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How Do Online Transactions Work?

Are they really safe and secure?


The Advent Of E-Commerce And Online Transactions

In the world we live in today, e-commerce and online transactions are no longer foreign concepts to most of us. We pay our bills online, buy our groceries online through sites like Happy Fresh and Tesco Online, buy our clothes from Zalora, buy our electronics from Lazada and even pay for our rides online through Uber.

How Do They Really Work?

However, have we ever wondered how online transactions actually work?

What magic goes on behind the scenes that allows us to transfer money from our bank accounts to merchants with a simple tap of a button.

Is it safe?

3rd-Party Payment Gateways

Most online merchants would use trusted 3rd party payment gateway providers who specialise in handing payments to handle their online transactions and receive payments from their customers.

MolPay And iPay88

In Malaysia, homegrown online payment gateways include MolPay by MOL Global and iPay88. If a merchant would like to give the option of paying via online banking accounts such as maybank2u and cimbclicks to their customers, they would have to use a payment gateway like MolPay and iPay88 because they are the only ones who support bank to bank transfers among local banks.

Paypal And Braintree

If the merchants are only targeting users with credit cards or debit cards, they could use global payment gateways such as Paypal and Braintree(also a subsidiary of Paypal).

The Authentication Process

In a nutshell, the payment gateway providers are the ones who handle the authentication process by checking with the banks or card providers such as visa and master card whether the card is valid before proceeding with the transaction.

It is Illegal To Store Your Credit Card Information

To make sure sensitive information is not being leaked or abused, it is illegal for merchants to store their customer’s credit card information.

Read Also: Why You Should Never Let Merchants Double Swipe Your Credit Card

3rd-Party Payment Gateway APIs

Online merchants are required to use the API provided by 3rd party payment gateway providers to process the transaction. An API is basically a code that merchants can embed on their platforms that allows their website to communicate with the payment gateway provider’s servers as they process their customer’s transactions for them.

The credit card information that customers key into the payment gateway’s API goes directly to the payment gateway’s servers where it will be processed and verified by checking with the banks and card providers.

Returns Transaction Status To Merchants

If everything checks out, the payment gateway provider will go ahead with the transaction and return a “successful” transaction status to the merchants.

Merchants Saves Transaction ID And Status For Reference

Merchants will then save the transaction ID and status returned by the payment gateway in their system for future reference. They would also have the option to save the last 4-digits of their customer’s credit card number (the rest will be blanked out) so their users would not have to fill out the entire credit card details again the next time they make a purchase as the payment gateways and banks will just use the same card from the previous transaction ID.

If the transaction returns a “successful” or “authorised” result, the merchant will go ahead and process the customer’s order and dispatch the goods. After which, the banks will release payment to the merchant’s account with the payment gateway provider in a couple of days should no complaints be filed by the customer that they did not authorise the transaction.

Successful payments would accumulate in the merchant’s account with the 3rd party payment gateway providers. These payments will be withdrawn monthly or when they reach a certain amount, depending on their preference and policy of their chosen payment gateway provider.

In the nutshell, this is what happens behind the scenes whenever we make a payment online.

Read Also: How Big Are Malaysian Banks Compared To The Rest Of The World 

DollarsandSense is a website that aims to help people make better financial decisions, one interesting bite-sized article at a time. Like us on Facebook to stay in touch with our latest article. 


DollarsAndSense Malaysia is a website that aims to help people make better financial decisions, one interesting, bite-sized article at a time. Like us on Facebook to stay in touch with our latest articles.