Definition: A payment gateway is an ecommerce service that processes credit card payments for online and traditional brick and mortar stores. Payment gateways facilitate these transactions by transferring key information between payment portals such as web-enabled mobile devices/websites and the front end processor/bank.
Payment gateways fulfill a vital role in the ecommerce transaction process, authorizing the payment between merchant and customer. Popular payment gateways include PayPal/Braintree, Stripe, and Square.
Payment gateways vs. Payment processors: what's the difference?
A payment processor analyzes and transmits transaction data. Payment gateways authorizes the transfer of funds between buyers and sellers.
How payment gateways work
When a customer places an order from an online store, the payment gateway performs several tasks to finalize the transaction:
The steps outlined above are repeated in an effort to “clear” the authorization via a consummation of the transaction. However, the clearing is only triggered once the merchant has actually completed the transaction (shipping the order). The issuing bank changes the “auth-hold” to a debit, allowing a “settlement” with the vendor's acquiring bank. The processor is then relied upon to settle all of the vendor's approved authorizations with the acquiring bank at the end of the day.
Other Payment Gateway Functions
Payment gateways also screen orders with a myriad of helpful tools. This screening process filters out as much fraud as possible. Examples of gateway fraud detection tools include:
Payment gateways even calculate tax amounts to authorize requests transmitted to the processor.