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The Technology Behind Payment Gateways

The Technology Behind Payment Gateways

Payment gateways are the interface between cardholders and merchant account owners. The piece of technology behind these gateways is built to read, capture, and transfer payment data from the customer to the acquirer through a payment processor.

Here is everything you need to know about payment gateway technology.

What is a Payment Gateway Used for?

Payment gateways provide merchants with a secure and seamless system through which customers can complete transactions using multiple payment channels. Online businesses rely on this system to authenticate transactions.

Think of a payment gateway as a virtual cash register. For eCommerce stores, the gateway is the checkout page through which customers input their card information to complete transactions. In a physical setup, the payment gateway is the Point of Sale terminal through which the customers swipe their cards to process payments.

Essentially, a payment gateway enables debit and credit card payments. The software is also built to keep a record of the customer’s card details. You do not have to re-enter your payment information every time you make a purchase.

Who Is Involved?

The success of a payment gateway is driven by the following key stakeholders;

  • Cardholder - This is the customer initiating the payment using a credit or debit card. For the cardholder, a payment gateway is a convenient channel to pay for goods or services electronically.      
  • Merchant - In this value chain, the merchant is the business making the sale. The business must have a merchant account into which funds paid by the customer are settled.        
  • Issuer - This is the bank that issues customers with credit cards, creates their card accounts, and processes card payments on their behalf.      
  • Acquiring Bank - Acquiring banks provide businesses with merchant accounts for payment processing. Through a payment processing system, the acquirer gets approval from the issuer to collect the payment initiated by the customer. The money is then settled in the respective merchant account within a predetermined period.      
  • Card Network - In processing payments, card networks are organizations that facilitate all transactions made via card systems. They provide and maintain card payment infrastructure.

How Does It Work?

Here is a step-by-step guide on how payment gateways work.

Step 1: Payment Initiation

Customers are the end user of the payment gateway technology. The function begins with the customer initiating payment by swiping a credit card or entering card details on a POS device and checkout page, respectively.

Step 2: Payment Gateway Activity

The payment gateway records the cardholder’s information and then passes it to the acquirer. At the same time, the software counter checks with the issuing bank to confirm the sufficiency of funds in the customer’s credit card account.

Step 3: Confirmation of Transaction

The technology sends the encrypted data of the cardholder to the Card Network for transaction processing. The Network approves the transaction, redirecting the data to the issuing bank for processing of payments.

Step 4: Funds Verification

The issuer verifies the availability of funds in the cardholder’s account. Following the validation of the transaction and confirmation of funds by the issuing bank, the gateway routes this information to the acquiring bank.

Step 5: Funds Settlement

The acquiring bank receives instructions from the issuing bank to transfer money from the cardholder’s account.

Types of Payment Gateway Software

The payment processing industry features different types of payment gateway applications designed to meet varying business needs, preferences, and budgets. They are categorized into the following classes;

  • Platform-Based - In platform-based software, the payment gateway’s server is integrated with the merchant’s server to allow direct transactions. This way, merchants can make sales and accept payments directly through its server. Notably, when customers input their card information in the merchant’s checkout portal, they are not redirected to a different page for payment.           
  • Hosted - Hosted gateways are designed to redirect cardholders to a different page to complete a transaction. Once payment is made on the third-party payment page, the customer is redirected back to the merchant’s page. Hosted payment gateways relieve online merchants of the burden of running and maintaining online payment systems.          
  • Local Bank System - Local bank system gateways share similar functionalities as hosted gateways. In this case, customers are redirected to a local bank system which is often the merchant’s service provider. Upon completing the payment, the customer is redirected to the seller’s website with a payment confirmation notification.

Benefits of Using a Payment Gateway

In addition to enabling credit card transactions, businesses benefit from payment gateways in such ways as;

  • Customized Payments - Most gateways come with dynamic application program interfaces that allow businesses to customize payments to their needs and preferences.           
  • International Payments - In addition to accepting payments worldwide, a payment gateway makes it easy for you to accept multiple currencies and currency exchanges.          
  • PCI Compliance - Every payment gateway is hosted on a different server from the merchant’s. As a result, businesses do not have to make any effort to be PCI compliant.


Having a better knowledge of how a payment gateway works, who is involved, and the infrastructure built with the technology is fundamental in choosing the best option. Consider a payment gateway built for the modern customer to help you deliver on the changing consumer habits.

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