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Internet Payment Gateway: How they work!

Point, click, approved; point, click, declined. Many of us don’t even consider there could be another way because so many of us have grown up around online payments; that’s all we’ve ever known! But indeed there was a time before online payments. There was even a time before direct deposit when the lines would snake around the bank lobby at 4:30 on Friday afternoons!

Be that as it may this is the 21^stCentury and we are a long ways away from that time. Online payments are enabled by what’s known as an internet “payment gateway.” The payment gateway is basically what handles the “approved/denied” part of the online shopping experience by communicating between the merchant and the customer's card issuing bank. But how does the payment gateway even work? How do you know that the customer's credit card is valid and you can ship their order?

Shopping Cart – The payment gateway begins with what you’re selling. Most online retailers have adopted the grocery store “shopping cart” icon to indicate the items they would like to purchase. In the shopping cart customers should be able to verify item, size, quantity, color, and any other identifying characteristics. They should also be able to enter in their shipping information, payment information, and “submit” the order. That’s when the customer's data is sent to the payment gateway.

Payment gateway – This is the place where the magic happens. The payment gateway is where customers transaction is approved or denied. The gateway could best be classified as an area where the transaction information is read, encrypted for security, and sent to their card issuing bank (like CapitalOne) for approval or denial. Its called a "gateway" then, since the gateway determines which transactions can pass through, and are ultimately approved or declined. Three things are done inside the gateway: Customers credit cards are processed for authorization, the transaction is settled, and the transaction is recorded in the reporting section.

• Authorization – This is the first step in the payment gateway. The customer's credit or debit card data must be encrypted, and then sent to the credit card issuing bank so that the transaction can be approved or denied. In the modern era this transaction time has gotten extremely efficient with most transactions getting an up or down in an average of 2 seconds. The gateway can also help you set rules on whether or not to check with the card issuing bank if the customer has supplied the correct billing address or CVV (3 digit code on back of the credit card), to help you prevent credit card fraud. Additional fraud protection measures such as IP blocking and velocity filters can also be enabled.

• Settling – As transactions are authorized during the day, the authorization places a temporary hold on the funds available on a customer's card. At the end of the day, the gateway will "Settle" all of the previous day's authorizations; this finalizes the credit card sale.  All the transactions from a business day are then sent in one batch together to your processing bank (merchant account), and these funds will then be deposited to your checking account within 2 business days (except over the weekends or holidays of course).

• Reporting – Reporting is where merchants can view their transactions. This is where you can review settlement batch reports, or search for a transaction in case you needed to issue a refund to a customer. Reporting is an effective tool for reconciling monies coming in as the settlement batch report should match the monthly merchant account statement from your processing bank.

Once you’ve received the authorization, your payment interaction with that customer is complete, just have to ship their order now! The authorization will settle later that evening, but once you've received the authorization you are clear to ship their order. Visa & MasterCard's regulations require merchants to ship the products as soon as a transaction is authorized, not wait until the funds are received in your checking account 2 business days later. It is always a good idea to keep accurate records and communication which comes through for every transaction so that you’re always clear about exactly what’s happened with every customer.

Click here to log into Durango's Internet Payment Gateway and take a tour! The demo logins are listed on the login page, and if you have any questions please feel free contact us!

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