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What is a Payment Gateway and how does it work?

The architecture that enables the smooth functioning of payments made online is known as the payment gateway. It makes sure that consumers and businesses can easily and swiftly make online payments.

There are a few important terms or factors that play a crucial role when it comes to online payment, as listed below.

  • The customer is basically the person who initiates the payment. For example, you buy food online and make payments through your debit/credit card online.
  • The merchant is the one who offers the customer their product. Customers pay the merchants for services rendered.
  • The issuing bank is the bank in which the customer has their debit or credit card issued.
  • The acquiring bank is the bank in which the merchant has the account. This bank sends the merchants transaction to the issuing bank to receive the payment from the customer.

Understanding Payment Gateway

Payment gateways are the spine of the technology behind the transfer of payment from the customer to the acquirer. The payment gateway ensures that there is enough balance in the customer’s card, the card details are secure and the payment is made securely from the customer to the acquiring bank without losing essential card information.

It acts as an intermediate between the customer and the merchant and makes sure that payment is carried out securely and efficiently.

Also read: How do credit card numbers work? What is the science behind it?

How does a Payment Gateway work?

The payment gateway works in the following manner:

  1. The customer adds the product which they want to buy to the cart and then proceeds to pay.  They then enter the card details required to carry out the payment which includes the cardholder’s name, the expiration date of the card, and the CVV number (Card Verification Value). This sensitive information is secured and then passed onto the payment gateway.
  2. The card details are encrypted by the payment gateway, and a fraud check is conducted before sending the details to the acquiring bank.
  3. The card information is then sent to the card schemes that are Visa, Master Card, among others.
  4. Another layer of fraud check is performed by the card scheme, and then the data is sent to the issuing bank.
  5. The issuing bank then authorises the transaction. The message of whether the payment is accepted or declined is sent back to the card schemes and then to the acquirer.
  6. The accepted or declined message is transferred from the acquiring bank to the payment gateway and then to the merchant. If the payment is accepted, then the amount is collected from the issuing bank by the acquirer. If not, then a message of error with your card or bank account is posted on the page.

The entire process does not take more than a few seconds

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How is the information kept secure?

The entire transaction is taken place on a secured website. When you proceed with a transaction, you will see the word secure written before HTTPS. The sites which carry out transaction are not HTTP but HTTPS in which “s” stands for Secure.

The system uses a signed request from a merchant, as a result of the hash function. This is done to validate the request of transaction. This signed requestion is a secret word between the merchant and the payment gateway. To detect any malicious activity, the IP of the requesting server is verified.

The acquirers, issuers and the payment gateways are backing Virtual Payer Authentication (VPA) to secure the transaction process. It is implemented under a 3D secure protocol which adds security layer.

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