What is a payment gateway, and how does it work?

June 11th, 2022 by Felix Cheruiyot

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Payment gateway connects the application programming interfaces (APIs) and the payment processing network (PPN). The payment gateway could be accessible in online stores or physical stores: the online payment gateway uses an internet-based network. However, the payment gateway is designed as a point of sale (POS) terminal in the physical stores: the POS machine reads the digital prints on debit or credit cards. Unlike the physical store payment gateway, the online method uses the internet and can be performed anywhere. For example, online internet transactions read debit and credit card information; the card details are used in online transactions. Both online and physical stores have several payment gateway methods available for merchants and shoppers living in Africa generally.

In an online transaction, the payment gateway is referred to as “checkout points.” All merchants have varying checkpoints, depending on your local banks; however, the same principle binds all “checkout portals.” Contrarily, checkout portals are absent in the physical payment gateway.

A payment gateway is easy to use, fast, and reliable whether you want to use it in an online or physical store. This article talks about the importance of a payment gateway, how it works, and its accessibility in Africa.

Advantages of payment gateway

The online and physical means of a transaction have their advantages; payment gateway advantages are listed below.

Fast and reliable transactions

Online payment gateway promotes smooth transactions between merchants and customers. Unlike the physical stores, the online store’s e-commerce platform calculates all the goods and services in the cart before the checkout page, making the online payment gateway fast and reliable. Customer details and card information are kept secured by the merchant. Security is highly important in payment gateway: online vendors secure their payment gateway with internet security software.

Affordable

If you are in Africa and decide to set up an e-commerce store with a payment gateway, you need a minimum amount of money. Merchants skip payment gateway because of the chargeback fees and maintenance, but it is worth it all. About 2.5 billion people shop online daily; you need to stand out in the competition with a fast payment gateway. Setting up a payment gateway is affordable, although the maintenance fee comes afterward.

Saves time

Online shoppers rely on the speed and accuracy they receive from online merchants, so many people shop online in Africa. Installing a payment gateway improves speed and saves your customers time in physical and online stores. Physical stores with point of sale (POS) terminals save their customers time because the machine works similarly to an online payment gateway; the only difference is the absence of checkout portals. Most online payment platforms remember customers' card information, which speeds up the transaction process, especially in the case of regular shoppers. It takes a little time to shop online in Africa via a payment gateway, no matter the part of the world you shop from.

Imposes less danger

All payment gateways demand updated payment software because the payment gateway service providers improve their service by fixing all errors and bugs in the new version of the software. Installing and updating new software promotes security and imposes less danger. The important thing about the payment gateway is that some merchants may not be able to use their payment gateway software unless they install the new updates. And this has shown to give positive feedback from customers.

Improves customer satisfaction

Evidence that shows customer dissatisfaction is cart abandonment. Customers leave their cart unchecked when the payment method is not easy to use. Merchants with payment gateway tend to retain more of their customers than competitors without a flexible payment method. Another thing is customer experience: a customer who knows that your payment method is easy to use will likely shop again, especially when he needs urgent services. In short, vendors that improve and provide outstanding services alongside a fast and reliable payment network are cherished by their customers. A payment gateway is more than an ordinary e-commerce tool; it influences how customers interpret merchant services.

Global recognition

Payment gateway is not limited to Africa: you can shop from an Africa-based company or other places. The payment plan supports debit and credit cards, and you do not necessarily have to know how the transaction is done. The customer’s local bank connects the cards with the payment gate, resolves the necessary amount after the customer authorizes the payment, and receives a “one-time password” via SMS or Email notifications. A physical transaction with POS is similar to an online transaction because it requires authorization. However, the physical transaction requires the customer to input a PIN instead of a “one-time password.”

Bonus - To learn more about cross-border payments and support, please read our article on: Everything you need to know about cross-border payments

Automated payment method

Privacy is appreciated in the payment gateway: no third-party involvement. You can transact a huge sum of money without going to the bank or other financial institution to verify your payment. The payment gateway gives the authorization to do many transactions, provided you have your security codes: hard and soft codes – the codes verify online and offline payment. For example, customers need to input a security PIN to use their debit or credit card if they want to shop in a physical store via the POS machine.

Fraud detection and prevention

A payment gateway prevents fake “money transfers:” money comes into your bank account directly, and you will receive the evidence. Many fraudsters generate fake money transfers; however, money transfers do not work for payment gateway. Instead, users link their local bank to the merchant platform, and the money is deducted directly from the bank. The payment gateway secures funds and assures security with a money-back guarantee.

Money-back guarantee

Suppose a transaction fails and money is debited from a customer's bank. There is a smooth connection between the merchant financial institution and the customer's bank so that the money-back guarantee remains 100 percent. Money is reverted within 24 hours of the transaction – customers do not need to visit the local bank or fill out any form since there are options like query and online support.

Online support

Online support is available for online transactions depending on the payment gateway service providers. Most payment gateway service providers associate their online support with the merchant website. Customers interact directly with the support team to solve any queries or complaints. However, customers provide evidence of the transaction in order to use the online support in some cases.

How does the payment gateway work?

Although a payment gateway has many advantages, you should know and learn how it works. This will let you understand some basic processes, and if at all you subscribe to a payment gateway service on your platform, you will tackle any issues that may arise. There is a low possibility of facing an issue because of the online support, reduced declined transactions, and fast & encrypted services attributed to a typical payment gateway. All in all, let’s talk about how a payment gateway works.

The payment gateway connects the application programming interfaces (APIs) and the payment processing network (PPN). The APIs are available on the merchant website; it simply connects the PPN chosen by the customer. Many options are in a payment gateway on a website; however, they follow the same principle.

Magnetic stripes and paper signatures are the “application programming interfaces” used before introducing personal identification numbers (PIN). The PIN is generated online (one-time password) or offline (card PIN). Presently, several payment gateways are available; for example, you can connect the application programming interfaces with the payment processing network via virtual cards and devices.

The 5 keyholders in the payment gateway

Cardholder/Initiator – the initiator/cardholder is the individual who initiates the transaction leading to the opening of a payment gateway. Cardholders are usually customers, shoppers, or buyers.

Merchants – merchants are the keyholders who receives money from the cardholder, and they are seller or service providers in e-commerce.

Issuing bank – is responsible for the customer transactions: the bank holds the customer’s account, verifies necessary transactions, and is also in charge of how the merchants receive the money.

Card schemes/third-party companies – card schemes are the companies that provide the card used for transactions. If cards are not employed during the process, the third party that oversees the money transfer between customer and merchant (for example, PayPal) is the payment processor.

Acquiring bank – as the “issuing bank” belongs to the customer, the “acquiring bank” belongs to the merchant. Acquiring banks are the merchant financial institution that receives payment.

In short, the cardholder/initiator initiates a transaction from the merchant’s platform, money leaves the issuing bank (via the card schemes/ third party company), and is deposited into the acquiring bank.

Basic working principles for payment gateway

The working principles of online and offline transactions are based on the types of payment gateway.

Redirect payment gateway: the payment gateway redirects the customer to another page called the processor’s page. The payment processors transfer information to the merchant’s financial institution to remove money from the customer’s account. The difference between a payment gateway and a payment processor is that payment processors transfer information only while the payment gateway authorizes transactions and oversees the transaction: it communicates with customers and merchants’ financial institutions.

On-site payment gateway: is also referred to as the self-hosted payment gateway because the transaction occurs solely on the merchant’s server. The self-hosted payment gateway puts the merchant in full control of any transaction: there is no redirection or a third party. The on-site payment gateway accepts multiple cards, preventing chargeback and multiple billing.

Off-site payment gateway: the off-site payment gateway works with third-party companies that oversee the transaction. The transaction is redirected to the third-party website, where customers complete the transaction and later send it back to the merchant’s page. It is called an “off-site payment gateway” because the payment does not happen on the merchant’s page. This differentiates it from a redirect payment gateway: the payment and processes happen on the merchant’s website in the case of a redirect payment gateway,

Conclusion

The payment gateway is highly versatile: merchants may host or choose a non-host platform. The hosting payment gateway puts the merchant in charge of the payment processes. This increases liability and costs for the merchant. The merchant has to maintain PCI-DSS certification compliance, a monitoring team, fraud systems and so many more. Self-hosting eventually ends up being expensive, especially for small businesses. IntaSend offers both Off-site and Redirect payment gateway and this takes all the hard work needed for the merchant to set up its own gateway. Being a maintained service, the merchant gets access to better security, software upgrades, and many ways to get paid or send money with fewer fees. Ensure you opt-in for the payment gateway you can maintain, remember the maintenance fee and add it to your plan. IntaSend payment gateway enables you to focus on your business and do things that know best. Sign up today to get started.


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