Have you ever wondered how an online payment gateway actually works? Here's a brief overview:
The payment gateway serves as the conduit between the customer, merchant, and their banks. Once the customer selects a product they like, they click the buy icon. The data entered by the customer in the browser is encrypted, and it's sent to the online store's server. Upon receiving the data, the server bundles the customer’s IP address with transaction details on a digital certificate (confirms the identity of both the buyer and the vendor and payment gateway). The collective data is termed as a digital order that's further encrypted and sent to the payment gateway.
There are certain payment gateways where the information moves directly from the client browser to the gateway. In this case, the merchant's server isn't used, and this also decreases the data security compliance requirements of the merchant. Upon arrival, the payment gateway provides authentication through the digital certificate. After that's processed, it shows the payment options available to the customer.
After the customer makes the choice of payment method, the details are sent by the payment gateway to a bank (if a card is used) or to the merchant’s bank (if the customer chooses an alternative option to pay). The customer’s bank or the merchant’s bank relays information to the issuing bank (if a card is used) or to the customer’s bank (if an alternative payment mode is used).
The bank checks the debit or credit limit of the customer and the validity of the payment method. Afterward, it will either approve or reject the transaction. A response code is generated in case the payment is declined along with the reason, too. This message gets transferred to the payment gateway through the acquiring bank.
Whatever the response, approved or declined, it's sent both to the merchant and customer. When the payment goes through, it's known as authorization/ ‘Auth.' All of this takes place within the span of a few seconds at the most (approximately 3-4 seconds).
For those transactions involving payment by card, the issuing bank has to clear the “Auth” and settle the payment with the acquiring bank. When physical goods are involved, it's done after the vendor or merchant goes ahead and ships the items, thus, fulfilling the transaction.
Generally, once every day (at the end of transacting hours), the vendor will submit all the approved ‘Auths’ to the acquiring bank. The acquiring bank then contacts the issuing bank to settle all outstanding payments. After the issuing bank sends the funds to the acquiring bank, the amount is then transferred to the vendor’s bank account.
The entire process, starting from authorization to settlement, is collectively referred to as the settlement period. As a norm, the whole process is generally completed in the period of 2-4 business days at the most. However, occasionally, there may be a delay by an extra day or two at either end.
Comments
Log in or sign up to join the conversation.