What is a Payment Gateway and How Does it Work?
Message of salary being credited to your account may probably be the one that you look forward to each month. With salary payout gone digital, online transactions may appear very simple from the outside but there are complex processes working in tandem in the background to make these a success.
Online payments have completely changed the way we transact today. Probably the biggest way one experiences digital payment is when salary payouts happen each month. In fact, with concerted push towards digital payments, we do not hesitate to pay via wallets or internet/mobile banking.
With the rapid proliferation of mobile devices, computers and the increasing speed of broadband connectivity, online transactions have become fast, easy and the preferred mode for financial transactions.
Here’s a deeper look at what a payment gateway is and why is it important for your business.
What Is a Payment Gateway?
In simple terms, a payment gateway is like a traffic light that directs the incoming traffic (payment) to the right place (example: the employees or vendor’s bank account). In other words, it’s a software that acts as a conduit between two transacting bank accounts.
A payment gateway can process credit and debit cards, mobile wallets (Paytm, Freecharge, Mobikwik, PhonePe, Google Pay, WhatsApp Pay), online banking, Unified Payment Interface (UPI), Real Time Gross Settlement (RTGS), and Immediate Payment Service (IMPS) in a matter of seconds, regardless of the place and compatibility.
Who Are the Key Players in the Payment Gateway Process?
Before getting deeper into understanding who needs a payment gateway and why, one needs to know the key players in the payment gateway ecosystem.
- Business Owner or Merchant: You may own a business or offer any services in any domain and vertical.
- The Customer or Payer: Also known as the buyer, the customer is the one who will pay you electronically for the services you provide. This means no cash is exchanged and all transactions happen through mobile phones or computers— from the customer’s mobile wallet, card, or account to the merchant’s bank. The payment here is facilitated by the payment gateways.
- Issuer: Here the issuer could mean the bank that has issued you the card (credit or debit), internet banking services, or even payment services like the UPI. This is where the gateways come into the picture.
- Acquirer: This is the final stage where the bank of the merchant gets the money. The bank, also known as the acquiring bank, maintains the account of the merchant and all transactions through payment gateways end up in that bank account. The acquirer bank deals directly with the bank of the payer with payment gateways only acting as the channel.
By now you know that payment gateways are more like middlemen. They connect one person with another and the main role of a payment gateway is to validate the customer’s payment details securely and ensure that the funds are available with the customer.
They can also decline payments if there are issues like incorrect CVV or one-time password (OTP), expired card, lack of funds, or other issues at the customer’s end. Its job is to encrypt sensitive details and ensure the information is passed securely from one end to the other.
Payment gateways simplify how merchants use the necessary software. As the most important connection during the payment processing, it’s the job of the gateway to manage the customer’s data.
Why do you Need Payment Gateways?
You need payment gateways to ensure all your financial transactions happen in real-time and without hassle. Indian payment gateways process billions of INR transactions each month and the number is growing pretty fast. Consider these facts:
- More and more people are now using smartphones with a high-speed data connection and this number is rising every day.
- With almost all services of banks available in banking apps, people are not hesitant in using apps for both banking and payment.
- With rising incomes, people are now shopping more and spending more and, in all probability, they are using mobile phones and cards to pay.
If you run a business today and collect money online, then you certainly need a payment gateway. Companies use payment gateways to transfer salaries to their employees. It’s not just convenient but also makes a lot of sense because it’s fast and easy. Imagine keying only the mobile number- just like you do when you transfer money to another bank account- and voila, the salary is transferred in seconds.
How Do Payment Gateways Function?
For both users (payer and receiver), a payment gateway looks easy. In just a few steps including some OTP or biometric authentication, one can easily buy and pay for services. It’s pretty straightforward for a receiver as the money comes into their account right after the payment has been initiated by the customer.
Most gateways follow these simple steps:
Step 1:
The customer goes to an e-commerce portal or to a shop to place an order or buy something. If buying from a store, the customer simply swipes a card and authenticates with a four or six-digit pin and the payment goes through. If the customer wants to use apps to make payment by scanning a QR code at a brick and mortar store, then the customer just scans the code.
Step 2:
The data from the card’s magnetic strip or the code is sent to the merchant’s payment processor and in this case, it’s the company that processes the transaction such as gateways.
Step 3:
The payment gateway then routes the transaction to the company from where the money is debited— such as MasterCard, Visa, American Express, RuPay, or other platforms.
Step 4:
The final step is when the transaction is approved or declined based on the CVV/OTP input.
Step 5:
As soon as the transaction is authorized, the card-issuing bank or the bank whose authorization is being used will transmit the authorization back to the gateway.
Step 6:
Once the payment gateway gets confirmation, the transaction goes through. Please remember that all these steps happen in less than a few seconds. There’s an intricate network of software at work that processes the requests.
How to Get a Payment Gateway
In order to have a payment gateway, you need to first have a business with a proper GST number and bank account. If you want to have a PoS device for credit/debit card, talk to your bank and they will issue you a PoS machine. Most people prefer to pay by mobile wallets and it’s easy to set up one. Just install one or all of the mobile wallets on your phone, register with your details, link your bank account, give your KYC documents, and your good to go.
Before you start using payment gateways, it’s important to read the fine prints to stay clear of legal issues later.
Looking for a payment gateway for payroll management?
KredPay is an easy-to-use payment gateway built into Kredily’s HRMS solution. It makes transferring payments to people within and outside the company very easy. It’s as easy as any payment gateway and the best part is it’s embedded in the HRMS system.
