What is a payment gateway and how does it work?

According to recent data, 4 in 5 people in the US used online payment systems. The value of online payment gateways will likely increase by over 15% between 2020 and 2025. A payment gateway can streamline and speed up payments to benefit customers and businesses in a society that is becoming increasingly cashless and where most payment services are done online or with credit cards.

It is crucial to comprehend how payment gateways operate, what to search for, and what possibilities are available before choosing one.

What Is A Payment Gateway?

It is a merchant service offered by e-commerce application providers that allow direct payment or credit card payment processing for bricks and clicks, online shops, and traditional physical stores. The word covers online shopping cart payments and card-reading hardware in retail establishments. However, payment gateways in physical stores have recently started accepting phone-based purchases using Near Field Communication (NFC) technology or QR codes.

How Does A Payment Gateway Work?

Before transmitting the card details to the acquirer, the payment gateway encrypts it and does fraud checks. The card schemes securely receive the data from the acquirer and do further fraud protection before transmitting it to the issuer for payment authorization.

What Is A Payment Service Provider?

Payment service providers, also known as PSPs, offer several services to businesses to assist in payment. They frequently give a firm a payment gateway and a merchant account, helping the business manage and collect payments. Payments are made to the PSP, who then forwards them to you.

What Is A Merchant Account?

Businesses can take payments in various ways, generally using debit or credit cards, through a merchant account, a sort of business bank account. An acceptor and a merchant acquiring bank enter into a merchant account arrangement to settle payment card transactions.

Common Types of Payment Gateways

Payment gateways often come in three varieties:

👉 Redirects

Redirects or hosted payment gateways typically require clients to visit another website for processing payments. PayPal is among one of the most famous merchant acquiring banks. However, SiteGround, Bluehost, and A2 Hosting are among the less well-known options.

Numerous small businesses use it because it’s simple to set up and is accepted everywhere. Because of its enormous popularity, PayPal is also an alternative for large organizations. PayPal makes sense for some businesses because it allows customers and merchants to set up regular payments.

👉 On-Site Payments

Large-scale enterprises frequently use on-site payment options processed on their servers, where the checkout procedure and payment processing are handled entirely through your system. The benefits have now reversed; you will have more authority and responsibility.

Every factor matters if you process payments on-site, and every enhancement to the customer experience can significantly impact your bottom line. This is especially true for retailers with high sales volumes.

👉 Off-Site Payments

With this approach, the front-end checkout will occur on your website, but the back-end payment processing will appear at the gateway.

This approach can streamline payment procedures while enhancing back-end security, similar to redirected payment gateways.

The drawback is that you will not have fully managed the user’s experience via the payment gateways. Ensure you are comfortable with the payment gateway’s security before choosing this action.

Security Standards and Payment Gateways

Payment gateways’ top priorities include compliance, security, and private payment card data handling. By 2023, the predictions stated that there would be $48 billion worth of fraudulent online payment gateways, making payment security offered by payment gateways even more crucial.

To assist you in selecting the best payment gateway for your eCommerce shop, we’ve listed a few security precautions each uses.

✅ PCI Compliance

The Payment Card Industry Data Security Standards (PCI DSS) are a collection of global security guidelines implemented by card schemes. PCI DSS protects credit card and debit card transactions and prevents the exploitation of cardholders’ private information. Companies must be PCI compliant to avoid fraud while accepting, storing, processing, and transmitting sensitive card information.

🔒 Encryption

Gateways encrypt data using SSL before transmitting it over the credit card network to safeguard the purchaser’s sensitive account information. Hence, fraudsters can’t obtain the buyer’s credit card information as it is passed through the various participants in the payment chain.

How to Choose A Secure Payment Gateway?

The following are the crucial elements you should consider:

1. What Is Your Budget for A Payment Gateway?

There are costs connected with third-party solutions like payment gateways, just like other services. Transaction fees are a cost of doing business. Be aware of them and do your homework before integrating your payment gateway into your website to avoid getting hit with a surprise bill.

2. When Should You Start Accepting Payments?

It typically takes 3 to 4 weeks to set up a payment gateway and merchant account. But, some companies that offer payment gateways, like PayPal, allow you to sign up and get going immediately without a merchant account.

While most payment gateways help create a merchant account, getting one remains time-consuming and challenging, especially for small or newly established businesses.

3. What Is the Expected Timeframe for Receiving Your Sales Funds?

It usually takes several days for a payment to be cleared, even though you immediately know if it has been accepted. Payment schedules differ significantly from supplier to supplier.

4. What Is the Security Level of The Payment Gateway?

Security is a significant consideration when accepting money. You should only work with service providers that are level 1 PCI DSS compliant and have built-in security features.

5. Does The Payment Gateway support International Payments?

Check to see if the payment gateway supports multi-currency international payments and an interface with many languages if you must accept international payments in the future.

Moreover, find out if you require a merchant account in a specific nation or if additional costs are associated with receiving payments in several currencies or from other countries.

6. Is the Payment Gateway Compatible with All Types of Cards?

The degree of technical and aesthetic compatibility between your gateway and the existing platform is crucial. You must reconsider your choice if it necessitates a lot of ugly tactics to integrate it into your current structure.

7. The Payment Gateway Offers What Level of Support?

It’s important to take customer experience carefully from the start because it’s one of those underappreciated factors that can significantly harm your organization.

A payment gateway should provide it when and how you may get it to acquire the required support. Contacting them is a smart place to start to find out how the first encounter goes. You can also look online for reviews from previous customers.

8. Is the Payment Gateway Able to Handle Automatic Recurring Payments?

If you wish to accept recurring payments, you might want to seek a system that will save the credit card information of your customers and allow you to charge them regularly automatically. Although many gateways now offer this capability virtually, they also need that your company has an online merchant account.

9. What Type of Payments Does the Payment Gateway Accept? Hosted or Non-Hosted?

Hosted Payment Gateways

Small-to-medium-sized companies needing a simple, affordable option to accept credit card payments online securely may find that hosted solutions more appropriate. It also entails directing potential customers to another website at a crucial stage of the payment process. Customers may not finish their payment if this additional step lengthens or slows down your payment procedure or if your payment page drastically differs from your website.

Non-Hosted Payment Gateway

Your consumers won’t need to leave your website to enter their information using a non-hosted payment gateway. You usually need an SSL certificate and to adhere to specific legal and technical PCI criteria to accept payments on your website.

The card information never contacts your server because you can transfer it directly from your customer’s browser to some payment service providers. This greatly simplifies the payment procedure for your consumers without adding any new demands to your workload.

10.  Does the Payment Gateway Work with The Existing/Planned Integrations?

Consider how the payment gateway will work with your shopping cart, existing invoicing, and accounting systems. Preferably, the payment gateway you select will be compatible with the applications you already use.

If not, you must still search for a company offering integrations with software developers because it is more convenient, saves you time, and indicates that the supplier has an API that’s also simple to integrate against, which will reduce future development time.

Why Do You Need Payment Gateways?

The following are the primary reasons why businesses need payment gateways:

Give More Options to Consider

Contrary to popular belief, surviving without a credit card is simpler. Even though over 80% of American adults own a credit card, significant marketplaces of consumers do not require them. Online shoppers can access alternate payment methods like PayPal, Venmo, and Apple Pay.

Your responsibility as an online merchant is to provide these options so clients may shop safely in whichever way they choose.

Ease the Life for Your Customer

Let consumers choose their options. When using payment gateways that accept both MasterCard and Visa can satisfy many of your needs, what about clients who use different credit cards, such as American Express, or who need to make payments from other accounts?

Consumers will find it more convenient and less hassle when paying with a credit card if they have more options.

Examples of Payment Gateways

Following are some examples of payment gateways:

Square

Square is a payment gateway provider and a credit card processor. In Q4 of 2021, the company reported a gross payment volume of $46 billion, demonstrating considerable growth.

Although they may charge more for manual transactions, Square’s services are primarily for small companies that need a way to handle credit cards for in-person transactions.

Paypal

Another robust payment platform for online merchants is called Paypal. You can accept credit cards like Amex and Visa through PayPal, which offers payment processing services to online retailers, auction websites, and other businesses worldwide. Additionally, it provides a simple cart connection, many customization possibilities, online invoicing, subscription billing, and the ability to accept payments via credit card over the phone.

Apple Pay

Apple’s payment gateway program helps retailers process Touch ID and Face ID payments. It places a lot of emphasis on customers who wish to keep an electronic wallet to manage their payments.

Numerous alternative payment gateways enable merchants to accept Apple Pay payments, similar to PayPal. Thanks to these services, retailers may now take payments from the approximately 1 billion iPhone customers who utilize Apple Pay globally.

Amazon Pay

With 200 million Amazon Prime subscribers globally, many businesses have succeeded with Amazon payments. This makes it a popular choice for payment gateways.

Amazon Pay is configurable with various plugins readily available, including several for use with BigCommerce.

Worldpay

Worldpay is a complete service with a global (but UK-based) presence that provides omnichannel payment options for companies of all sizes. Also, you can pay monthly or on an as-needed basis.

Adyen

Businesses like Uber, Microsoft, Spotify, and eBay use Adyen to manage client and corporate transactions. The program allows you to control risk, track outcomes, and accept all payments made to your business from a single platform.

Adyen lets you examine transaction information to gain “data-rich insights to learn client behavior,” in addition to accepting more than 250 payment methods and 150 different currencies.

Opayo(Formerly Sage Pay)

Opayo provides more than just a merchant gateway; it also gives you the option of directly entering all sales and transactions into your Sage accounting software. Because you can view your expenses and income in real-time, it is beneficial for efficiency-related reasons. Although Opayo offers a variety of plans, it is best to have a merchant account to benefit from the program, not the least of which is to lower transaction fees in the first place.

Cardstream

Cardstream does not bind you to a long-term contract like Opayo. Cardstream appears to excel in customer service, whereas larger payment gateway companies like Worldpay struggle.

Its white-label solution and lack of affiliation with an acquiring bank mean that setting it up requires more effort. Those seeking ease may therefore want to go with a complete solution.

Authorize.Net

The primary goal of these solutions is to make payments easier to process, which Authorize.net (from Visa) accomplishes. The platform enables you to sell things and accept payments online or in person at a store. It was created with all kinds of companies and offered a variety of programs.

With the assistance of the solution, you may instantly move money into a merchant bank account and accept payments from websites. It accepts American Express, MasterCard, Visa, Diner’s Club, Discover, JCB, and other well-known credit cards. Additionally, the platform works with online payment gateways, including PayPal, Apple Pay, and Visa Checkout.

How Can Wallester Help You?

With Wallester, you can quickly implement and roll out cutting-edge payment options. By intelligently and conveniently managing all procedures, our individualized financial solutions will assist you in starting and growing any firm. We offer variable monthly fee pricing, regulatory compliance, and total support for the infrastructure of your solution, in addition to accelerating the time it takes for your financial product to reach the market.

The Final Thoughts

The digital economy relies heavily on payment channels. These technologies lower some obstacles to online businesses by enabling clients to securely and safely communicate their credit card information. Initially just simple card readers, payment gateways have evolved into sophisticated systems that gather and confirm signatures, PINs, and other data for merchant transactions.

FAQs

Why Is A Payment Gateway Beneficial for Your Business?

All online stores must invest in payment gateways since they are the only means to accept payments. They can process payments more quickly and interact with shopping carts. They are also beneficial for managing and preventing fraud.

What Is the Difference Between A Payment Gateway and A Payment Processor?

A payment processor examines and sends transaction data to an issuing bank, such as credit or debit card information connected to a bank account instantly. A payment gateway completes the above mentioned tasks and permits money exchange between the customer and vendor.

Is It Possible to Build Your Own Gateway?

A payment gateway could be created from scratch, but it wouldn’t be cost-effective. According to Softjourn, creating a primary gateway to handle credit and debit card payments might cost one-third of a million dollars, not to mention the added hassles of dealing with foreign exchange rates and regulatory compliance.