Payment Gateway Explained: What Is It and How Does it Work?

Payment Gateway Explained - What is a Payment Gateway - iPay88


If you’re looking to start an e-commerce business, one of the key components to its success is a reliable and trustworthy payment gateway, which helps to facilitate the transactions between customers and merchants online.

E-commerce in Malaysia has been steadily growing in recent years, driven by factors such as the growth of cashless adoption, the popularity of mobile payments, and government initiatives to promote digital payments.

As a result, the popularity of e-commerce has led to more and more businesses choosing to start their e-commerce journey and reach broader customer audiences. The Internet has made it easy for businesses to sell not only locally (within their area of operation) but also nationally or even globally.

To facilitate such commerce, online transactions are essential as they are the fastest and the easiest way to do business. In order to accept payments online, businesses (merchants) will need to choose a payment gateway.

This article will explain what a payment gateway is, how it works, how payment gateways ensure the security of transactions, and how it can help your business grow.

What is a payment gateway?

Put simply, a payment gateway is a secure e-commerce application that acts as an intermediary between a merchant and a customer’s financial institution. This allows online businesses to process payments for goods or services bought through their website or mobile app.

The payment gateway safely transmits transaction data, including credit card information, bank account details, or digital wallet details, from the customer to the payment processor and then onto the merchant. This ensures the transaction is authorized and valid before transferring the funds to the merchant’s account.

In essence, a payment gateway streamlines the process of processing card payments by serving as a link between the merchant’s website and their acquirer. As an intermediary between a merchant and a customer, a payment gateway plays a critical role in facilitating the secure transfer of funds between the customer’s financial institution and the merchant’s account.

Sensitive data protection

Additionally, a payment gateway prioritizes protecting the customer’s sensitive payment data by transmitting it from the merchant to the acquirer and then the issuer using data encryption. The gateway complies with the PCI-DSS compliance standard, which outlines a set of rigorous data protection procedures, including annual audits and recertifications, to ensure the standard’s reliability.

You may view the payment gateway as a virtual equivalent to a physical post-of-sale terminal in retail stores.

When choosing a payment gateway, it is also important to analyze the payment methods that are offered. Most payment gateways aggregate multiple payment methods available to ensure that the customers will find their favorite payment options on merchants’ websites or apps.

At iPay88, we offer the most comprehensive range of payment methods available in Malaysia. These include bank cards (Visa, Mastercard, Amex, UnionPay), Online Banking with all Malaysian banks, major e-wallets (such as Boost, GrabPay, Touch ‘n Go e-wallet, MAE, Shopee Pay, AlipayPay+, WeChat Pay and others), BNPL (Atome, Grab Pay Later, Moby Pay) as well as other payment methods that are popular in Malaysia, such as Google Pay, Apple Pay, and PayPal.

How does a payment gateway work?

A payment gateway works by securely transferring transaction data between a merchant’s website or mobile app, the customer’s financial institution, and the payment processor. Here is a general overview of how a payment gateway works: 

  1. The customer selects the products or services they want to purchase on the merchant’s website or mobile app. 
  2. The customer then enters their payment information, which could include their credit card information, bank account details, or digital wallet information. 
  3. The payment gateway encrypts the payment information and securely transmits it to the payment processor. 
  4. The payment processor then forwards the encrypted information to the customer’s financial institution. 
  5. The financial institution verifies the transaction details and either approves or declines the transaction. 
  6. The financial institution sends the approval or decline notification back to the payment processor, which then forwards it to the payment gateway. 
  7. The payment gateway relays the notification to the merchant’s website or mobile app, informing the customer of the transaction’s status.
  8. If the transaction is approved, the payment gateway transfers the funds from the customer’s financial institution to the merchant’s account. 

Overall, it’s a rather complex process involving multiple parties. Therefore, it is important to choose a payment gateway that is fast, stable, and reliable to ensure the transaction is processed quickly and without unexpected failures.  

While most of the payment gateway’s activity occurs during the payment process, both merchants and customers benefit from its use. The steps outlined above can occur in a matter of seconds, taking place in near real-time. 


Security features of a payment gateway

A payment gateway is a critical component of a secure online payment system. As such, it includes several security features designed to protect the sensitive payment data of customers and merchants.

Some of these security features are:

  • Encryption: Payment gateways use encryption to secure the data transmission between the customer and the payment processor. The encryption process encodes the data, making it unreadable to anyone without the proper decryption key.
  • Tokenization: Tokenization is a process that replaces sensitive payment data, such as credit card numbers or bank account details, with a unique token. This token can be used for future transactions, reducing the need to store sensitive payment information on the merchant’s server.
  • Fraud detection: Payment gateways often have built-in fraud detection and prevention features. These features can identify suspicious transaction activity, such as multiple transactions from the same device or unusual transaction amounts.
  • Compliance with PCI-DSS: The Payment Card Industry Data Security Standard (PCI-DSS) is a set of security standards designed to protect payment card information. Payment gateways must comply with PCI-DSS standards, which include data encryption, regular security audits, and the implementation of appropriate security controls.
  • Two-factor authentication: Payment gateways may require customers to go through a two-factor authentication process to verify their identity before processing a payment. This process involves providing a second form of identification, such as a unique code sent to their mobile phone or email.

Overall, payment gateways incorporate several security features to safeguard the payment data of customers and merchants, preventing fraudulent activities and ensuring secure transactions.


Safety of online transactions

In order to ensure the safety of online transactions, payment gateways have to comply with PCI-DSS (Payment Card Industry Data Security Standard). It is a set of international security standards established by the payment card industry to ensure the secure handling of payment card information.  

In fact, the PCI-DSS standards apply to all entities that accept payment cards, including merchants, payment processors, and payment gateways. 

PCI-DSS compliance includes several requirements for protecting payment card data, such as: 

  • Building and maintaining secure networks and systems, including the use of firewalls and regular vulnerability scans. 
  • Protecting cardholder data by encrypting sensitive information during transmission and storage. 
  • Maintaining strict access control measures to limit who can access payment card data. 
  • Regularly monitoring and testing security systems and processes to identify vulnerabilities and potential threats. 
  • Implementing strict security policies and procedures, such as password management and regular security awareness training for employees. 

To maintain PCI-DSS compliance, organizations must undergo regular security audits and assessments to ensure they are following the established standards. Failure to comply with PCI-DSS standards can result in hefty fines and the loss of the ability to accept payment cards. As such, it is essential for organizations that handle payment card data to prioritize PCI-DSS compliance to ensure the security of customer data and avoid potential penalties. 

iPay88 is a PCI-DSS-certified payment gateway with Level 1 certification, which is the highest industry standard for payment gateways processing online payments.

Choosing the best payment gateway for business

So, how to choose the best payment gateway for your business? Choosing the best payment gateway for your business can be tricky and time-consuming as there are lots of payment processor providers in the market.

However, partnering with a trusted and experienced payment service provider and the acquirer can simplify the complexity of payment gateways. With over 20 years of experience in online payment processing, iPay88 can provide a streamlined and engaging payment experience for your customers.  

In addition to our PCI-DSS Level 1 compliance, which we maintain annually, we also offer a wide range of payment methods, built-in risk, and fraud management services, consolidated reporting for easy financial reconciliation, widely customizable features that best suit your business needs, and professional consulting to choose the best services for your continuous business growth.  

By utilizing our all-in-one payment solution, which is specifically designed to meet the needs of today’s demanding consumers, you can provide frictionless and secure checkout experiences to your customers and maximize your revenue. 

Looking to increase your profit margins with reliable payment solutions? Contact our team of payment experts now and begin accepting online payments with ease.

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