What is a Payment Gateway?
A payment gateway is a technology that authorizes the payment by credit cards for online retailers, brick and click stores, traditional stores, and for ecommerce businesses. The payment gateway protects the details on a credit card by encrypting the sensitive information it holds. This process ensures that personal private details are passed securely between the customer and the merchant.
A payment gateway is part of the “magic” that occurs in the background when a credit or debit card transaction takes place. By sending information securely between the website and credit card network for processing and then returning transaction details from the payment network back to the website it is a primary component that enables ecommerce to function.
If you have a website and are interested in accepting credit card payments either online or through a mobile device you will need a payment gateway. It is the bridge between your product sales and your customer.
How Does a Payment Gateway Work?
A payment gateway is the essential technology that keeps your customer’s payment data safe, and relays data to you.
Now that you understand the basics, let’s explore how this technology works:
Step 1: The customer selects the service or product they want to purchase and enters the checkout page. You might offer various payment options here. Some of the payment solutions available include:
- Hosted payment page: where customers are directed to another page when they’re ready to enter their transaction data.
- Server-to-server integrations: Where you can request payment information on the same page using the right payment system.
- Client-side encryption: The strategy that uses encryption on the client side to send it to the merchant service to simplify PCI.
Step 2: The client then enters the information for their credit card on the service provider’s payment page. This transaction data might include the card expiration date, customer’s name, CVV number, and the number for the credit card.
Step 3: The information is delivered to the payment gateway, and the payment gateway will encrypt the card details, as well as using fraud detection techniques. This makes the interaction safer.
Step 4: The acquiring bank sends the information to the card schemes like Mastercard or Visa.
Step 5: The card schemes check for threats and frauds in the payment card industry again, before sending the payment data to the issuing bank.
Step 6: The issuing bank screens the payment and authorizes or rejects the transaction, with an approved or declined message going back to the customer.
Step 7: The acquiring bank then sends the decline or approval message to the payment gateway, which informs the merchant if the payment service has been approved. If the payment solution is approved, the acquirer can collect the required amount from the issuing bank.
Step 8: Funds are deposited into the merchant account, in a process that’s called the “settlement”, and the merchant can display a confirmed payment message.
There are any number of providers that can setup a payment gateway for you, so how can you choose the right one for your business? The first step is to research features and when you’re doing this consider the following:
- Security of the network. A secure network should be your number one priority when looking for a payment gateway. Your customers must be able to have trust that their financial information will remain secure when purchasing from your store. Look for PCI-compliance, as this is critical when accepting credit cards online.
- The customer experience. Besides being secure, the process for payments should be smooth and make purchasing from you convenient for your customers. If it becomes cumbersome, requiring too many steps, too much time, or too much personal information, your customer may abandon their purchase and go looking elsewhere. You should look for a payment gateway that allows you to accept all major credit and debit cards, as well as being integrated with all major shopping carts. In today’s world it is also crucial that the payment gateway is optimized for mobile users.
- Internationally acceptable. Unless you are only expecting to accept payments from your local market you should ensure that the payment gateway allows for international acceptance. The internet is global and crosses all borders, and your customers might come from any corner of the globe. Don’t limit yourself with a payment gateway that doesn’t allow for global payments.
- Fees. The fee structure at each payment gateway will differ, so be sure it fits in your budget, and that it isn’t excessive compared with other payment gateway offerings.
The Basics of Payment Gateways
Payment gateways are the technology that keep the transaction ecosystem rolling in your organization. These tools enable payment and checkout support for consumers. If you’re an online business, you need a payment gateway as part of your payment processing strategy.
To help you follow this definition, here are some of the terms that you need to know when it comes to payment processing:
- Merchants: Merchants are the online businesses (you) that operate in the digital world. They offer services or products to customers from all over the world.
- The customer: Customers, or card-holders, are the people who want to access your products and services, supporting the transaction.
- The issuing bank: This is the customer’s bank, responsible for issuing cardholder debit or credit on the behalf of the card programs.
- The acquirer: Otherwise known as the acquiring bank, this is the financial institution responsible for maintaining the bank account of the merchant (merchant account). This bank passes the transactions to the bank that issued the information.
What a payment gateway does is capture and transfer payment data from the customer (cardholder) and migrate it to the acquirer. The result is that you can accept payment from your customers. Gateways validate the details of a customer’s card (securely), using tools like Visa and Mastercard processing. This technology can also encrypt card details, so information remains secure.
The payment gateway works as the crucial middle-man between the merchant and customer, ensuring the transaction is delivered promptly and securely. An online payment gateway simplifies how merchants integrate software. As the “middle man” in payment processing, the gateway manages the customer service details between the merchant and acquirer.
Why are Payment Gateways Important?
Now that you understand how payment gateways work, let’s consider why they’re so important. At first, payment gateways don’t seem “that” important. They’re basically just a middle man for the overall experience. However, payment gateways are more essential than you think.
Remember, online transactions are what’s known as a “card nor present” transaction. The cardholder can’t swipe a card to give you access to their bank account, so a different kind of credit card processing is necessary. With an online store, you need to rely on the card information that a customer gives you on the checkout page.
It’s hard to know for certain if the payment information given is actually the card of the person in question. When card-not-present transactions take place, there’s a much higher risk of fraud. With payment gateways, you have a solution. Fraudsters would have much easier access to your card data if you took the payment gateway out of the online experience. This would expose your business to more issues with chargebacks and fraud.
Fraudsters could also find additional ways to initiate transactions illegitimately, leaving you more exposed to reputation issues and fraud. Since a payment gateway is the gatekeeper for customer payment data, it relays information from you, to merchants, to the acquirer and issuing bank, using data encryption to minimize risk away from sensitive information.
Gateways are also helpful for protecting you from insufficient funds and accounts that can’t actually make payments.
Payment Gateway vs Payment Processor
A payment processor is a tool that executes a transaction by sending data between you, the issuing bank, and your customer’s acquiring bank. This technology provides the POS systems and credit card machines you use with the technology required to accept payments.
Alternatively, a payment gateway is the solution responsible for securely transmitting online payment data to the processor for the continuation of the transaction lifecycle. The gateway can also authorize payments for transactions where cards aren’t present. It’s similar to an online point of sale.
Payment processors facilitate transactions for merchant services, while payment gateways communicate the decline or approval of transactions between you and your clients, while keeping you PCI compliant.
The most common reason to use a gateway is that you need to accept services and goods in the digital world. However, gateway technology is expanding to offer a more comprehensive buying experience across all devices and channels. In addition to supporting eCommerce transactions, gateways can also be valuable for integrating payments with CRM or accounting software.
Not all merchant account providers use a payment gateway, and some will use a third-party gateway instead, which can be a little more complicated. Most companies prefer to use a payment gateway and merchant account aligned by the same provider.
Payment Gateway vs Merchant Account
There are a lot of terms for companies to understand when they start selling online, from PCI DSS guidelines, to SSL certificates, and transaction data. It’s easy to get confused by some of the terms. Payment gates and merchant accounts are similar tools, but they’re not the same.
Your merchant account is the account that’s responsible for enabling merchants to process payments. Your payment gateway deposits the funds from your transactions into that accounts. There’s usually a schedule set up for how often the payments in your merchant accounts are transmitted to your bank.
Merchant accounts are different to standard business bank accounts and cards with American Express. The main difference is that you don’t have control over your merchant account. This is simply an environment that holds onto your deposits for you. Unfortunately, it’s not possible to send money straight to your bank account, because merchandise can be returned.
There’s always a risk that something you sell to your customer will need to be returned, and this leads to a risk. Returns are taken from the money sitting in your merchant account. It’s also worth noting that your payment gateway may need to accumulate deposits from various sources. Rather than giving you a variety of different deposits, it collects that information in your merchant account and combines it into a single deposit for the bank account.
To take debit and credit card payments through your website, you’ll need both a payment gateway, and a merchant account. Some services bundle these elements together. For instance, all-in-one payment service providers like PayPal or Stripe will ensure that you don’t need a separate merchant account to start selling online.
Some companies prefer to use merchant accounts and gateways as separate products. This can sometimes be a little cheaper.
Examples of Payment Gateways
Around 96% of merchants shop online, so it’s pretty important to ensure you have a basic eCommerce solution set up for your store. Payment gateways are a valuable component of the shopping experience, but there’s no one-size-fits-all option for what you should use. Here are some of the most popular payment gateways available.
Square is a better-known solution for companies who want a credit card terminal that they can use in-person. Although you can use Square for your eCommerce site, it has more of a presence in the physical world. However, that’s part of what’ makes the Square solution so special. You can process payments in-person and online through your eCommerce website with the same provider.
Square promises a simple and clean solution for accepting payments, so you can ensure that your customers aren’t going to struggle with your checkout. There’s a comprehensive website builder available through Square too. That means if you’ve already got an offline solution, but you don’t have a way to sell online yet, Square can get you fully set up. The rates are very reasonable.
2.5% per transaction when you sell online through the payment gateway
- Excellent for both online and offline selling
- Protects your customers to the highest security standard
- Predictable flat-rate pricing structure
- Social media integrations to help you sell through more environments
- Dedicated hardware for selling offline
- Some issues with account stability
- Better functionality for offline selling
Stripe is one of the better-known products on the market today for companies that want to access payments through a consumer card number. Stripe provides fantastic functionality no matter what your business might sell, and it already supports some of the biggest companies around, including Lyft, Slack, and Pinterest.
Stripe features some of the best applications for easy eCommerce payments. You can enjoy a customizable environment that’s quick and easy to establish, plus you can even let customers purchase products straight from a tweet. Analytics are built-in to give you a better idea of what’s going on with your business growth, and you can even spread your payment gateway on an international basis too.
2.9% + $0.30 per domestic transaction
- Secure and customizable gateway that’s easy to set up
- Sigma service to easily view sales data and analytics fast
- Ecommerce support for international companies
- Unique payment options like Bitcoin, and tweet purchases
- Support to save information and offer one-click checkouts
- Occasional issues with cancelled or frozen accounts
- Limited in-person payment options
3. Amazon Pay
Amazon might not seem like a payment gateway provider at first glance, but there’s as lot more to this ecommerce marketplace giant than you might think. The great thing about Amazon Payments is how simple it is to use. You can remove the learning curve from the checkout process and draw from all the technical strength associated with an established platform.
Amazon Pay supports a simple, familiar, and reliable way to handle purchases for your business. Integration to your site is also driven through API technology, which means it’s a little easier to customize your Payment structure to suit your needs. It’s also worth noting that Amazon Payments delivers excellent responsiveness.
2.9% and $0.30 per domestic purchase.
- Good brand reputation
- Excellent simple processing
- Integrates easily with your website
- Fantastic technology
- Decent responsivity rate
- Takes a while to set up
- Can be a little expensive
Essentially the best-known payment gateway around, PayPal has taken the world by storm. PayPal has a fantastic status in the marketplace, so it’s great for earning customer trust. You’ll also have the extra benefit of knowing you’re using a payment gateway that’s proven to be successful. This gateway boasts up to 44% checkout conversions for businesses that use it, along with amazing live support, fraud protection, and cart integrations.
PayPal scales to suit the needs of your business. Whether you’re in a high-traffic environment, or a growing business, there are multiple versions of payment solutions to choose from. In minutes, you can easily add a PayPal button on your website and focus on making sales.
2.9% + $0.30 per domestic transaction
- Excellent brand awareness
- Very easy to use
- Fantastic fraud protection
- Good conversion rates
- Easy integrations
- Some issues with getting payments
- High fees
Created to support small and mid-sized businesses alike, Authorize.net is all about quick and easy payment processing. This gateway will help you grow your business at the speed that suits you. Aside Aside from an extensive list of options for payment, including mobile payments and checks, you can also unlock additional payment methods too, like subscription billing.
For a great pricing structure, Authorize.Net offers you a fantastic virtual terminal where you can give your customers a secure and positive shopping experience. PCI compliance is included, and you can customize checkout pages to highlight your brand when accepting credit card information. Authorize.Net even has an advanced system for fraud management.
2.9% + $0.30 per transaction
- Wide range of payment options to choose from
- Set up recurring and subscription payments
- Secure and easy to use for customers and brands
- Advanced fraud detection suite
- Wide range of support resources for beginners
- Competitive pricing
- No free trial
- Slow access to funds with credit cards
6. Google Pay
Google Pay might be one of the best-known payment gateway solutions for companies today, particularly in the age of COVID and digital selling. If you’re looking for an easy way to take transactions, or you’re building money for your nonprofit through donations, Google is a great choice. Hundreds of millions of people use this product every day already.
The Google Pay experience is available through an API which you can add to your website or any other online service where you want to take payments online. Customers can easily pay with any debit or credit card they have stored on their account, which makes it faster to process payments in real-time. There’s also the option to quickly integrate with your existing Chrome or Android apps.
2.9% fee for credit cards
- One of the cheapest options available for online payments
- Integrates with Android apps and Chrome
- Simple and convenient checkout for customers
- Extremely secure interface for protection purposes
- No initial setup fees necessary
- Might not be ideal for a small business with Apple users
- Some issues with functionality
7. Apple Pay
If we’re going to mention Google Pay in this review, then we’re going to have to look at Apple Pay too. This simple and convenient system is just like Google Pay, in its ability to allow customers to easily move through a checkout procedure with as little stress as possible. Your customers can add their credit and debit cards to the Apple accounts on their phone to start paying immediately.
Fees and transfer times are great with Apple Pay cash, as you can transfer up to $10,000 with absolutely no problem. You can also transfer money from your account to your bank within around 3 days. If you’ve got a lot of Apple customers, this is an obvious choice for you.
3% fee when using a credit card
- Excellent for customers already using Apple devices
- Integrates with your Apple apps
- Fantastic quick transaction process
- Easy to use for both brands and their customers
- Convenient for mobile shopping
- Only compatible with iOS apps
What to Consider When Choosing a Payment Gateway
The right payment gateway solution is a must-have for any business owner. It ensures that you can delight your customers and manage transactions on a regular basis. However, finding the right payment gateway isn’t always easy. Here are some points to consider when making your choice:
- Security: This might seem obvious, but customers aren’t going to deliver their personal details to you if you’re not following their requirements when it comes to the right data security standard. Look for a gateway that’s as secure and private as possible. Remember, too, displaying security signage causes around 80% of consumers to feel safer on your site.
- Compatibility: Your payment gateway needs to work well with the current platform you’re using for your website, and any hardware that you plan on accessing offline, if you’re running a store or a pop-up shop. If you’re concerned that there might be issues with the functionality you need, then you’ll need to reach out to a developer who can help.
- Budget: Cutting corners to reduce the cost of something crucial, like a payment gateway, is rarely a good idea. However, you should still be aware of the kind of fees you’re going to be paying. Like with any service, there are costs associated with transaction fees, and chargeback, merchant account fees, and so on. Some payment gateways will charge you extra for additional payment methods.
- Payments: Your payment gateway should support all the payment methods that your customer uses. The easier you make it for your customer to purchase things using their preferred method, the more likely they are to keep buying with you. You should be able to see what kind of countries your customers are coming from with your site analytics. From there, you can make informed decisions about the payment options you need.
- Functionality: Sometimes, your payment gateway will complete a transaction within the same pages of your website that the customer was already on. Other payment gateways send your client to a new page, which can be a little bit worrying for the customer. It’s difficult to know which option your customer will prefer, so keep an eye out.
Finding Your Ideal Payment Gateway
Choosing the right payment gateway for your business can be a worrying concept at first, but it’s a necessity if you want to accept transactions. The good news for growing brands is that there are a lot of great products out there if you know where to look.
Start by assessing the needs of your customers, and the kind of transactions you want to facilitate both online and offline. A payment gateway that offers the option to access additional country support and bonus features might be ideal of you’re planning for growth.