Payment Gateway, Payment Processor and Payment Security Explained

Summary

This video script delves into the world of digital payments, focusing on the roles of payment gateways like PayPal and Stripe, and payment processors. It explains how these systems ensure secure transactions through encryption and tokenization, protecting payment data during transit and at rest. The script also touches on the function of payment networks such as Visa and Mastercard, and the collaboration between banks and financial institutions in the authorization and processing of transactions. The goal is to provide viewers with a comprehensive understanding of the digital payment ecosystem, setting the stage for a follow-up video on designing a payment system.

Takeaways

• 💳 Digital payments are integral to everyday transactions, from coffee purchases to splitting expenses among friends.
• 🛒 The payment gateway acts as an intermediary, ensuring payment information is correctly formatted and secure, akin to a 'Special Assistant'.
• 🔒 Data encryption is used to protect payment information during transmission, making intercepted data unreadable without the decryption key.
• 🗝️ Tokenization is employed to safeguard sensitive payment data when stored, replacing actual credit card numbers with tokens that are useless to hackers.
• 🔍 Address verification helps prevent fraud by ensuring the customer's billing address matches the bank's records.
• 🏦 The payment processor is responsible for checking the availability of funds and moving money between accounts, often working with issuing and acquiring banks.
• 🔄 Payment gateways and processors work together to authorize and process transactions, with the gateway handling data transmission and the processor ensuring funds are available.
• 💼 Companies like Visa and Mastercard facilitate communication between banks during credit and debit card transactions, but do not directly process transactions themselves.
• 🔄 The payment network ensures the transaction is authorized and securely moves money from the customer to the merchant, completing the payment process.
• 🤝 Some companies, such as Stripe and PayPal, offer both payment gateway and payment processing services, making it common for businesses to use a single provider for both needs.
• 🛡️ Security measures like encryption and tokenization work in tandem to protect against unauthorized access and fraud in the digital payment ecosystem.

Q & A

What is the primary role of a payment gateway in digital transactions?

A payment gateway acts as the first point of contact when a customer initiates a card transaction online. It takes the payment information, verifies the details, and ensures they are correctly formatted and complete, including credit card number, expiration date, and CVV. It also handles the authorization of the transaction and the secure transfer of payment information.

How does encryption protect payment information during online transactions?

Encryption converts the original payment data into a coded format that can only be deciphered with the proper decryption key. This ensures that even if someone intercepts the data during transmission, it would be virtually unreadable without the key.

What is tokenization and how does it differ from encryption in terms of data protection?

Tokenization is a process where sensitive payment data is replaced with a non-sensitive equivalent, called a token, which represents the actual data. Unlike encryption, which protects data during transit and can be decrypted for processing, tokenization protects data at rest, ensuring the original data is never stored or exposed.

What is the difference between a payment gateway and a payment processor?

A payment gateway primarily handles the transmission of payment data and acts as a bridge between the customer, merchant, and payment processor. A payment processor, on the other hand, is responsible for actually moving the money between accounts and communicates with the customer's bank to verify sufficient funds for the transaction.

What is the role of banks in the context of digital payments?

Banks play a crucial role in verifying the availability of funds in a customer's account and authorizing transactions. They work closely with payment processors and are involved in the authorization process to confirm that the customer has the necessary funds or credit limit.

How do payment networks like Visa and Mastercard fit into the digital payment ecosystem?

Payment networks like Visa and Mastercard facilitate communication between the issuing bank (the customer's bank) and the acquiring bank (the merchant's bank). They process transaction data and ensure that the transaction is authorized and the money is securely moved from the customer's account to the merchant's account.

What is the purpose of address verification in digital payments?

Address verification helps to prevent fraud by ensuring that the customer's billing address matches the one on record with the bank. This adds an extra layer of security to the transaction process.

Why is it important for online stores to offer multiple payment options?

Offering multiple payment options provides customers with flexibility and convenience, allowing them to choose the payment method that best suits their needs. This can enhance the customer experience and increase the likelihood of completing a purchase.

What factors do businesses consider when choosing a payment gateway and payment processor?

Businesses evaluate factors such as transaction fees, types of payment methods supported, security features, customer support, and other relevant services when choosing a payment gateway and payment processor.

Can a single company perform both payment gateway and payment processing services?

Yes, some companies, like Stripe and PayPal, perform both payment gateway and payment processing services. However, it's important to note that while many companies offer both, there are exceptions where some companies may only deal with one of these services.

How does the payment process work when a customer makes a purchase online?

When a customer makes a purchase online, they add items to their cart and proceed to the checkout page. The payment gateway verifies the payment details, the payment processor communicates with the bank to confirm sufficient funds, and if approved, the payment network facilitates the transfer of funds from the customer's account to the merchant's account, completing the transaction.

Outlines

00:00

💳 Digital Payments and Security Overview

This paragraph introduces the concept of digital payments and their integral role in daily transactions. It explains the function of payment gateways like PayPal and Stripe, which act as intermediaries to facilitate secure online transactions. The paragraph delves into security measures such as encryption and tokenization, which protect payment information during transmission and storage, respectively. It also touches on the role of payment networks like Visa and Mastercard, and the involvement of banks in the authorization and processing of transactions. The script sets the stage for a follow-up video that will design a payment system from scratch, emphasizing the importance of understanding the fundamentals of digital payments.

05:01

🔄 The Role of Payment Gateways and Processors

The second paragraph elaborates on the roles of payment gateways and processors within the digital payment ecosystem. It clarifies the distinction between the two, with payment gateways primarily handling the authorization and secure transmission of payment information, while payment processors are responsible for moving funds between accounts after confirming the availability of funds. The paragraph also discusses the collaboration between payment gateways, processors, and payment networks like Visa and Mastercard during credit and debit card transactions. It highlights the importance of choosing the right payment gateway and processor based on factors such as fees, supported payment methods, security features, and customer support. The paragraph concludes by noting that many companies offer both services, making it common for businesses to rely on a single provider for both payment gateway and processing needs.

Keywords

💡Digital Payments

Digital payments refer to the transfer of money through electronic means rather than using physical cash or checks. In the video's context, digital payments are essential for daily transactions, such as buying a coffee or splitting expenses, and they form the main theme of the discussion. The script mentions digital wallets as one of the payment options, illustrating the convenience of digital payments in online shopping.

💡Payment Gateways

A payment gateway is the first point of contact for online transactions, acting as an intermediary between the customer and the bank to ensure that payment details are correctly formatted and secure. The script explains that payment gateways perform initial checks on credit card information and use encryption to protect data during transmission, which is crucial for the security of digital payments.

💡Payment Processors

Payment processors are responsible for the actual movement of money between accounts during a transaction. They work closely with issuing and acquiring banks to confirm the availability of funds and to facilitate the transfer of money. In the script, the payment processor's role is highlighted in the authorization process, which is distinct from the payment gateway's role in handling the transmission of payment data.

💡Encryption

Encryption is a security measure that converts original payment data into a coded format, which can only be deciphered with the proper decryption key. The script mentions that payment gateways use encryption to protect payment information during transmission, ensuring that even if data is intercepted, it remains unreadable without the key.

💡Tokenization

Tokenization is another security measure used to protect sensitive payment data when it is stored. Instead of storing the actual credit card number, a token that represents the card is stored. The script explains that tokenization protects data at rest, making the stored data much less useful to hackers, as the actual card information is never stored or exposed.

💡Credit Cards

Credit cards are a form of payment that allows customers to borrow money to make purchases. The script discusses credit cards in the context of online transactions, where the payment gateway verifies the credit card number, expiration date, and CVV to prevent fraud.

💡Debit Cards

Debit cards are another payment method that allows customers to make purchases directly from their bank account. The script mentions debit cards as one of the payment options provided by online stores, indicating the variety of digital payment methods available to consumers.

💡Digital Wallets

Digital wallets are electronic devices or applications that store payment details and can be used to make transactions. The script describes digital wallets as one of the multiple payment tools offered by online stores, showcasing the diverse options for completing purchases in the digital age.

💡Visa and Mastercard

Visa and Mastercard are payment networks that facilitate communication between issuing and acquiring banks during credit and debit card transactions. The script explains that these networks work with payment gateways and processors to ensure that transactions are authorized and that funds are securely moved from the customer's account to the merchant's account.

💡Issuing Bank

The issuing bank is the financial institution that issues credit or debit cards to customers. In the script, the issuing bank's role is to confirm that the customer has the necessary funds or credit limit when a transaction is processed through a payment network like Visa or Mastercard.

💡Acquiring Bank

The acquiring bank is the financial institution that processes transactions for merchants. The script mentions that the acquiring bank works with payment processors to verify the availability of funds and to facilitate the transfer of money to the merchant's account upon a successful transaction.

Highlights

Digital payments are integral to daily transactions, from buying coffee to sharing expenses among friends.

The video explores the basics of digital payments, including payment gateways and processes like PayPal and Stripe.

Security aspects such as encryption and tokenization are discussed to protect payment data.

Payment networks like Visa and Mastercard and the roles of banks in the payment process are examined.

A follow-up video will design a complete payment system from scratch.

The checkout process involves specifying purchases and choosing from various payment options.

Payment gateways act as intermediaries, ensuring payment information is correctly formatted and secure.

Data encryption is used to protect payment information during transmission, making it unreadable without a decryption key.

Tokenization protects sensitive payment data when stored, using tokens instead of actual card numbers.

Encryption and tokenization work together to safeguard against unauthorized access and fraud.

Payment gateways do not check fund availability; this is done by payment processors.

Payment processors communicate with banks to verify sufficient funds and obtain transaction authorization.

Visa and Mastercard facilitate communication between issuing and acquiring banks during transactions.

Payment gateways and processors work in tandem to authorize and securely move money from customer to merchant.

Businesses choose payment gateways and processors based on fees, supported payment methods, security, and services.

Some companies like Stripe and PayPal offer both payment gateway and processor services.

Understanding the distinction between payment gateways and processors is crucial for businesses accepting payments.

Transcripts

[Music]

digital payments have become an

essential aspect of our daily lives

whether it's for a simple coffee

purchase or when you are dividing

expenses among friends in this video

we'll examine the fundamentals of

digital payments starting with payment

gateways and payment processes like

PayPal and stripe and explore some of

the interesting aspects of security such

as encryption and tokenization we'll

also look into payment networks such as

Visa or Mastercard along with the roles

of banks so that you get the complete

picture once you have grasped the

fundamentals of payments stay tuned for

a followup video where we'll design an

entire payment system from start to

finish so let's get

started imagine you are shopping online

and you see a cool video game you want

to buy you click on it and add it to

your card when you are ready to pay you

proceed to the checkout page where you

specify your purchase the online store

offers various payment options including

credit cards debit cards and digital

wallets providing you with multiple

tools for completing your game

purchase now the payment Gateway is the

first point of contact when you the

customer initiates a card transaction

online it's like a Special Assistant

that takes your payment information and

sends it to the bank to make sure you

have enough money to buy the game it

performs an initial check to ensure that

the customer's payment details are

correctly formatted and complete this

includes verifying the credit card

number expiration date and the pvv or

card verification value the payment

Gateway may also perform an address

verification to validate the customer's

bilding address matches the one on the

record with the bank which helps to

prevent fraud so it primarily handles

the authorization of the transaction and

the secure transfer of payment

information payment gateways use data

encryption during the transmission of

payment information to protect it from

interception so when you enter your

credit card information on an online

shopping website that information is

encrypted before it is transmitted to

the payment Gateway so even if someone

were to intercept the data during this

process it would be virtually unreadable

without the decryption key encryption

involves converting the original payment

data into a coded format that can only

be deciphered with the proper decryption

key and this I have covered in detail in

my https video where I talk about

various security algorithms and their

use in depth payment gateways also use

tokenization to protect sensitive

payment data when it's stored whether on

a merchant server or within the payment

Gateway system so when you have made a

purchase on an e-commerce website

instead of storing your actual credit

card number the merchant stores a token

that represents your card encryption

primarily protects data during Transit

the journey from your device to the

Gateway and then to the merchant while

tokenization protects data at rest when

it is stored on the

servers with encryption the original

data is decrypt Ed for processing once

it reaches its destination and with

tokenization the original data is never

stored or exposed in the first place

tokens are used for all future

transactions and in the event of a data

breach encrypted data might still be

vulnerable because it can be decrypted

with the right key in contrast tokenized

data is much less useful to hackers as

the actual card information is never sto

these two security measures by payment

Gateway work together to provide a

robust and their defense against

unauthorized access and fraud in the

digital payment ecosystem note that the

payment Gateway itself does not directly

check the availability of funds in the

customer's bank account that specific

fund availability check is carried out

by the payment processor during the

authorization process the payment

Gateway primarily handles the

transmission of payment data between the

customer the merchant and the payment

processor so it acts as a bridge for

data once the payment Gateway has

verified the car details it forwards the

transac action to the payment processor

the payment processor communicates with

the customer Bank to verify whether

there are sufficient funds available to

cover the transaction amount if the

funds are available the payment

processor obtains an authorization from

the bank which confirms that the

transaction can proceed if the funds are

not available the transaction is

declined and this information is sent

back to the payment Gateway which then

informs the customer or Merchant a

payment processor here is the entity

responsible for actually moving the

money between accounts it often Works

closely with the issuing bank which is

the customers bank and acquiring bank or

Merchants Bank it communicates with the

issuing bank to confirm that the

customer has the necessary funds or

credit limit now both payment gateways

and payment processors often work with

visa and MasterCard payment networks

when processing credit and debit card

transactions these companies don't

directly process transaction or serve as

payment gateways instead they partner

with banks and financial institutions

that issue their cards to

Consumers when you use a Visa or

Mastercard your transaction data is

processed through payment Network and

they facilitate the communication

between the issuing bank and the

acquiring Bank this I have covered in

detail in my previous video on buy now

pay later services and credit card

processing where I talk in detail about

issuing Bank acquiring Bank how credit

cards are issued and the role of payment

Network such as Visa or Mastercard

basically when you make a payment with a

Visa or Mastercard the payment Gateway

and payment processor work together to

transmit and process the transaction

through the respective payment Network

the network ensures that the transaction

is authorized and securely moves the

money from the customers's account to

the merchant account completing the

payment process so while payment gway

tends to play the traffic cop to approve

or reject a transaction and is the first

point of contact when customer initiates

a c transaction online payment

processors ensure your money moves from

your account to the merchant seamlessly

when a business or an online store

decides to accept payments they evaluate

and choose a payment Gateway and payment

processor this choice is based on

factors like transaction fees the types

of payment methods supported the

security features customer support and

other relevant Services now there are

some companies for instance stripe and

PayPal that perform both of these

services to the average person it might

seem like they are pretty much the same

thing but there are exceptions to this

some companies just deal with the

payment gateways while other stick to

Payment Processing however in most cases

today you will find that if a company

offers one service they will likely

offer the other service too so it is

easier to think of these two things as

two separate Services rather than being

from entirely different

[Music]

companies