What is a payment gateway and how does it work? Top 3 solutions for marketplaces

When building marketplace software, it is crucial to provide online payments. To remain competitive and boost consumer engagement, an organization should enable real-time or near real-time transactions.

For this purpose, software engineers can integrate a payment gateway. The main advantages of this solution are automated payment processing and increased data security. Since the team doesn’t have to develop tailor-made software, you will save both time and costs.

In this article, we will consider the most popular payment gateways — Braintree, PayPal, Stripe — to help you choose the best option for your online marketplace platform. You will also get a clear understanding of how a payment gateway works.

What is a payment gateway?

Serving as an analog of a third-party virtual terminal, a payment gateway is used for authorizing transactions. When a user makes an online purchase, the required card data is sent to a payment gateway, which forwards it to the acquiring bank and then—to the organization that issued the card.

The key tasks of this process are to:

  • verify customer identity
  • authorize a transaction
  • protect vendors against multiple issues that include fraud, insufficient funds, exceeded credit limits, and expired cards.

With this functionality, consumers don’t have to provide their information to each individual merchant, which increases the security of sensitive data.

In addition, popular payment gateways employ data encryption to prevent cybersecurity threats. Furthermore, by integrating an online payment solution, an organization faster develops an online marketplace platform, this way reducing project costs and time-to-market.

How does a payment gateway work?

The process of carrying out online transactions using a marketplace payment gateway:

1) When making an order or purchase, a user enters the necessary payment data, which is delivered to an app payment gateway. If this operation is performed via a website, the web browser used by the buyer encrypts data — e.g., using Secure Socket Layer connections — to safeguard it from security risks.

2) This data is sent to the payment processor employed by the acquiring bank of a merchant and then — to the card association (i.e., Mastercard, Visa, American Express).

If you aim to develop a multi-vendor marketplace, it is reasonable to automate this process by allowing transaction data to bypass merchant systems.

As a consequence, the information will be routed directly from the browser to the gateway and finally — to the payment association sending the transaction to the card-issuing company.

3)After verifying the availability of funds, the card-issuing organization approves or declines the transaction, sending a response code to the payment processor. This code contains the reason for transaction failure, for example, credit card expiration or banking account termination.

4) If everything is okay, the authorization code is forwarded to the payment processor and next — to the marketplace platform. As a result, the transaction is performed and the funds are withdrawn from the user’s account. Thanks to the app payment gateway, the entire process takes just 2–3 seconds.
Now, let’s consider the most popular payment gateways for online marketplace platforms.

Top payment gateways for marketplaces

1. Braintree

Established in 2007, Braintree is a US company delivering online payment solutions to industries such as e-commerce, travel, and hospitality. The organization was acquired by PayPal in 2013.

Braintree is a popular payment gateway provider that supports digital transactions via:

1) PayPal — It is another worldwide leading gateway that you can connect to your marketplace platform through the integration with Braintree.
2) Venmo — Payments via this mobile wallet application are available in the USA.