What are payment gateways and what do they do?
A payment gateway is an interface that provides a secure, encrypted connection between a merchant’s online website or hosted payments software, or point-of-sale (POS) terminal for in-person payments, and major credit card processing companies.
Payment gateways fulfill a number of functions, such as fraud screening and compliance tools, and securely storing and tokenizing sensitive cardholder data.
For online payments, a payment gateway is like a virtual Point of Sale terminal, tasked with the duty of authenticating a digital payment request by the customer. Instead of inserting a physical card into a physical terminal, the customer must enter credit card details including a security code and billing address as proof of authenticity into the payment gateway’s virtual terminal. If the credentials are correct, the gateway will forward the payment information to the payment processor.
From this point onwards, the transaction works just like in an offline, in-person card transaction – the payment processor securely transmits the transaction data to the two banks. Upon successful completion of the fund transfer, the processor shares the details with the customer via the gateway.