' or equivalent button, or perhaps enters their card details using an automatic phone answering service.
  • If the order is via a website, the customer's web browser encrypts the information to be sent between the browser and the merchant's web server. This is done via SSL (Secure Socket Layer) encryption.
  • The merchant then forwards the transaction details to their payment gateway. This is another SSL encrypted connection to the payment server hosted by the payment gateway.
  • The payment gateway forwards the transaction information to the processor used by the merchant's acquiring bank.
  • The processor forwards the transaction information to the card association (i.e., Visa/MasterCard)
  • The card scheme routes the transaction to the correct card issuing bank.
  • The credit card issuing bank receives the authorisation request and sends a response back to the processor (via the same process as the request for authorization) with a response code. In addition to determining the fate of the payment, (i.e. approved or declined) the response code is used to define the reason why the transaction failed (such as insufficient funds, or bank link not available)
  • The processor forwards the response to the payment gateway.
  • The payment gateway receives the response, and forwards it on to the website (or whatever interface was used to process the payment) where it is interpreted and a relevant response then relayed back to the cardholder and the merchant.

The entire process typically takes 2-3 seconds.