What is a Payment Gateway(Definition)

Payment gateway is an infrastructure to enable a web merchant having an online ECommerce store to charge a customer from his credit/debit/prepaid card or bank account(netbanking) resulting in transfer of funds electronically from customer's account to merchant's account.

So in India : CCAvenue, EBS, ICICI Payseal etc can be called as acquiring bank – which receive payments on behalf of the merchant.

Using payment gateway allows us to receive payments from different channels and financial instruments at our websites. Cards used can of VISA/MasterCard/JCB/AMEX/Discover etc. Now a days all banks allow debit their accounts online using netbanking. Other modes can be by Mobile payments, Cash Cards or using IVR etc.

To use a payment gateway, prior approval is required, including payment of non-refundable setup fees which can be from Rs. 0 to Rs. 75,000. For every transaction, the payment gateway charges you called TDR which can be fixed, percentage or composed of both from the amount of each payment at your website.

Useful links

• Factors to look into while comparing payment gateways
• Price Comparison in India
• E-Commerce and Payment Gateway Terminology
• Accepting credit cards on site--pros and cons
• Merchant Account Fees of Payment Gateways Explained
• Polls
• How to choose right payment gateways in India

Flow Chart

You can much easily understand Payment Gateway by assuming an example and seeing the transaction flow. Also available is the same payment gateway flowchart in PDF:

Payment Gateway Transaction Explained

1. A merchant(you) have an ECommerce website to sell products and a customer selects a product to buy. The merchant has signed up with an Acquirer bank or a payment gateway company to receive payments from customers online. Depending on the plan you've chosen with the payment gateway you've two options
   1. you can receive credit card details at your website only( e.g. Paypal Website Express Checkout Plan). This is always costly and large websites opt for it. Using it you can do seamless processing of credit card payment at your website only giving customer a smooth experience since the customer is not take to the payment gateway website to key-in credit card details. However it increases your headache to receive and store credit card and other personal information securely at your website. You'll also need to be a certified PCI DSS website.
   2. the customer at your site is redirected to the payment gateway interface where he/she keys in the credit card or online bank details (e.g. Paypal Website Standard Plan). There is no security burden on your site and is the cheapest option compared to the above one. However I don't like going to a payment gateway site, entering all the details and transferred back to the merchant site just like we do for booking tickets at IRCTC. And we know that given Indian infrastructure sometimes transactions fail when the transaction fails while returning to the merchant website( as it regularly happens with IRCTC booking).
2. So now the customer, as explained above key's in the credit card details either at your site or at the payment gateway site.
3. Now those details are passed to the Payment Processor affiliated to the payment gateway who is a third party agent.
4. Payment Processor in turn passes the details to the appropriate Card Association or bank. For example if the card is of type VISA then the transaction is forwarded VISA Card Association for verification.
5. Now the Card Association transfers the transaction to the issuing bank – that is from which bank the customer card was issued. For example HDFC Bank.
6. Now the bank will do additional security check and check for your credit balance and how much you're allowed to spend and then the response it passed back to the Card Association.
7. Card Association now channels back this response to the Card Processor
8. Card Processor send it back further to the originator payment gateway
9. Payment gateway now shows whether the transaction was success or failure, this response is also relayed to your merchant site so that you can process the order.