A Payment Gateway is the server which connects your website, mobile app, cash register with the one or more payment switches (or processor network). It enables online transfer of money by communicating with different parties involved in the transaction and have become an essential part of our online world, from online shopping to utility bill payments, to charity givings, a payment gateway help us in many ways. It lets your website, mobile app, mPOS or cash register know whether a charge is approved by the cardholder's bank and then submits your charges for settlement.
Lets understand how a payment gateway works by considering a typical credit card transaction.
A credit card transaction involves five entities
- The cardholder
- Issuing bank i.e. the bank that issued the credit card
- Card Brands. Visa, Mastercard , Amex
- Merchant’s Bank
- Merchant i.e Shop, e-commerce website etc
The above process can be summarized in three simple steps:
Authorization - When you swipe a card or click the submit button, the payment gateway manages the process of confirming with your issuing bank if you have sufficient funds available for the purchase.
Capture - After verifying that the funds are available, a hold is placed on the money this is called capture and the merchant can ship the goods. Although the merchant does not yet have his money yet, but he is confident that he will receive the funds as they have been captured.
Settlement - Settlement is the process of the final transfer of money to the merchant and is accomplished in one business day. During settlement, the card issuing bank and the merchant bank connect with each other. The payment gateway aggregates the daily transaction details from the issuing bank and sends them to merchant bank, the payment network then handles the settlement and the money are transferred to the merchant's bank account. The issuing bank charges the bill amount to the buyer and the charge appears on his credit card statement.