How to create a payment gateway? Cost, benefits, use cases, challenges, opportunities

Bysam anderson

By becoming a part of the online payment ecosystem, startups and enterprises can benefit from this increasing digitization of payments. A crucially important cog in this near-flawless digital payments system, payment gateways are digital point of sale (POS) terminals that serve several vital functions facilitating the digital payment ecosystem. Before diving deep into building or to create a payment gateway, let us first understand how payment gateways work.

What is a payment gateway, and how does it work?

When we walk into a brick-and-mortar store, completing a (non-cash) transaction involves swiping a card on the POS terminal, which captures our card information while sharing it with the relevant parties for authorization and completing the transaction.

When we replicate this on a digital storefront, the payment gateway acts as the POS terminal capturing the consumer’s card information. However, other vital functions are happening simultaneously. Let us examine in a step-by-step process how digital transactions take place.

Step 1: After the consumer adds the product or service to their cart and proceeds to checkout, they are then taken to the payment gateway either on the merchant’s server or on third-party servers. The consumer selects the preferred mode of payment. After entering the card details, the consumer clicks on something like ‘make payment.’

Step 2: Once the consumer submits their card details, the payment gateway first tags the transaction as card-not-present (CNP) and encrypts and secures the information to be transmitted to multiple parties.

Step 3: The encrypted data is sent to the payment processor. The payment processor is a tech that communicates with the banks to settle the payment.

Step 4: The payment processor communicates with the acquiring bank (merchant’s bank) and the issuing bank (customer’s bank), which evaluate the transaction.

Step 5: The issuing bank and the appropriate card network (Visa or Mastercard, in most cases) approve or decline the transaction. This approval or denial is communicated to the payment processor, which sends the status to the payment gateway.

Step 6: The payment gateway communicates the transaction’s status to the merchant’s website, which is then displayed on the screen to the consumer. And this is where the transaction is completed.

How to create a payment gateway?

A snapshot of a payment gateway development process, let us examine in a step-by-step guide how to approach the development of a custom payment gateway.

  • Research and ideate: Before embarking on getting your payment gateway developed, you should first ascertain the business objective you want to accomplish with your payment gateway. You should also define your target audience and conduct thorough due diligence before creating the gateway. Once this is completed, you can move on to building the product.
  • Develop the infrastructure: This includes building the systems and networks required to process, authorize, and settle payments securely. These are the main nuts and bolts of your payment gateway and should be developed by a reputed payment gateway software development company like Appinventiv.
  • Implement fraud detection measures: As already mentioned, fraud detection is something that the users of your payment gateway will expect. So implementing this mechanism is as crucial as creating the gateway itself. Implement measures to detect and prevent fraudulent transactions.
  • Obtain licenses and certifications: Creating a payment gateway involves a lot of compliance, as discussed above. So before you launch your product into the market, you’ll have to obtain all the necessary compliance certificates, which you can get with the help of a payment gateway development services company.
  • Integrate with the payment processing network: Your gateway will need to communicate with the payment processing network to authorize and settle transactions.
  • Test and launch your payment gateway: Carefully test your gateway to ensure it functions properly and securely before launching it to the public.

Types of payment gateways

Based on the positioning of the payment gateways, these can be classified into three categories which are explained below.

  • Hosted gateways: Hosted payment gateways are when a customer is redirected to the payment processing website away from the merchant’s website. This hosted gateway is where the transaction will take place. Hosted gateways are appropriate for merchants who do not have the resources to meet the necessary security standards to host the payment gateway on their server. But this also results in the merchant having little control over the consumer’s payment experience. Additionally, it redirects the consumer from the merchant website adding in the time it takes to complete the transaction. But these sacrifices are necessary to secure the transaction and the consumer data.
  • Self-hosted payment gateways: Self-hosted payment gateways are placed on the merchant servers but send the information to a third-party payment gateway URL for processing and authentication. This gives the merchant more control over the payment experience of the customer.
  • API-hosted payment gateways: API-hosted payment gateways are the most sought-after by merchants of all sizes because it gives the merchant complete control of the buying and payment experience. But this requires merchants to be PCI DSS compliant as their servers will store every customer’s payment information.

A complicated piece of technology, such as a payment gateway, requires technical expertise and business intelligence to deliver the best product. At Appinventiv, as a leading FinTech software development company with nearly a decade of experience, we have helped thousands of our clients unlock their digital potential.