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What does a payment gateway do with your data?

Inovio recurring paymentsThere’s a lot that goes into launching your online business, including: gathering the necessary capital, offering products and/or services you are excited about, getting your staff in place, and identifying your potential customer base. In all of the hubbub of launching your online business, there’s one other crucial component you’ll need to have in place to accept money from your customers: your payment gateway.

What exactly are payment gateways?

Think of your payment gateway as the intermediary that facilitates transactions between you (the merchant) and your customers’ issuing banks. The gateway is the part of your online payment system that acts as a virtual point of sale solution and is similar to what you see every day in physical stores. In order to ensure that sensitive credit or debit card data is transmitted safely from the customer to you and then to the authorizing bank, payment gateways encrypt the transaction details. In many cases, payment gateways can not only process credit and debit card payments but can also handle echecks and bank-issued debit cards.

Understanding the data trail.

Although it can take only a few seconds for a payment to be processed and approved, a great deal happens during that brief period of time. As a business owner, it behooves you to have a grasp of all the moving parts that are involved with accepting a credit card payment. Here’s how the process works:

  • After perusing your website, your customer places the products they want to buy into their virtual shopping cart.
  • The customer proceeds to checkout where they provide a payment method such as Visa or Mastercard along with information such as their name, billing address, credit card number, expiration date, and possibly a CVV number. Note that because you have no access to the person’s physical card, the transaction will be processed as “card-not-present” and have slightly higher fees because of increased risk. 
  • Using a secure connection, the customer’s information is uploaded and sent to the payment gateway where it is encrypted.
  • The transaction is then safely forwarded to your payment processor.
  • Next, your payment processor sends the information along to the credit card association (Visa, Mastercard, etc.) who imposes an interchange fee on the transaction. Note that while some of these companies (such as American Express) can also act as issuing banks that approve or decline the transaction, Visa and Mastercard cannot.
  • If the transaction involves Visa or Mastercard, the bank determines whether the payment will be approved or declined. Criteria used to make this decision include whether the credit card is valid, if the customer is authorized to use the card, if sufficient funds exist to ensure that the credit limit is not exceeded, and whether there are any freezes or holds on the account. If all looks to be in order, the payment will be approved. If not, the bank will decline the transaction and provide a reason for doing so.
  • Whether the payment is approved or declined, the issuing bank then sends word back to the credit card association.
  • The credit card association notifies the payment processor.
  • The authorization then reaches your gateway and passes through it back to your website. At this time, you and the customer are both made aware of the status of the transaction. If an approval has been granted, the buyer will see that a temporary authorization has been placed on their account. When the issuing bank releases all funds to the acquiring bank and every fee is paid to the parties involved, the payment status will move from “temporary” to “cleared.” At this time, you may ship the products since payment is complete.
  • The money is placed by the acquiring bank into your merchant account, alerting your payment processor that payment processing can take place. At this time, the transaction is completed, with all parties receiving their portion of the fees. Once this is done, the funds that remain are deposited into your business account.

Again, most of this process occurs within a matter of seconds. However, the last step is not automated and may take up to 48 hours. However, certain conditions might lengthen the time it takes to settle a transaction, especially if the processor suspects that there may be fraud involved.

Additional features to look for in your payment gateway.

While facilitating customer purchases securely is the primary purpose of payment gateways, many of them offer extra that can make them even more appealing. These may include:

  • The encryption and off-site storage of cardholder data, allowing them to make purchases at a later date without having to reenter the data again.
  • The added security of tokenization (in addition to standard data encryption) which turns sensitive cardholder data into a string of symbols that are useless to would-be hackers. 
  • Recurring billing features that allow for subscription-based services. With options for customization, you can tailor billing intervals and trial periods to fit your customers’ unique needs.
  • Virtual terminal access. This lets you input a customer’s credit card information and conduct payment processing through your computer’s web browser. This versatile technology can also be used with a tablet or mobile phone.
  • PCI compliance aka adherence to the payment card industry’s data security standards (PCI DSS). 
  • Application program interfaces (APIs) that make it possible for you to customize gateway functions.
  • Seamless integration with third-party accounting software. 

Of course, your gateway must also interface seamlessly with the shopping cart that you use in your online store. Many of the most popular carts are equipped with plug-ins that make the task easy even if you are a technology novice. However, some shopping carts lack this feature, which requires that you either switch to a different one or hire someone to provide customized integration services.

The next time you purchase a product yourself or help one of your customers to do so, take a minute to appreciate all that is involved. Although it appears virtually instantaneous, numerous players and procedures take an active role. When all goes well, a customer simply inputs the necessary information, clicks the “buy” button, and receives confirmation. Then, they simply sit back and wait for their package to arrive at their doorstep. 

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