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How a Payment Gateway Works

Online stores are everywhere.  You can get all sorts of things online; anything from clothes and groceries to ridiculously rare items.  All these stores have one thing in common: they all process your credit card payment somehow.  Now, there are many ways the merchant can receive this information ranging from encrypted emails, to simply just storing it in a database for later processing. However, the most common approach is to integrate a Payment Gateway into the online shopping cart.  There are many payment gateways out there but the two most common are PayPal and Authorize.Net.

Payment Gateways work like middlemen between your site and a payment processor.  It’s a really simple interaction but here are the typical steps your credit card details travel from your online checkout the merchant’s bank account.

  1. You submit your credit card payment through a merchant’s website.
  2. The payment gateway manages the routing of payment information on the behalf of the merchant through several entities, as outlined in the next steps.
  3. The payment gateway passes the information through a secure connection to the payment processor.
  4. The merchant bank’s payment processor then submits the transaction to the credit card network (Visa, MasterCard, American Express, etc.).
  5. The credit card network routes that information to the bank that issued the credit card to you, the customer. This bank is commonly known as the issuing bank.
  6. The issuing bank approves or declines the transaction and passes the result back to the credit card network.
  7. The credit card network relays that results back to the merchant bank’s payment processor.
  8. The payment processor then relays the information back to the payment gateway.
  9. The payment gateway stores the results of the transaction and sends them to the website for the merchant to see.
  10. The merchant then delivers your goods.
  11. Finally, the issuing bank sends the appropriate funds for the transaction to the credit card network, which passes the funds to the merchant’s bank.  The bank then deposits the funds in the merchant’s bank account and settles the transaction.  The funds are typically deposited within two to four business days.

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