What is a Payment Gateway: The Process in a Transaction

Let's get back to basic for a moment...

• You are starting your own online business
• You want to earn money by selling goods or services online
• You aren’t sure what a payment gateway does

If you crossed at least one point from the above, then you’ve come to the right place. While many of you start an online business as an extension of your physical business, there are plenty of businesses that focus solely on their online platform.

Although you may come from different experiences, I am sure that you acknowledge EDC (Electronic Data Capture) even if you are not familiar with the term. EDC is the device used to cater physical card transactions inside stores or your local cafes.

Payment gateway is similar to EDC in digital form, where users will be charged through a payment gateway company. In general, a payment gateway acts as an intermediary between you (merchant) and its partners (financial institutions).

Here is an overflow of how a payment gateway process your payments:

Note: Acquiring Banks are financial institutions that have the final say on the decision of the transaction, checking verification of credit line as well as history along the way.

On the other hand, Issuing Banks are simply the banks that issue customer’s credit card. You may be wondering what does Card Network (Visa, MasterCard, etc) have to do with this? Card Network connects Issuing and Acquiring Banks as well as providing some level of security to the transaction. They also determine the fees collected by the payment entities, which ultimately becomes your transaction fees (or similarly MDR in regards to EDC).

There are roundabouts of receiving payments without adding payment gateway to your online, such as providing customers with your bank account number and let them transfer you the funds. However, do you really want to add such nuisance to your customers?

With the current customer-oriented industry that provides utmost convenience for end customers, you may wonder why your products are failing to grasp the popularity of the market. It is ultimately your decision whether you need a payment gateway to your online business or not. However, based on my current experience in the online industry, an online business without a payment gateway will leave an unpleasant experience for your digital customers.