Payment gateways: An introduction

While cash remains many people’s preferred payment method, research suggests that debit and credit cards are quickly gaining ground. According to estimates published recently by consultancy firm Capgemini, 366 billion non-cash transactions were completed across the globe in 2013, marking growth of 9.4 per cent on the previous year. The increased use of credit and debit cards is no doubt fuelling the evolution, with growth of 9.9 per cent and 13.4 per cent respectively.

Technology has a significant part to play in this shift. It’s fair to suggest that e-commerce has been the main driving force behind it all, and contactless payments have had quite the supporting role. If the trend is to continue, it’s clear that the right digital infrastructure needs to be in place – and there are few examples more important than the payment gateway.

What is a payment gateway?

A payment gateway is an e-commerce application service which facilitates the sharing of relevant information between banks during an attempted credit or debit card transaction. It allows the appropriate information to be sent to the acquiring bank, and then collects a response from the issuing bank (whether the exchange has been approved or declined).

Generally, the service is needed by any business that wants to trade online and accept card payments from its customers. With the total value of B2C e-commerce sales currently standing at almost $1.5 trillion per year – and major growth expected in the coming years – this group is likely to include the majority of commercial organisations.

Global payment gateways

As mentioned above, significant growth is expected in the e-retail sector, with a 2014 report from eMarketer predicting that more than $2.3 trillion will be spent online in 2018. This shift is very much a global trend. While North America and Western Europe are still major players, it’s the activity elsewhere in the world that industry figures have been quick to highlight. The growth is being spearheaded by consumers in the Asia-Pacific region, with figures from Central & Eastern Europe, Latin America, the Middle East and Africa all moving in the right direction as well.

In this age of the internet, there are no longer geographical barriers restricting consumers and retailers; products can now be bought and sold from and to anywhere in the world. For this to happen, though, trading businesses must continue to adopt suitable payment gateways – those which are capable of processing card payments of any kind, in as many countries and currencies as possible. Language barriers must also be taken into account, with effective translation imperative.

How does a payment gateway work?

Payment gateways tend to be services provided by a third party. This payment processor will be a company authorised to process credit card transactions between consumers and traders – it does this by providing a reliable and trustworthy connection to the acquiring bank. Its job is then to evaluate whether a transaction is valid or not, and then to approve or decline it accordingly. This is all necessary to prevent fraudulent activity and protect the money of both buyer and the seller. Security is, therefore, a theme that runs right through the transaction process.

Once the customer has placed an order online, their information will be sent – after being encrypted by the browser in use – to the merchant’s own webserver. The retailer then forwards the information onto its own payment gateway, through another SSL-encrypted connection to ensure the sensitive data cannot be intercepted. From here, the transaction details are sent to the payment processor being used by the acquiring bank and finally onto to the relevant card association.

After completing the necessary credit and fraud checks to determine whether the payment can be completed, the card provider will send a response code back to the processor and payment gateway. This code states the result and – if necessary – reasons for the decision. Assuming authorisation has been given, the order can be fulfilled and the necessary funds transferred from the issuing bank to the merchant.

As well as the order being carried out through the HTTPS communications protocol and SSL encryption adopted for the exchanging of information, the whole process – and all involved parties – must operate within a strict set of rules known as the Payment Card Industry Data Security Standard (PCS-DSS).

Looking ahead

The fact that the whole transaction process can be completed in seconds is hugely important to businesses today; time, after all, is money. Despite being considerably more complex than cash payments, card transactions are now quicker, safer and more convenient than any of the obvious alternatives. Provided the right payment processing solutions are adopted by modern merchants, the evolution will continue at its current pace. With all of the above considered, it’s clear that payment gateways have a pivotal role to play in this seemingly inevitable shift.

Author: Graeme Parton


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