10 Reasons to Understand the Working of a Payment Gateway

e commerce payment gateway

For e-commerce business owners, knowing about the working of a payment gateway is essential. It is through an e-commerce payment gateway that you can receive online payments from your customers. It doesn’t matter what kind of business you own. As long as you sell products/services online and want to receive hassle-free online payments, getting an in-depth understanding is necessary.

Before we go ahead and explore the working of payment gateways, here are 10 reasons that highlight their importance:-

  1. Purchase Criteria: A comprehensive understanding of payment gateways helps to select the right one for your online business. Their purchase criteria and guidelines are deeply interlinked with an in-depth knowledge of their mechanism and categories.
  2. Checkout Experience: An e-commerce payment gateway is directly responsible for ensuring a quick, secure, and hassle-free checkout. This checkout experience is crucial in determining successful conversions and repeat visits/purchases.
  3. Provides an Impetus to Impulse Purchases– If your payment gateway enables payments in simple, swift steps, the probability of impulse purchases is higher. A sluggish process with unnecessarily tedious steps will lead to high cart abandonment rates.
  4. Payments Security and Data Safety Compliance- For merchants receiving online payments, it is a legal requirement to comply with the latest prescribed payments/data safety regulations. When you understand the functioning of payment gateways, it is easy to understand the legal mandates and abide.
  5. Ensures Fraud Prevention in Online Payments– Cybercriminals are always on the lookout for loopholes in online payment processing. With the right information and insights on payment gateways, you can ensure that your online store transactions don’t fall prey.
  6. Gain Insight on Digital Payment Modes– The digital payments infrastructure in India is growing by leaps and bounds. With Fintech players launching new payment modes, knowing about payment gateways will help you understand how digital payments work.
  7. Recurring Billing and Subscriptions– Many e-commerce products/services are reliant on a monthly/quarterly/annual billing cycle or a subscription-based model. In this case, knowing how payment gateways work is all the more important. This will ensure that any discrepancies are immediately identified and resolved correctly.
  8. Solving Customer Refund Issues– For e-commerce business owners, customer refund issues are extremely common. You can face massive customer dissonance if the refund doesn’t reflect timely. Timely observation and resolution of payment gateway issues will ensure customer loyalty.
  9. Providing Credit Payment Options- Since 2020, there has been a remarkable drop in spending capacities due to the Covid-19 pandemic. Many e-commerce businesses have been able to stay afloat by providing BNPL (Buy Now Pay Later) and EMI. Sound knowledge of payment gateways will help your business extend these crucial payment modes to loyal customers.
  10. Loyalty Points/Referral Points Incorporation– When payment gateways were initially introduced, they were just the virtual versions of card swipe machines. Today, these have massively evolved to include myriad virtual payment options like internet banking, digital wallets, UPI payments, and more. Loyalty program integration is yet another aspect of payment gateway evolution that e-commerce businesses need to be familiar with.
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Sequential Functioning of a Payment Gateway

In a nutshell, the role of a payment gateway is to securely and efficiently transfer funds from the customer’s account to the merchant account. There are several steps involved in this process. 

Here is a sequential outline to understand how a payment gateway works:-

Step 1: Customer Payment Details are encrypted by and sent to the Payment Gateway

  • When a customer makes any purchase on an e-commerce website, they choose the payment mode and click on ‘pay now’.
  • Once the payment details (card/UPI/wallet details etc) are entered, the merchant website carries out its SSL encryption immediately.
  • These encrypted details are passed on to the payment gateway. All further payment procedures are sequenced by the payment gateway.
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Step 2: Issuing Bank receives an Authorization Request from the Payment Gateway

  • The payment processor of the acquiring bank receives the encrypted details from the payment gateway.
  • Thereon, this is forwarded to the concerned card network (or the network of the payment mode being used).
  • Once the network signals the necessary approval, a request is routed from the issuing bank to the acquiring bank.
  • The next step is for both the card details and the transaction details to be finally authenticated. A confirmation is thereon sent by the payment processor to the payment gateway.

Step 3: The Transaction Amount gets credited to the Merchant Account

  • Once the authorization request is accepted by the issuing bank, the payment gateway concludes the checkout process. The customer’s account is debited with the approved amount. The customer receives the ‘payment successful’ notification followed by the order details.
  • Depending on the holding period, the merchant account gets credited. With the most reputed payment gateways, the holding time is almost zero. The transaction amount is reflected in the merchant account as soon as the customer’s account is debited.
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Add-on Features of Payment Gateways

  1. Cloud Storage- For greater ease of information retrieval and reports generation, most payment gateways provide a cloud storage add-on feature.
  2. Subscription-based payments- Not all payment gateways are equipped with a recurrent billing facility where the customer’s account gets auto-debited every month. This is an additional feature that you need to opt for.
  3. Loyalty Program Integration- As mentioned above, if you have a loyalty program, your e-commerce site’s payment gateway should be attuned accordingly.
  4. Accounting Software Integration- If you have a separate online retail accounting software, your payment gateway should be able to sync with it.

Conclusion : For both aspiring and established e-commerce entrepreneurs, being well-versed with online payment processing will always work in your favor. You might be extremely preoccupied with the operational aspects of your business or entangled in customer service. Yet, taking out time to understand the fundamental working of online payments will enhance competence. Most importantly, it helps to choose the right payment gateway for your e-commerce website or app. In case of any inadvertent payment-related scenario, sound knowledge of payment gateways will help you address and resolve issues quickly.  Hence, it is not far-fetched to state that a holistic understanding of payment gateways will boost your business performance.

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