How does a payment gateway work?

A payment gateway uses the Internet to send and receive information. It is a specially designed application that facilitates purchase transactions.

it accurate and immediate authorization of payment. Internet connection is required, since most of the time a payment gateway makes use of the communications channel available over the Internet.

1. The customer makes a purchase. This can be via a Web site.
2. The Internet browser being used by the customer uses Secure Socket Layer (SSL) encryption to “scramble” the information being sent.
3. The Web site takes the details and forwards to the payment gateway. The payment gateway is separately hosted.
4. The payment gateway collect all information and sends it 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 process 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.
11. The business collect all 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.
12. The business’s bank takes the approved funds and puts them into the proper account.
13. In some cases, this account may be with a different bank. It is whatever the merchant designates.
14. This is known as settlement funding. It takes about three days from the time of purchase for a business to actually receive usable funds.