What Is a Payment Gateway and How Does It Work?

A payment gateway ensures the proper functioning of the payments ecosystem. It is the mechanism that connects consumers with businesses safely that are also profitable for both parties. Above all, it is a complex merchant service with countless opportunities.

Nowadays, many businesses choose to upgrade to electronic payment systems like Paxum. This service provides a reliable payment gateway that should improve online payment flows. Read on to determine if you need to make the same step too!

What Is a Payment Gateway?

To better understand a payment gateway, we need to look closer at what this mechanism contains.

A payment gateway is not a stand-alone feature in the payments ecosystem. On the contrary, it consists of a dynamic group of actors that include:

  • The merchant – an online business is operating in a specific industry and offering products and/or services.
  • The customer – the cardholder who aims to obtain the products and services the merchant offers.
  • The issuing bank – the customer’s bank that issued his credit or debit cards.
  • The acquirer – the financial institutions that host the merchant’s bank account.
Home sales brokers and real estate investors are exchanging with investors being filing cash at the agent's hand.

How Does a Payment Gateway Work?

The system unites the four actors in the same venue and gives them specific roles within the payment gateway. Here’s how it works once it’s up and running:

  1. The customer initiates the transaction by entering his credit/debit card details on the merchant’s payment page. These details are strictly confidential, and third parties cannot see them. For instance, they include the name, the card’s expiration date, and the CVV number.
  2. The payment gateway platform holds the customer’s details under encryption for better security.
  3. The service also checks the customer’s activity for fraud before sending the payment forward.
  4. Next, the acquiring bank also checks the details for fraud before sending the payment to the issuing bank.
  5. The issuing bank also screens the details for possible fraud.
  6. Lastly, the issuing bank approves or declines payment.

The gateway can also communicate back and forth with the merchant. Once the payment receives approval, the acquirer takes part of the payment amount from the issuing bank and keeps the funds in the merchant’s account.

Lastly, it deposits the capital into the merchant’s account. In the industry, many refer to this process as “settlement.” Also, its conditions depend on the agreement between the merchant and the payment gateway.

If the payment gateway encounters hurdles along the way, it may stop. For instance, it could be that the buyer does not have any of the payment methods that the merchant accepts. In this case, the platform will redirect the customer to the beginning. There, they can start the process again, but with different payment methods.

The payment gateway benefits both merchants and customers. Even if you cannot see its real-time progress, this feature works intensely to quickly, cost-effectively, and securely complete the stops above.