What is a Payment Gateway(PG)
A payment gateway is a technology that helps the sender and receiver process payment that may be online or in-store from different payment modes like debit cards, credit cards, UPI, wallets, pay later, etc. Without a payment gateway it is impossible to make digital transactions. The payment process may be collecting payment to a bank or payment at any merchant’s site.
Payment gateways are different from payment systems or payment processors which use customer information to collect payment from the customer on behalf of the merchant. A payment gateway acts as a central point in the payment processing system that collects, transfers, and authorizes customer information in real time to the merchant’s bank where the transaction is processed itself.
The payment gateway has four players in its process; the customer, the merchant, the issuing bank, and the receiving payment or acquiring bank.
While making an online payment the customer transfers their personal and financial information. In the backend, security layers encrypt the information and check for the fund transfer and notify the account holder of the status of approval or decline of the transaction.
Payment gateways are different from payment processors:
Payment gateways(PG) and payment processors are different but both components are required to make a successful online transaction. Any technical glitch in one of the components leads to payment failure. The difference between the two is as follows
- A payment gateway collects information and forwards it to the payment processors for verification. Payment processors validate the data considering the security point of view.
- The payment gateway informs the status of approval or decline of transactions for both the customer and the merchant. The payment processors communicate responses to the payment gateway through data transmission between issuing and receiving banks.
- Since the payment gateway collects information, it needs SSL encryption. Payment processors deal with the bank database so it needs to encrypt and comply with an ISO 8583-compliant platform.
- Payment gateway is economical considering development and maintenance cost while payment processors have massive development and maintenance costs. For small to medium-scale business payment gateway is suitable.
Payment Gateway classification:
Payment gateways are classified on two bases; based on the PG provider and based on the payment flow.
Based on the provider PG is classified as
Third-Party Payment Gateway
Third-party PG refers to the PG services offered by other companies like Paytm, PhonePe, PayU, Razorpay, PayPal, etc. These companies provide a seamless experience and support payment modes like debit cards, credit cards, wallets, UPI, etc.
Bank Payment Gateway
Some established banks like ICICI, and HDFC, have developed their own payment gateway and this we call Bank PG. Prior to third-party PG merchants were dependent on bank PG.
Based on the Payment Flow
Hosted payment gateway
A hosted PG redirects the customer back to the merchant after the checkout and this is maintained by the Payment Service Provider (PSP). This is also a third-party PG service and is commonly seen on an e-commerce website.
Self-hosted payment gateway
Self-hosted PG allows customers to make payments without leaving the site or app. A merchant has more control over the checkout and payment experience. With its customizable feature self-hosted, PG allows complete transactions on a single page.
Non-hosted payment gateways
Non-hosted PG allows customers to complete payment on the merchant page itself, it is also called on-site PG and works with API integration with website UI.