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What is a Payment Gateway?

Nov 7th, 2011

A Payment Gateway is a service that processes electronic transactions; Most importantly it handles the communication between a customer’s credit card company or issuing bank and the merchant’s bank to facilitate (credit card) payments.
It is a necessary part of the transaction between customer, business and the banking institutions.

To make a long story short — it is the link between a customer’s credit card and a merchant’s (virtual) point of sale *:

When a customer enters his or her credit card information, this information is forwarded to the Payment Gateway which forwards it to the merchant’s payment processor.
The payment processor contacts the either the credit card company (for American Express & Discover) or the customer’s bank that had issued the card.
The customer’s bank assesses the availability of funds to cover the transaction and returns an authorization code the the Payment Gateway which determines if the transaction was successful or if the transaction has been declined.

* The process has been simplified (as there are more steps involved), but it should give you an overview as to why you need a Payment Gateway to process e-commerce transactions.

One of the best known Payment Gateways is authorize.net.

Quick Price Comparison (authorize.net vs PayPal’s PayFlow Pro **)
Gateway Setup Monthly Transaction Fee Fraud Detection Recurring Billing
authorize.net $99 $20 $0.10 $0/$9.95 * $0/$10
PayFlowPro $249 $59.95 $0.10 $89.95/49.95 $39.95/$29..95

* Two numbers mean the first one is the one-time Setup Fee, the second one is the monthly service fee.
** PayFlowPro is NOT your regular PayPal account. It’s a Payment Gateway owned & operated by PayPal.

NOTE: The prices shown are subject to change without notice. Please check the Payment Gateway’s website for the most up-to-date prices and before making a decision.

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