More and more businesses are now accepting digital card payments alongside traditional payment methods. The reason for this shift is the people’s growing interest in cashless payment options because of their flexibility and ease of use. Customers don’t have to carry cash anymore and can track their spending better when they pay with a card.
Digital card payments can be generally categorised into two types: in-person transactions and online payments. Physical transactions simply require customers to swipe their card on the card machine or enter a PIN to proceed. A receipt is then printed, which provides proof of the payment. However, the process looks different for online payments since they do not involve a card machine. Instead, a software-based tool called a payment gateway replaces the hardware.
This blog will explain the concept of payment gateways, describe how they work, outline the reasons why businesses should use them, and discuss their benefits in detail.
What is a payment gateway?
A payment gateway is a technology that facilitates all types of cashless transactions for a business. It performs two main functions: collecting the customer’s payment details and securing them. It uses methods like encryption, tokenisation, multi-step authentication, and more. Its primary responsibility is to protect the sensitive information as it moves from the customer to the next stage in the payment chain.
Once the gateway has securely passed the information along, the payment processor communicates with the bank’s network to authorise or decline the transaction. This is how a digital payment takes place using a payment gateway.
Compare Payment Gateway Quotes Today
Payment gateway vs Payment processor
Are payment gateways required for in-person transactions? The technical answer is no, but there are nuances. Modern card payment solutions often combine the software functions of both payment processors and payment gateways within the same card machine. This situation makes it difficult to distinguish the roles of payment gateways and processors. In this context, even without explicit mention, the functions of a payment gateway also occur during physical transactions. With that said, the core roles of gateways (data collection and security) and processors (authorisation) remain separate.
For example, a company might provide payment processing services that also include gateway functions, along with the card machine hardware, so the responsibilities of each component overlap. Other key terms help explain the process in more detail: the cardholder’s bank (the customer’s bank), the merchant account, and card schemes such as Visa and Mastercard, which facilitate communication between banks and businesses.
With this background, we can better understand how a payment gateway works to process transactions alongside these other components.
How does a payment gateway work?
Let us now discuss how a payment gateway works in detail. We will also look at how it works in combination with other components to carry out the transaction.
- Customer initiates the payment: A customer decides to make a purchase online, proceeds to the checkout page and enters the required information, including their credit card number and PIN.
- Encryption of information: After collecting the information, the payment gateway immediately encrypts the payment details using SSL or TLS technology. This is the first layer of protection, which is often followed by tokenisation later in the process.
- Request sent to payment processor: The encrypted data is then sent to the payment processor, which starts communication between the merchant’s bank and the customer’s bank. It is responsible for authorising payments and transferring the transaction request to the bank for approval.
- The bank confirms the transaction: The cardholder’s bank checks if the account has sufficient funds for the purchase and approves the transaction. A payment verification code is sent back to the payment processor.
- Transaction completion: The payment processor forwards the authorisation code to the payment gateway, which then notifies the merchant and customers that the transaction has been successful. This marks the end of the verification stage.
- Settlement process: The funds are transferred from the customer’s bank to the merchant account. It is responsible for handling the funds for one to three days before depositing them into the business’s main bank account.
Compare Payment Gateway Quotes Today
6 Benefits of Payment Gateway For Your Business
| Benefit | Key Points |
|---|---|
|
Covers security aspects of transactions |
|
|
Saves cost for businesses |
|
|
Enhances customer experience |
|
|
Processes payments faster |
|
|
Implements fraud detection |
|
|
Increases sales |
|
Now that we have discussed how payment gateways work, let’s explore the benefits of using them for businesses.
1. Covers the security aspects of transactions
If the function of a payment gateway could be explained in a single phrase, it would be its ability to protect users’ card information during a transaction. Card details, including the account number, PIN, and the three-digit CVV number, are transmitted multiple times to carry out a payment. To ensure these remain secure throughout, payment gateways employ advanced techniques such as encryption and tokenisation. These gateways also employ fraud detection tools and maintain PCI DSS compliance for each transaction.
Here’s a brief overview of how the two most common techniques work:
- Encryption works by converting the original information into a special code that is only accessible to authorised users. This prevents interception during transmission. When the “encrypted” data reaches its destination, it is converted into its original readable form through a process called decryption.
- Tokenisation replaces the original information with a unique and unrelated piece of data called a token. This token is stored in the business’s database, instead of the original data. Unlike encryption, tokenisation cannot be traced back to its original data, which means the risk of misuse is minimal even in cases of theft.
2. Saves cost for businesses
Another important advantage of using a payment gateway is cost savings. Most payment gateways do not require expensive setup fees, which makes them especially affordable for small and medium-sized businesses.
Here is a quick breakdown of typical payment gateway costs and what you might expect to pay:
- Setup fee: (£0 – £250)
- Monthly fee: (£10 – £45)
- Transaction fee: (£0.00 – £0.25 or 1% – 5%)
In addition to these basic charges, there may be other costs like chargeback fees, refund fees, and security compliance fees, depending on the specific service.
3. Enhances customer experience
Online payment gateways improve the checkout experience for customers in several ways, including:
- Smooth checkout: Payment gateways can integrate effortlessly into the business’s website to provide a range of online payment options. This allows customers to complete their purchases with a single click without being redirected to external sites.
- Several payment options: Modern payment gateways support a variety of cashless payment methods, including credit and debit cards, digital wallets and bank transfers.
- Mobile optimisation: Payment gateways typically provide transaction confirmations via SMS or email. These features provide customers with the assurance that their payment information is secure when they shop online from a business.
4. Processes payments faster
Payment gateways process transactions in real time, which results in quicker payment processing compared to traditional methods. This procedure also reduces the time lag between when a customer makes a purchase and when the business receives the funds. When faster payment processing is paired with strict security and fraud prevention tools, the process becomes convenient and efficient for both the customers and the business.
5. Implements fraud detection
The fraud detection technologies used in payment gateways monitor transactions in real-time and implement machine-based algorithms to identify suspicious activity. These risk assessment tools track transactions in a variety of ways, such as by analysing spending patterns, IP addresses, locations, and device information. This helps protect users from fraudulent activity, like cybercrime or identity theft.
For example, imagine a purchase of £5000 made at a candy shop in Manchester using a credit card. The payment gateway verifies the cardholder’s identity before processing the transaction. The payment gateway verifies the cardholder’s identity by reviewing the card’s previous payment history, examining the card’s usage location, and comparing it with past transactions.
If the payment is online, the system can track the IP address and verify whether the transaction is being made from the same smartphone or desktop as in the past. If the payment is in person, the exact location of the card machine can be confirmed. The payment is accepted if all of these details match.
A potential fraudulent activity in this example would be if the user is based in London, usually makes transactions under £500, and suddenly attempts a £5,000 purchase. In such cases, the cardholder’s bank may be contacted to confirm the transaction. This approach helps businesses prevent financial losses and avoid chargeback fees.
5. Increases sales
Payment gateways also benefit businesses by boosting their sales.
- Enhanced checkout experience: A seamless checkout process minimises friction and reduces card abandonment.
- Currency conversion: They enable international sales by supporting transactions in multiple currencies and languages. By providing localised payment options, businesses enhance the shopping experience for international buyers and drive more sales.
- Recurring payments and subscriptions: Payment gateways simplify the management of businesses working on subscription models. Automated billing and secure transactions reduce the likelihood of payment disruptions.
Explore Reliable Payment Gateway Options In The UK With ComparedBusiness UK
If you’re ready to employ these benefits of payment gateways, contact ComparedBusiness UK. It streamlines the setting up of a digital payment gateway for your business by connecting you with reliable payment gateway providers in the UK. Just submit your requirements in under 2 minutes, and we will get back to you with quotes from them. This will cost you nothing.
Businesses need payment gateways to securely process online payments, enabling customers to pay via credit cards, debit cards and digital wallets. Payment gateways guarantee the encryption of transactions, safeguard sensitive data, and offer a smooth checkout process.
Payment gateways secure transactions by encrypting sensitive payment data using SSL/TLS technology. This ensures that details are not intercepted by unauthorised individuals. They may also utilise fraud detection tools, such as CVV checks.
A bank is a financial institution that holds customers’ accounts and processes funds, while a payment gateway is a technology platform that facilitates online transactions between customers and merchants. The gateway acts as an intermediary in the payment process.
