Payment Gateways 101: What They Are And How Do They Work?

The payment gateway and online merchant account provider are the most essential elements of eCommerce. It is vital for online sellers and purchasers and acts as a link between the two. In this article, we will read everything you need to know about payment gateways as a merchant.

What is a Payment Gateway?

The application that combines all the parties involved in an online transaction is known as a gateway. It brings the merchant account provider website, issuing bank and other stakeholders on the same page to facilitate a smooth transaction. It also utilises payment methods such as ACH payments, bank-issued debit cards, cryptocurrency etc to process direct transactions.

How Does it Work?

Credit card processing through a payment gateway takes place in the following steps-

  1. The payment gateway handles the customer payment by encrypting the customer information and sending it to the merchant account or third-party processor.

  2. The data of the transaction is then routed to the credit card issuing authority, where the issuing bank either approves or declines the transaction.

  3. The issuing banks then transmit the information to the credit card issuing authority. It then goes through the merchant account< the payment gateway< and the website where the customers get to know if the payment is accepted or declined.

  4. The issuing bank processes the transaction and releases the funds to the acquiring bank.

  5. Every stakeholder gets a cut of the processing fee and the remaining funds are received by the merchant account of your business.

Types of Payment Gateways

There are three types of online payment gateways used by online eCommerce stores. These are-

  1. Redirect Gateways

It is a simple and affordable merchant gateway service. Here, the customer is sent to a third-party website to complete the transaction after checking out. It is convenient, as the merchant requires a little control over the process and other platforms processes the payment.

  • On-Site Checkout; Off-Site Credit Processing

In this kind of payment gateway, the checkout is done by the customer on your site but the payment is processed off-site. The merchant can avoid on-site payments while eliminating the need to go to another website for completing a purchase.

  • On-Site Gateway and Processing

This solution is incorporated by large eCommerce settings which deal with voluminous transactions and ACH money transfer online every day. Here, the checkout and the payment processing occur on the same server- on your server. You have complete control over each step of the purchase and it is your responsibility to offer a good experience to your customers.

Final Thoughts

Payment gateway is a requisite for online eCommerce stores, and having significant knowledge about a payment gateway and merchant account provider is vital for the success of the store. Begin your online transactions by partnering with an efficient payment gateway today!


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