What is Payment Gateways?
A payment gateway is a server that links websites and banks so that online transactions can be completed in real-time. They provide a secure and integral link between a website and a bank.
When a customer submits an account or card details on a website, the payment gateway accepts the details and directs them to the bank for verification. The bank sends a reply for transactions as accepted or declined to the payment gateway, which directs the response back to the web server.
The customer’s device then receives this message from the web server. For example, after making a payment, a customer receives a message: ‘Your payment has been successful’.
Table of Content
How Payment Gateway Works
Let us now study the steps in this process, which are as follows:
- A customer purchases an item in a retailer’s online portal and enters a credit card number at the checkout of the portal.
- Online portal’s checkout transfers the details about the purchase to the payment gateway for processing.
- Payment gateway directs the transaction information to the retailer’s bank.
- The retailer’s bank transmits the transaction information to the bank that issued the customer’s credit card to authorize the transaction.
- The customer’s bank either approves or refuses the transaction and sends that information back to the retailer’s bank.
- In case the transaction is approved, the bank deposits funds into the retailer’s account at a scheduled time.
- The payment gateway transmits transaction confirmation on the retailer’s website and informs the customer whether the transaction was approved or declined.
- Integration of Payment Channels
- Banking and Legal Issues
- Value-added Services Offered to Website Owners
Integration of Payment Channels
To improve the transaction process, via e-payment channels, banks and other financial and non-financial institutions seek to integrate the various delivery channels, transactions, and host systems used for electronic payment. This requires synchronization of the various e-payment channels. However, the task of integration is complicated and faces several challenges.
Some organizations provide system integration services in the e-payment domain, which includes the integration of ATM/ POS/mobile channels, transactions, card payment systems, payment gateways, and other value-added services.
Banking and Legal Issues
In India, the Reserve Bank of India is responsible for payment and settlement systems regulation. The RBI encourages the objectives of safety and effectiveness of payment systems by:
- Monitoring the existing and planned systems
- Evaluating the payment systems against the established objectives
- Incorporating changes in the system, wherever necessary
By supervising payment and settlement systems, the RBI helps to:
- Maintain stability in these systems
- Reduce risk
- Enhance public confidence in these systems
In India, there are two Acts that provide the necessary statutory support to the RBI for regulating the payment and settlement systems. These Acts are:
- The Payment and Settlement Systems Act, 2007
- The Payment and Settlement Systems Regulations, 2008
Let us now consider some legal guidelines for banks regarding e-payments:
- The banks need to establish their identity and make inquiries about the integrity and reputation of the prospective customer.
- The security procedures adopted by banks for validating users need to be recognized by law as a substitute for signatures. The Information Technology Act, 2000, in Section 3(2) provides ‘the asymmetric crypto system and hash function’ as a means of validating an electronic record. Any other authentication method will be identified as a source of a legal risk.
- The banks need to maintain the secrecy and confidentiality of customers’ accounts.
- In the electronic banking system, there is minimal scope for banks to act on stop-payment instructions from customers. Therefore, banks should inform customers of the timeframe and the circumstances in which a stop-payment instruction can be accepted.
- Banks should also ensure technology and security standards for e-payments through payment gateways.
Value-added Services Offered to Website Owners
The main function of payment gateways is to direct electronic payment transactions efficiently. However, they also provide various value-added services to website owners, such as:
- Shopping cart service: Payment gateways offer shopping carts to proprietary website owners for use. This helps website owners to save the cost of acquiring shopping carts from third-party providers.
- Point-of-Sale (POS) service: Payment gateways enable website owners to directly process payment information at a POS, and thus avoid third-party intervention.
- Multi-currency service: Payment gateways offer simple currency conversion services that can be availed through a proprietary website directly or through a third-party provider.
- Fraud protection service: Payment gateways offer fraud detection or data security services that can be availed through a proprietary website directly or through a third-party provider.
- Alternative payments facility: Payment gateways offer payment acceptance facilities through different payment service providers, such as PayPal, Google Checkout, or AlertPay.
- Recurrent billing option: Payment gateways offer recurrent billing options, which can be availed through a proprietary website directly or through a third-party provider.