How Payment Gateways and Processors Work Together?

In the world of online/offline shopping, it becomes important to offer your customers safe and secure payment options. This is where payment processors and payment gateways come in handy. The most interesting part is that both these terms are interchangeably used but they are meant for different tasks within the payment process. Therefore, in this blog post, we will talk about how these two elements work in sync to ensure a reliable and smooth transaction.

Customer Initiates Payment

The payment process starts from the very moment the customer decides to purchase something whether from an online store or a normal brick-and-mortar store. For this, the customers are required to provide their payment details which usually include:

• Credit or debit card number
• Expiration date
• CVV code
• Billing address

These details are entered on the retailer’s website for online shopping; however, for offline purchases, the information is entered into the point-of-sale (POS) system.

Payment Gateway Transmits Data

The role of the payment gateway comes just after the customer provides their payment details. It is to safely transmit this crucial information from the retailer to the payment processor. Here’s how it works:

• Data Encryption: The payment gateway securely encrypts the customer’s payment details to safeguard them against any security threats.
• Secure Transmission: The encrypted information is then securely sent to the payment processor for further processing.

In short, payment gateways act as an intermediary between the retailer and the payment processor while ensuring that the customer’s sensitive payment details are securely transmitted.

Payment Processor Authorizes Transaction

Once the encrypted payment data is received by the payment processor, it then starts working on the technical aspects of the transaction. These include:

• Communicating with the Customer’s Bank: The processor connects with the customer’s card issuer or bank to confirm the payment details.
• Checking Funds Availability: Further, it verifies if the customer’s account has enough funds to complete the transaction.
• Fraud Prevention: Apart from that, the payment processor performs a fraud check to make sure that the transaction taking place is legitimate enough.

This step is extremely crucial as it ensures that only authorized and legitimate transactions take place while safeguarding both the customer as well as merchant from any potential fraud.

Transaction Approval/Denial by Payment Processor

After the payment processor performs fraud checks and verifies the transaction details, it comes to either of the two outcomes:

• Approval: If the funds are enough and everything else is also fine, then the transaction is approved.
• Denial: On the other hand, if the payment processor detects any problem including insufficient funds or wrong payment details, the transaction is denied automatically.

After the denial, the payment processor then sends the result back to the payment gateway.

Payment Gateway Informs Merchant

The payment gateway receives the approval or denial from the payment processor and passes this information on to the merchant. Based on the outcome:

• Approved Transaction: The merchant is notified that the payment was successful, allowing them to proceed with fulfilling the order.
• Denied Transaction: The merchant is informed of the denial, so the customer is required to provide a different payment method.

This step keeps the merchant updated, enabling them to complete the transaction or address any issues if required.

Settlement by Payment Processor

The final step in the payment process involves settlement. This is managed by the payment processor and involves certain steps:

• Funds Transfer: The processor transfers the funds from the customer’s bank to the merchant’s bank account.
• Batch Processing: Typically, all the transactions are settled in batches at the end of the day. Herein, the processor combines all the approved transactions and transfers the total amount to the merchant.

In short, settlement means that the merchant gets paid for the approved transactions while completing the payment cycle.

Conclusion

In a nutshell, both payment gateways and payment processors play crucial roles for businesses looking to offer smooth and secure payment experiences to their customers. The payment gateway handles the secure transmission of transaction data. On the other hand, the payment processor takes care of authorization and fund transfers. However, together they ensure the smooth completion of the payment process.