19th June 2019

How Do Payment Gateways Work

At the end of the day, what you care about when you buy something online is for the item to reach your door as soon as possible, right? Right. Well, you obviously want the money to leave your account safely. Oh, you also want the transaction to happen fast, without any possibility for fraud.

On a second thought, it seems like an online transaction is not as simple as it seems through the eyes of the consumer. Even though the overall experience happens fast and efficiently, there are many processes in motion behind the scenes. The information journey is quite remarkable and payment gateways play a major role in this whole back and forth.

Payment gateways are the “middle man”, the intermediary between the customer and the merchant acquiring bank. They collect and send credit card details from the website to the payment network and then return the response/feedback back to the website.

It’s an essential tool for all businesses that accept online/mobile payments. It bridges the gap between customer trust and merchant accountability. In a few simple steps the payment gateway captures the credit card transaction, encrypts, tokenizes, directs it to the processor and returns the approval or decline back to the customer.

Breakdown

Now that we know what payment gateways do, let’s break down their different components. What are their key functions and what should a business be mindful of when choosing their payment gateway?

Network security

Let’s start with point-to-point encryption (P2PE). As the name suggests, P2PE is a set of processes that ensure protection for the customer’s personal information from the first point of interaction (card swipe/point of sale) until that data reaches its destination. What this means, is that anyone who tries to intercept the information journey and try to steal it, they will find a set of data that is not decipherable to the naked eye.

Secure encryption methodologies and cryptographic key operations include key generation, distribution, loading/injection, administration and usage.

Tokenization

Similar to P2PE, tokenization is a process of substituting sensitive data with hard to read codified messages. In this case, the primary account number is replaced by unique identification symbols with a stand-in value called a token.

Even if this token gets in the hands of hackers, it is not traceable back to the customer and it means little to nothing without the decryption key.

Even though tokenization and decryption have the same function, they are different in many ways. Tokenization is a more flexible process as it does not alter the type or length of data, making it readable by traditional processing systems. Moreover, tokenization is a much simpler process altogether, making it faster and not taxing on the payment gateway system.

In saying that, the one is not a substitute for the other, as they both create layers of security that protect sensitive information from fraudsters.

PCI DSS Compliance

Payment Card Industry Data Security Standard (PCI DSS) is an information security standard established in 2006 by leading credit card brands as the industry’s benchmark security protocol. There are four levels of PCI Compliance and they all depend on the annual volume of transactions processed by a business.

The PCI security controls & procedures are updated on a frequent basis as internet security is an evolving organism that requires you to be proactive and reactive at the same time. The latest iteration of the PCI Compliance checklist goes like this:

  1. Install and maintain a firewall configuration to protect cardholder data
  2. Do not use vendor-supplied defaults for system passwords and other security parameters
  3. Protect stored cardholder data
  4. Encrypt transmission of cardholder data across open, public networks
  5. Use and regularly update anti-virus software
  6. Develop and maintain secure systems and applications
  7. Restrict access to cardholder data by business need-to-know
  8. Assign a unique ID to each person with computer access
  9. Restrict physical access to cardholder data
  10. Track and monitor all access to network resources and cardholder data
  11. Regularly test security systems and processes
  12. Maintain a security policy and ensure that all personnel are aware of it

A payment gateway that is PCI DSS takes on the compliance responsibility but more importantly shows a willingness to abide by the industry’s highest security standards and stay up-to-date with the latest developments on the security frontier.

Payment Gateway

User experience

A gateway payment provider is not just a practical solution to your online payment process but an important part of the user experience. Even though most of the work is being done behind the scenes, the customer gets to interact with the gateway on the front-end. That immediately makes the gateway an intrinsic part of any online business.

The ultimate goal for any online business owner is to create a smooth, seamless journey for their customers from the moment they land on the homepage to checkout. As you can safely assume, the biggest drop-off and abandonment rates happen at the last stage of the purchasing process, the payment page/shopping cart. That’s the step where every customer starts second-guessing their decision to buy something.

This is why the payment gateway interface needs to aid/push the customer to make the purchase and not pose as another hurdle in their decision-making process. How can the payment gateway achieve that? Let’s run through a list of features that can elevate the user experience and increase the click-through rates.

  • Industry-known payment solutions and payment options such as Visa, Mastercard and American Express create a sense of familiarity, safety and security for customers
  • Displaying any security and SSL certificates adds even more to the trust factor

Looks aren’t everything but an integrated payment gateway that mirrors the aesthetics and looks of your online store can go a long way. The payment page should look like an organic part of the website and not a third party page that was simply dropped on the site. Fonts, colorways and navigation should match the rest of the website, creating a unified experience.

Another point to be mindful of is whether the payment page is a single page checkout or an optimized multi-step checkout. The debate has been going on for quite some time without a clear-cut answer. A simple assumption though is that if the customer is in a hurry when making the purchase, flicking through multiple windows will most probably increase the possibilities of abandoning the purchase.

Recap

Now that we have established the process, the purpose and the different components of the payment gateway, let’s recap on its benefits for businesses and consumers alike.

Consumers

Convenience is an obvious gain but it’s too big to leave out. A payment gateway offers consumers the opportunity to perform fast, easy and efficient transactions without the hustle of cash or worrying about card information security.

Accepting payments that are repeated on a monthly basis, tracking and reporting of those payments are additional layers of convenience for the consumer. By having a clear breakdown of expenses, consumers can budget and save money as well as forecast.

Other major points of reference are supporting multiple currencies and cross-border mobile payments. Payment gateways transform a customer’s phone into a credit card and location/currency are no longer bottlenecks when deciding to transact.

Businesses

Payment gateways are a massive upgrade to a merchant’s services offering. With a simple monthly fee, a merchant can create a bond of trust and credibility with their client-base and move away from brick and mortar practices, establishing a new-age approach to their payment service.

A payment gateway is not merely a service execution tool but a platform where you can analyse real time data, understand your customer and iterate your business scope accordingly.

The implementation of a gateway payment system does not only aid and service your current clients but it creates potential for more business opportunities. Just think of affiliate marketing. The entire referral/commissions system is predicated on a healthy online payment gateway system. Your business’ bank account will see a major boost upon implementing such a system, giving you a competitive edge over your competition.