If you are looking to set up your business so that you can take advantage of ecommerce operations, you have probably heard the term “payment gateway.” A payment gateway is a necessary part of the transaction between customer, business and the banking institutions that both are using. A payment gateway is used to facilitate electronic transactions. Some of the main features of a payment gateway include:

• Software application designed especially for ecommerce, although it can be used to authorize payments in traditional brick and mortar businesses.
• Encryption of payment and personal data.
• Communication between the financial institutions involved and the business and the customer.
• Authorization of payments.

Some payment gateways feature tools that can help your customers figure out shipping and handling costs, as well as sales tax. There are also fraud detection tools and other features that can be used with a payment gateway. Many ecommerce Web hosts offer payment gateways as part of their hosting packages.

How does a payment gateway work?

A payment gateway takes advantage of the Internet to send and receive information. It is a specially designed application that facilitates purchase transactions. Many traditional businesses use them as well, since it allows for more accurate and immediate authorization of payment. An Internet connection is required, since most of the time a payment gateway makes use of the communications channel available over the Internet. This is much faster than older credit card processing done by via the phone line.

Here is an illustration of how a payment gateway works:

1. The customer makes a purchase. This can be via a Web site, or physically in person. It may even be a phone order that the business enters in by hand while on the phone with the customer.
2. The Internet browser being used by the customer uses Secure Socket Layer (SSL) encryption to “scramble” the information being sent.
3. The business Web site takes the details and forwards them to the payment gateway. The payment gateway is separately hosted in some cases, and encryption is still necessary.
4. The payment gateway takes the information and sends the details to the bank used by the business.
5. The bank sends the request to the card association. In the case of American Express or Discover, the card association is the same as the bank, and a response can then be issued. If the card used has a MasterCard or Visa logo, additional steps occur.
6. With Visa or MasterCard, the card association forwards the information to the bank that issued the card. This is the customer’s bank.
7. The customer’s bank assesses whether or not there are sufficient funds to cover the transaction.
8. The issuing bank then sends an authorization code. This code will tell the payment processor card association whether or not to allow the transaction to go through. The authorization code corresponds to the reason for a decline if there is one, or simply includes the code that allows the transaction to take place.
9. The payment processor sends the authorization code to the payment gateway.
10. The payment gateway then sends the code on to the business. If the transaction is declined, the sale is terminated. If the transaction is approved, the sale goes through and the money is placed on “hold” from the customer’s account.

While this process seems lengthy, in reality it only takes a few seconds to complete. In some cases, it happens in two seconds. In other cases, it can take as long as 10 seconds. It depends on the connection speed of the site, as well as traffic on the local Internet service provider. Before the sale is properly “settled”, however, the product must be shipped. Here are the additional steps that a transaction must go through to reach final authorization:

• The business gathers all of the authorization codes from that day into a “batch” at the end of business. These codes are submitted to the bank where the business has its merchant account.
• The business’s bank takes the approved funds and puts them into the proper account. In some cases, this account may be with a different bank. It is whatever the merchant designates. This is known as settlement funding. It takes about three days from the time of purchase for a business to actually receive usable funds.

A payment gateway can be very useful. If you want to accept online transactions you will need one. Even if you don’t operate a business Web site, a payment gateway can be a useful ecommerce tool.