1.4 Securing the Internet Checkout: The Emergence of Payment Gateways
In the previous post, we discussed payment processors and their role in facilitating transactions by transmitting data from merchants to acquiring banks. We also explored how they help acquiring banks aggregate merchant-level data and share it with card networks for seamless payment processing.
Everything seems to be running smoothly right? Payment flow improved, computers are helping in reducing the delays, merchants are happy, and banks are processing transactions without a hitch. But wait… aren’t we forgetting something? Oh, right! It’s still the 1980s, and we’re on the brink of a game-changer. Something is about to shake up the entire payments landscape. Something called the internet.
The 1990s: E-Commerce and Online Payments
The internet changed everything. Suddenly, more people wanted to shop online, but the traditional payment system wasn’t built for it. Unlike in-person payments, where merchants could physically verify a card, online transactions required customers to enter card details on a website, exposing them to potential hacking and large-scale data breaches where millions of credit cards can be compromised at once.
To secure these transactions, cardholder data needed to be encrypted and transmitted safely to the acquiring bank. While payment processors were designed to connect POS to the acquiring banks, and aggregating the data, they lacked the encryption and security layers needed for online payments.
As businesses moved online, many lacked the technical expertise to securely handle credit card transactions. Implementing encryption, ensuring secure data transmission, and complying with evolving security standards like PCI DSS were significant challenges. Not all companies had the resources to build these capabilities in-house. They needed a ready-made solution that could securely capture, encrypt, and transmit payment data
This need led to the development of payment gateways, a technology designed to capture, encrypt, and securely transmit payment data from online merchants to payment processors, enabling safe and seamless digital transactions.
Payment gateways solved key challenges:
✔ Enabled secure online payments without direct bank integrations.
✔ Protected businesses from fraud and chargebacks.
✔ Ensured encryption and compliance with evolving security standards (PCI DSS).
✔ Allowed merchants to accept multiple payment methods seamlessly.
The First Payment Gateway
The first payment gateway, CyberCash, was launched in 1994 to facilitate encrypted card transactions over the internet. Soon after, Authorize.Net (1996) emerged, making online payments more accessible for businesses.
In the late 1990s and early 2000s, PayPal (1998) revolutionized the space by offering a user-friendly digital wallet and reducing friction for consumers.
The Evolution of Payment Gateways
🚀 1990s – Early 2000s: The Foundational Era
CyberCash, Authorize.Net, and PayPal pioneered secure online transactions.
SSL encryption became the standard for protecting payment data.
Fun Fact 1
Amazon launched in 1995, but online payments were so clunky that many people still preferred mailing checks! Imagine doing that now 😨
Fun Fact 2
In 2001, Visa introduced 3D Secure (Three-Domain Secure) to add an extra layer of authentication for online transactions. Later other card networks implemented their versions. 3D Secure 1.0 relied on static passwords or OTPs, often displayed in pop-ups or redirects at checkout. The card networks provided the 3DS framework but the OTP triggered was done by the issuing bank.
This system had usability issues, leading to high abandonment rates. In 2016, 3D Secure 2.0 was introduced, offering risk-based authentication, biometrics, and a frictionless experience for most low-risk transactions, while still requiring step-up authentication (OTP, biometrics, etc.) when necessary.
💳 2000s – 2010s: Growth & Standardization
Payment gateways integrated with e-commerce platforms (Shopify, Magento, WooCommerce).
Stripe (2010) simplified APIs, allowing developers to embed payments directly into websites and apps.
🌎 2010s – Present: The Era of Embedded Payments & Globalization
Payment gateways expanded beyond cards—supporting digital wallets (Apple Pay, Google Pay), BNPL (Buy Now Pay Later), and crypto payments.
AI-driven fraud detection reduced false declines and chargebacks.
Businesses now use omnichannel payment gateways that work across in-store, mobile, and online transactions.
Below is an image showing how the payment flow evolved with the introduction of payment gateways.
As you can see, payment gateways act as the bridge between the merchant and the payment processor, securely transmitting transaction data. This shift enabled real-time, encrypted communication of payment details, reducing the merchant’s exposure to sensitive data and adding an extra layer of security and efficiency to the transaction flow.
Coming up next:
In our next post, we’ll wrap up the payment lifecycle series with a summary of the end-to-end payment flow. From there, we’ll shift gears and begin exploring the world of fraud—starting with an introduction and diving into its many facets.
Stay tuned!
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