A payment gateway is the technology that authorizes and processes credit card payments for online stores. It's the bridge between your customer’s bank and your ecommerce website, making sure transactions go through securely and smoothly.
If you're running an online store, you need a payment gateway to accept payments. Without one, you can’t take credit cards or digital wallets, which means you’re essentially out of business. It doesn’t matter how good your products are—if people can’t pay easily, they won’t buy.
This article breaks down how payment gateways work, what options you have, how much they cost, and how to choose the right one for your ecommerce business.
Key Takeaways
- Payment gateways are interfaces used to collect consumer payment information.
- In physical stores, payment gateways include point-of-sale (POS) terminals that accept card payments or mobile wallets.
- In online stores, payment gateways are the “checkout” portals where customers enter credit card details or digital wallet credentials.
- Payment gateways are different from payment processors, which actually handle the money transfer on behalf of the merchant.
- Some payment gateways also support cryptocurrencies, allowing payments in Bitcoin and other digital assets.
Why Your Ecommerce Store Needs a Payment Gateway
A payment gateway is essential if you want to take any kind of online payment. It’s the engine that powers the checkout process. Without it, you're stuck with manual invoicing or cash on delivery, which kills conversions and doesn’t scale.
Key reasons to use a payment gateway:
- Security: It encrypts sensitive card data, so your customer’s information stays safe.
- Speed: Most gateways process transactions in seconds, so there’s no delay in confirming payment.
- Scalability: As you grow, a good gateway can handle thousands of transactions a day.
- Trust: A seamless and secure checkout builds trust with buyers and reduces cart abandonment.
Risks of not having one:
- Data breaches from unencrypted transactions
- Higher chance of fraud
- Lost revenue from failed payments
- Damage to brand trust due to poor checkout experience
When a customer checks out, the payment gateway handles the heavy lifting—verifying funds, checking for fraud, encrypting data, and notifying both parties of the result. It makes ecommerce possible.
How Payment Gateways Work (Step-by-Step)
Let’s break down what happens the moment a customer hits “Buy Now” on your store. While this all happens in just a few seconds, there’s a lot going on in the background.
Payment gateway process:
- Customer enters card info at checkout.
- Gateway encrypts the data and sends it to the payment processor.
- Processor routes it to the customer’s issuing bank (the bank that issued their card).
- Bank checks funds, verifies the transaction, and either approves or declines.
- Approval or denial is sent back through the processor to the gateway.
- Store receives confirmation and finalizes the order.
- Funds are settled in the merchant account within 1–3 business days.
Here's a quick table to summarize the roles:
| Step | Who’s Involved | What Happens |
|---|---|---|
| 1 | Customer | Enters payment details |
| 2 | Payment Gateway | Encrypts and transmits data |
| 3 | Processor | Sends to issuing bank |
| 4 | Issuing Bank | Approves or declines |
| 5 | Gateway | Notifies store of result |
| 6 | Store | Confirms order |
| 7 | Acquirer | Deposits funds to merchant |
This all happens in real-time. Without a payment gateway, this chain breaks—and the sale doesn’t happen.
Payment Gateway vs Payment Processor vs Merchant Account
These three terms often get confused, but each one has a distinct role.
Definitions:
- Payment Gateway: The software that sends transaction data securely to the payment processor.
- Payment Processor: The service that communicates with the customer’s bank and approves or declines the transaction.
- Merchant Account: A type of bank account that temporarily holds the money from credit card sales before it’s transferred to your business bank account.
Some services (like Stripe or PayPal) combine all three functions into one platform, which is ideal for small and mid-sized businesses.
Here's a breakdown:
| Feature | Payment Gateway | Payment Processor | Merchant Account |
|---|---|---|---|
| Role | Transmits transaction data | Processes the transaction | Holds the funds temporarily |
| Example | Authorize.Net, Stripe | Fiserv, TSYS | Provided by acquirers |
| Needed For | Online checkout | Authorizing payments | Receiving funds |
Understanding the difference helps when comparing platforms and negotiating fees.
Types of Payment Gateways
Not all gateways work the same way. Payment gateways come in a few main types, and each has its own pros and cons depending on your setup and goals.
1. Hosted Payment Gateways
These redirect customers to the provider’s website (e.g. PayPal) to complete the transaction.
Pros:
- Easy to set up
- No security compliance burden
- Trusted platforms boost buyer confidence
Cons:
- Less control over branding and user experience
- Can feel disruptive to customers
2. Integrated Payment Gateways
These are built directly into your site using APIs. Stripe and Square are common examples.
Pros:
- Seamless customer experience
- Full control over checkout design
- Better analytics and tracking
Cons:
- Requires developer setup
- PCI compliance is your responsibility
3. Self-Hosted Gateways
These collect data on your server and send it to the processor.
Pros:
- Complete control
- Full white-label experience
Cons:
- High-security risks
- Complex compliance with PCI-DSS
- Rarely used by small businesses
Choose the type based on your technical skill level, budget, and how much control you want.
Popular Payment Gateway Providers
Here’s a look at the most widely used gateways in ecommerce today. Each has its strengths and potential limitations.
| Gateway | Best For | Fees | Countries Supported | Setup Time |
|---|---|---|---|---|
| Stripe | Developers & startups | 2.9% + $0.30 per txn | 40+ | Quick |
| PayPal | Fast setup, global users | 3.49% + $0.49 per txn | 200+ | Instant |
| Square | Omnichannel sellers | 2.9% + $0.30 per txn | US, Canada, UK | Quick |
| Authorize.Net | Enterprise users | $25/mo + 2.9% + $0.30 | US, Canada | Medium |
| Shopify Payments | Shopify users | 2.9% + $0.30 | 20+ | Instant |
| Braintree | Subscription businesses | 2.9% + $0.30 | 40+ | Medium |
| Klarna | Buy now, pay later | Varies | 20+ | Quick |
Each of these platforms offers different integrations, reporting tools, and fraud protection features.
Payment Gateway Costs: What to Expect
Fees are one of the biggest factors when choosing a gateway. Most platforms follow a simple pricing model, but there are often hidden costs to watch out for.
Typical fee structure:
- Transaction fees: 2.9% + $0.30 per successful charge (standard for Stripe, PayPal, etc.)
- Monthly fees: Some charge $20–$30/month (Authorize.Net)
- Chargeback fees: $15–$25 per dispute
- Refund fees: Some keep the processing fee even if you refund the customer
- Currency conversion fees: 1%–2% if you sell internationally
Example comparison:
| Provider | Transaction Fee | Monthly Fee | Chargeback Fee | Refund Fee Policy |
|---|---|---|---|---|
| Stripe | 2.9% + $0.30 | $0 | $15 | Non-refundable |
| PayPal | 3.49% + $0.49 | $0 | $20 | Non-refundable |
| Authorize.Net | 2.9% + $0.30 | $25 | $25 | Non-refundable |
| Square | 2.9% + $0.30 | $0 | $0–$20 | Non-refundable |
Always read the fine print. The right gateway depends on your transaction volume and refund rate.
How to Choose the Right Payment Gateway
Choosing a payment gateway shouldn’t be rushed. The wrong choice can cost you money, hurt your conversion rate, and frustrate your customers.
What to look for:
- Easy integration with your platform (Shopify, WooCommerce, Magento, etc.)
- Transparent pricing with no long-term contracts
- Strong security including PCI compliance and fraud protection
- Global support if you're selling internationally
- Good reporting tools for payouts, fees, and performance
Ask yourself:
- What platforms does it support?
- Can it scale with your business?
- Are there any limits on volume or types of products sold?
- What’s customer support like?
If you’re just getting started, use an all-in-one provider like Stripe or PayPal. As you grow, you might move to something with lower fees or more control.
Can You Switch Payment Gateways Later?
Yes, but there’s a process. Most ecommerce platforms let you swap gateways, but it may involve downtime or adjustments to your checkout process.
What to consider before switching:
- Will your customers need to re-enter payment info?
- Will subscriptions or recurring payments be affected?
- Will it impact your analytics, reporting, or order history?
- Are there cancellation fees with your current provider?
If you’re scaling quickly and outgrowing your current solution, it might be worth the hassle. But always back up your data and test the new system first.
FAQs About Payment Gateways
Is PayPal a payment gateway?
Yes. PayPal is both a payment gateway and a processor. It also functions as a digital wallet.
Do I need a merchant account?
If you use an all-in-one service like Stripe or PayPal, they provide the merchant account for you. Otherwise, yes—you’ll need one.
Can I use more than one payment gateway?
Yes, many stores offer multiple gateways to give customers choices (like PayPal + Stripe).
What’s PCI compliance?
It’s the security standard required for storing or processing credit card data. If you use a hosted or integrated gateway, they usually handle this for you.
Final Thoughts: Start Simple, Then Scale
Getting paid online doesn’t need to be complicated. Choose a gateway that works with your platform, charges fair fees, and keeps your customers’ data safe.
Start with Stripe, PayPal, or Square if you’re new to ecommerce. Once you grow, you can compare more advanced options to reduce costs or get more features.
A payment gateway is the backbone of your ecommerce store’s payment system. Without it, you can’t sell anything online.
