What is a Payment Gateway?

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As defined by Wikipedia, “a payment gateway is an e-commerce application service provider service that authorizes payments for e-businesses, online retailers, bricks and clicks, or traditional brick and mortar. It is the equivalent of a physical point of sale terminal located in most retail outlets.”

A payment gateway is essentially an application that replicates the functionality of a credit card company, allowing credit cards to be processed successfully online. It is an online system for real-time charging of credit cards when a customer places an order.

A Payment Gateway provides credit card processing, billing, reporting, settlement and operational services to acquiring and issuing banks. It manages the process of transferring authorized and captured credit card funds between different financial accounts such as the merchant’s company checking account. These corporations typically charge merchants, a discount rate and a transaction fee for this service. These fees vary from individual service providers.

Why is a payment gateway important?

Whenever someone tries to make a purchase from a merchant’s or seller’s website, the seller needs to be able to complete the e-commerce transaction. In order for the e-commerce or online shopping transaction to be successful, the seller needs to be able to sell online, take orders, and be able to receive an online payment.

How does a payment gateway work?

Every time you purchase an item from an online retailer, you are using what is known as a payment gateway. A payment gateway can be thought of as the middle man between your bank or money, and the organization you are making the purchase from. A payment gateway performs one very important function – it authorizes payments from credit cards for banks. You give the payment gateway your credit card information. The payment gateway will perform a variety of checks on your credit card. If it passes all the checks, the payment gateway will send the transaction to the bank at the other end.

One other very important feature of a payment gateway is that it will, and must, encrypt information. When dealing with credit card and personal information, there are many requirements that are places on the privacy of that information. The largest of which is a standard known as PCI compliance. Among the vast array of compliances for this standard is the requirement that any transmission of personal information be encrypted. A payment gateway will take care of this requirement in every case. A different way to see the payment gateway is to imagine a police officer keeping security and trust between all parties.

Payment gateway and ecommerce hosting

E-commerce hosting provides for the functionalities that are required for e-commerce websites. This can include SSL support, database access. Some e-commerce hosting services also include the shopping cart software in the e-commerce hosting package. It also implies escalated levels of performance and reliability of e-commerce transactions done using a payment gateway.

An e-commerce hosting service provides the necessary platform. To be able to sell online, you also need a payment gateway in addition to the e-commerce hosting account.


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