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How do payment gateways work?

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Source: Xendit

With the rise of e-commerce, online businesses and more traditional start-ups, there is an increasing need to offer the best customer experience to your customers. Read about what a payment gateway is and how it can help make your business succeed in this article. In short,

“A payment gateway is a service that authorizes transactions to occur between online/offline businesses and their customers in a secure and convenient way”

Accepting money

Payment gateways transmit AND authorize transactions, while payment processors merely transmit the payments. Behind the scenes of moving money from buyer to seller, a payment gateway is hard at work ensuring that each transaction runs quickly, smoothly and securely, typically by:

  1. Encryption: Payment gateways encrypt sensitive data that is sent between the customer’s browser, the retailer’s server and the bank. This makes the data exclusively encoded for private use between the buyer and seller, keeping the buyer and seller’s financial data secure. Payment gateways that Payment Card Industry Data Security Standard (PCI DSS) compliant removes the need to manage expensive hardware and software to store sensitive payment details (i.e. card information).
  2. Request: The payment processor receives an authorization request from a financial institution or credit card company to proceed/not to proceed with the transaction and sends the response to the payment gateway.
  3. Fulfillment: The payment gateway will authorize transactions to proceed to the next interface (either on the seller’s or payment gateway’s user interface).

Payment gateways like Xendit makes businesses make timely bank transfers in Indonesia possible by partnering multiple banks banks to set up virtual accounts for your business that can be easily managed and monitored on the Xendit dashboard.

It is important to ensure that transactions occur on time and payment gateways normally reduce the amount of time taken to move funds between buyer and seller, as well as confirming that payments are successful.

Source: Xendit

Sending money

Beyond helping businesses accept payments, payment gateways can help businesses send money out too; enabling businesses to transfer money to their business partners, users, and staff at scale.

Payment gateways can set up direct integrations with multiple payment processors, such as banks, to enable faster and more reliable payouts. 

Xendit has made automated and timely transfers possible by integrating directly with most of the major banks in Indonesia. Intra-bank transactions go over the bank’s internal ledger. In interbank transfers, the transfer goes through an interbank switcher network before arriving at the recipient bank. Upon receiving a transfer request, our system automatically processes the transfer via the optimal bank channel based on what’s available and fastest for that payout amount and bank destination. This process is simplified in the diagram below:

Source: Xendit
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