What is a payment gateway? How does an online payment work?

Introduction

With COVID-19 running for over a year now, all of us have turned to electronic services from paying on an app for food delivery, to a cool gadget on Amazon to even a trendy dress on SHEIN. All we had to do was enter our credit card details and VOILA our order is placed. It is important to understand how online payments work for it will save you money, help you decide the correct payment method and even lessen the stress when having to deal with refunds. In this post, we will give you a secret that will make refunds a few seconds process rather than few weeks!

What is a Payment Gateway?

Payment Gateway is the engine that talks to the credit card holder’s bank to verify that the credit card entered is correct, followed by capturing money from the buyer’s bank account and transfer it to the merchant’s bank account; often the two bank accounts are in different banks and sometimes even different currencies. Each website or mobile application you use to pay online is connected to one or more payment gateways or as others call it “Payment Methods” such as PayPal, Credit Card, Apple Pay, etc. Once you choose a payment method, your payment process goes through two steps: Authorization and Capture. When you choose, for example, credit card as a payment method and enter your card details this is sent in an encrypted manner for verification. Whether the card is Visa or Mastercard, the payment gateway verifies that the card is valid, have enough balance and that no risk flags are associated with this card. This sends an Authorization to the website/mobile app you are shopping from that they can now deduct the money. Capture is the process of taking the money from your credit card and sending it to the merchant. Capturing usually depends on the business model. If it’s a simple purchase and delivery, the capture will be instant. Whereas if it’s subscription, the capture usually takes place after the free period is over.

Did you know that there are different types of payment gateways?

Not all payment gateways are the same, while they all deal with money, how they operate are very different. When you pay for a product or service online, the money usually reaches the merchant in 2-3 working days depending on where you are in the world. That is the time it takes the payment gateway’s partner bank to reconcile all the payment transactions before transferring it to the merchant bank account.
  1. Traditional Payment Gateway: The traditional payment gateway is where it offers only Debit and Credit Card payments (Visa, MasterCard, and Amex)
  2. Online Wallets: The online wallets allow you to Top-up your wallet with your credit card and use to pay and even send money to people. One of the best examples of that is PayPal, that’s why when you send or receive money, it is instant.
  3. Fintech Payment Gateway: These types of payment gateways are a group of different online wallets and traditional payment gateways, where it groups all payment methods into one group and allows you to pay using any of the available methods. You will most likely not notice the difference as this is on the merchant side of business.

Why understanding how payment gateways work is Important?

Let’s first start by stating that payment gateways make money by charging the merchant a percentage for each transaction that takes place on their website or app. Why is it important to know this as a customer? Not important really. What’s important for you when choosing a payment gateway is the benefits you will get. If you use a specific card, your bank will issue you back loyalty points. Additionally, when you pay using PayPal and ask for a refund, if the merchant’s refund policies are lenient, the refund could be instant. However, with credit and debit cards, the refund can take somewhere from 2 weeks all the way up to 6 weeks!

# Tips and Reminders when paying online using a payment gateway.

  1. Voids aka Instant Refunds: All payment transactions placed by cards can be voided, as if they never happened, within 24 hours. If you placed an order using debit or credit card and your order is less than 24 hours, it wouldn’t count as a refund; instead, it is called VOID. So, make sure if you placed the wrong order to contact customer service asap. If it passed 24 hours, it would count as a refund and good luck getting your money!
  2. Always Choose the currency of the website: If the website’s currency is in USD, always pay in USD and not in your own currency. Never use a currency converter! Websites always add extra hidden charges in their currency conversion. It is better for you to pay for your bank’s currency conversion rather than paying the currency conversion twice!

Conclusion

All this information can be overwhelming but once you dig into it, it will all make sense. We suggest you to watch more videos online on Youtube to learn more about payment gateways and how to save your money.

Do you have any questions regarding Payment Gateways? Drop us your query at [email protected]

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