As lockdowns, restrictions, and ongoing consumer health concerns disrupted daily life in ways that affected spending trends and consumer habits, the pandemic accelerated payments industry digitization by two to three years. As businesses and consumers switch from cash to digital payment methods, the power dynamics in the payments industry are changing. Card payments still dominate the in-store retail channel, but mobile wallets are gaining ground and paving the way for the future.
The customized payment solutions that are steadily gaining traction are facilitated by two entities called Payment Gateways and Payment Switches. Despite being invisible to the human eye, they are at the core of every scalable payment method that banks and businesses today are attempting to deploy for a niche customer experience.
What Is A Payment Gateway?
A payment gateway is a tool that guides the transaction process from beginning to end, handling security and settlement. The payment gateway, also known as the facilitator of the payment, is an online digital cashier who charges, verifies, collects money, and delivers the goods. By launching a payment gateway, fintech companies allow merchants to accept payments in their selling platform, online or offline.
These companies are third-party software that sits between businesses (merchant selling platforms) and the bank accounts that issue payments. By using this software, the customer is able to submit sensitive information such as card information, passwords, and PINs to the merchant for delivery of promised goods. Paying gateways validate submitted information and deduct funds after verifying availability. Within one to two business days after the products have been shipped or handed over, the funds are transferred to the merchant account.
What Is A Payment Switch?
A payment switch is also a technology, but it is integrated into the payment gateway. It is an independent entity that sits within the payment gateway to assist the payment process.
Being an OLTP (online transaction process tasks), a payment switch handles all the nuances within a transaction. There are many merchant accounts boarded with their bank (acquirer bank) in a payment gateway. When a payment request comes in from a merchant selling platform, the payment switch dynamically identifies the acquirer bank (connected to that merchant) as well as the issuing bank, allowing the transaction to be processed securely through BIN allotment.
The payment switch can route a transaction in a variety of ways, including by a BIN allotment. Besides routing by amount, the system can also route by time of day. Upon receiving the message from the issuing bank, it formats and sends back the response to the acquirer.
Payment Gateway vs. Payment Switch
Payment gateways and payment switches are the two variables that have become the atom of the whole payment ecosystem. These two entities aren’t the same but aren’t different either. In order to reduce downtime and outages, they are embedded onto each other.
There is a tendency to confuse both and view them as one, but they are not the same. Despite the apparent similarity in their operations, payment gateways and payment switches differ in their underlying complexities.