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Payment Gateways

Payment gateways provide a way for businesses to process credit card payments. This article will review how payment gateways work and what types of transactions and merchant services can be done through these payment processors.

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When a merchant makes a sale and swipes a customer's credit card, the card number, the amount and the merchant ID travel over the credit card processor's computer network. The credit card processor can either be a bank or a company that does nothing but provide credit card processing services.

How do payment gateways work?

From the processor's network the transaction goes to a credit card computer network. If the customer is using Visa, for example, the transaction will go to Visa's network. In turn, the electronic transaction goes to the bank that actually issued the card. The bank then checks the account and verifies the customer has adequate credit to cover the purchase. The bank then sends the merchant an authorization over the network. Now the sale is complete, but the transaction is not -- no money has changed hands yet.

At the end of the business day, the merchant sends that day's charges, in a batch, to the credit card network for processing. The transactions travel via the merchant's credit card processor. Individual transactions are then stripped out and sent back to the individual cardholders' banks. Banks then debit cardholders' accounts and make appropriate payments to the merchant's credit card processor through the Federal Reserve Bank's Automated Clearing House.

The credit card processor then credits the merchant's bank account for the transaction amount, minus its fees for the transaction. Those fees also go toward paying transaction fees to the issuing bank and the credit card network. Despite the use of computers, it can take two business days before the merchant's account is credited.
What else can I do through a payment gateway?

In addition to providing tools to authorize and reserve funds for payment, most payment processors also provide tools for sending batch transactions, handling chargebacks, and issuing refunds to customers. They may also provide other enhanced services, such as the ability to process credit cards using a Palm Pilot.

Related Article: Processing Credit Cards >>

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