Payment Gateway: definition & how they work

A payment gateway is an essential service for accepting online payments in today’s increasingly cashless society. Serving as a bridge between customers, merchants, and payment processors, gateways enable secure electronic financial transactions using plastic credit cards and other payment methods. This allows businesses to safely and conveniently facilitate online purchases.

Understanding what payment gateways do and how they work is key for any e-commerce business, service provider, or sharing economy platform looking to integrate digital commerce capabilities.

Online payments: key definitions

Before diving into specifics on gateways, it helps to level-set on terminology for the various pieces of the online payments ecosystem:

Payment gateway: The service that facilitates the transfer of payment transaction data between the customer, merchant, and payment processor via a secure online connection. Enables safe acceptance of electronic payments.

Payment processor: The entity that transmits and confirms transactions between the cardholder and the card issuer. Checks for sufficient funds availability and approves or declines each purchase.

Merchant account: A type of business bank account that allows merchants to accept card payments. Required to process transactions via a payment gateway. A merchant account forms an important link in the chain of digital commerce.

Merchant’s bank: The bank that maintains the merchant’s account for accepting and processing funds from credit/debit purchases. Merchant bank accounts enable a business owner to accept payments and have funds deposited into business account.

Issuing bank: The cardholder’s bank that provides the line of credit or holds the funds behind debit card purchases. Approves or denies specific payment transactions at the time of purchase per the customer’s account status.

Understanding Payment Gateway

Before we explore the intricacies of how a payment gateway functions, it’s beneficial to clarify the payment platform definition. It is a comprehensive system that not only processes credit card transactions but also encompasses the entire digital payments ecosystem, including payment gateways, processors, merchant accounts, and the associated security protocols. 

A payment gateway provides the underlying payment processing connectivity and enables online payments capabilities that facilitate transactions between customers and online merchants. It acts as an intermediary that allows online businesses to accept payments from digital channels by providing a portal for customers to securely enter debit card details to pay instantly and facilitates the transaction data transfer between buyers, e-commerce businesses, and financial entities. 

The gateway transfers the transaction details to the payment processor, which forwards the data to the relevant issuing and merchant-acquiring banks to complete or decline the payment. This enables funds to safely move from shopper to business.

Ultimately, the gateway facilitates payment acceptance while protecting merchant account and customer data integrity via security protocols and encrypted connection for the customer’s browser. This allows businesses to securely accept electronic payments from a diversity of sources – including credit cards, debit cards, PayPal, Apple Pay, etc. – without seeing or storing sensitive cardholder account details themselves.

How do Payment Gateways Work?

This customer journey from adding items to carts at the online stores to entering payment details provides a streamlined experience strategically enabled by the gateway connectivity behind the scenes. The step-by-step payment gateway transaction process typically functions as follows:

1. The customer initiates the purchase transaction on the merchant’s website, choosing a preferred payment method whether that’s a Visa credit card, Mastercard debit card, PayPal account, or other digital wallet services.
2. The customer enters payment details like credit card number, expiration date, CVV code, and billing address info into the secure gateway-hosted checkout page, which encrypts data transmission via SSL.
3. The gateway securely sends the encrypted payment authorization request to the payment processor applying tokenization to swap sensitive payment data with unique identifiers.
4. The processor verifies available funds by checking with the issuing bank to ensure sufficient balance and valid status tied to the customer’s account.
5. Once transaction approval is obtained from the issuing bank, the processor facilitates the actual transfer of funds into the merchant-acquiring bank account. This settlement process gets logged by the applicable financial institutions.
6. Finally, the gateway confirms the completed transaction back to the merchant’s website, which displays a payment successful confirmation page to the customer. Receipts are generated containing reference codes for traceability.

This all happens instantly to provide a seamless customer experience. The gateway handles re-routing the transaction details to the applicable financial entities for verification while keeping critical cardholder data safe via sophisticated security and compliance protections.

Payment Gateways Types

There are multiple gateway options with three core types of payment gateways differing by integration method that impact payment processing: hosted, self-hosted, and API-based: hosted, self-hosted, and API-based.

Hosted payment gateway

• Hosted by the payment gateway service providers themselves.
• The merchant sends the customer to a third-party site to enter payment details.
• Seamless but the merchant has less control than in the external domain.

Self-hosted payment gateway

• Gateway code installed directly on merchant’s systems.
• Keeps customers on the merchant’s site through the entire payment process.
• Offers more customization control but requires more tech capabilities.

API-hosted payment gateway

• Gateway sends Application Programming Interface calls to the merchant’s site behind the scenes.
• No redirect off the merchant domain so appears hosted but isn’t.
• Provides flexibility to embed seamlessly while customizing checkout.

Why are payment gateways important for business?

Payment gateways provide digital infrastructure enabling commerce critical for any online business looking to easily accept payments across channels by using electronic transaction capabilities. They enable key e-commerce platform functionalities like allowing business owners to receive payments, enhancing user experience, and expanding customer reach. Key benefits include:

Faster payments

• Receive card-based funds directly deposited into bank accounts within 1-2 business days.
• Avoids delays of 5+ days common with paper check payments.
• Enables access to funds to fulfill orders sooner.

Convenient processes

• Self-service 24/7/365 purchases without staff processing each transaction.
• Customers check out on their own time rather than having to interface directly with sales teams.
• Merchants can focus on high-value business priorities rather than manual order admin.

Improve your security

• Leverage gateway-provided firewalls, intruder detection, and virus scanning.
• Maintain PCI compliance offloading data risk.
• Reduce the chance of POS skimming & cash register theft with less on-location cash.

Enhance user experience

• Embedded, mobile-optimized checkout keeps customers engaged on site through purchase completion with progress trackers showing order status.
• Accept common digital wallets like Apple Pay and PayPal customers already have configured rather than forcing enrollment in other payment services.
• Persistent carts let customers re-access in-progress orders logged against their profile across devices.

Expand your customer base

• Appeal to wider, global demographics demanding electronic payment options instead of only accepting limited payment types like cash or check.
• Facilitates impulse buys and higher average order values.
• Let tourists, international shoppers, and cross-border purchasers buy from merchants accepting diverse payment credentials.

Payment gateways provide the digital infrastructure that is indispensable for enabling merchants to implement key strategic advantages like omnichannel commerce and expanded customer reach.

Payment gateway’s security features

Payment processing plays a key role in ensuring safe transaction flow and secure storage of sensitive cardholder information, including card details, throughout the payment process. Payment gateways leverage security capabilities like:

3D Secure authentication

• Multi-factor authentication applies additional challenges to verify high-risk transactions like requesting pin codes sent to cardholders’ phones that must be entered to approve orders.
• Helps deter fraud for larger purchases while minimizing interference with smaller routine transactions.

Tokenization

• Securely swaps permanent card details with temporary tokenized stand-ins to avoid exposing primary account numbers in merchant systems. Tokens serve as proxies for facilitating payments.
• Tokens are mapped to real payment accounts on the gateway side and then shared with external entities like merchants for transacting without providing visibility to underlying financial data.

PCI DSS compliance

• Adherence to comprehensive Payment Card Industry Data Security Standards helps safely store, process, and transfer sensitive cardholder information and transaction data records. PCI compliance is among the vital data security protocols and standards gateways must adhere to.
• Includes managing systems access with role-based permissions, password policies, mandatory staff security training, VPN-protected networks, and intrusion detection capabilities.

How much does a payment gateway cost?

Typical pricing involves:

• Setup fees ranging $100-$500
• Monthly service fees of $25-$200 depending on features and transaction tiers
• Per-transaction processing fees charging 2-4% of transaction value
• Fixed per transaction costs of 10-30 cents assessed in addition to percentage processing rates
• Early termination fees if canceling service before an agreed-upon contract period
• Interchange fees set by the credit card companies and card networks

When evaluating cost, weigh projected sales volumes, average order values, seasonality spikes, and risk tolerance. Review of integrations with other software tools like accounting, inventory, and CRM systems carry added costs per connection.

How to choose a secure Payment Gateway?

There are over 300 many payment gateway providers worldwide from small niche companies to large global enterprises. Top factors when selecting an appropriate payment gateway include:

• Long-standing, stable company: 5+ years in the market with a proven track record of safely handling large payment volume with strong merchant satisfaction ratings based on third-party verified reviews.
• Omnichannel payment options: Facilitates in-person physical terminals, custom online payment forms, QR code payments, recurring billing, and mobile wallet acceptance.
• Bank partnership protections: Clear terms in the provider’s merchant account around uptime, security guarantees, and liability coverage for any unverified transactions or problematic chargebacks.
• The breadth of platform integrations: Seamless connectors to diverse business systems like order management, tax processors, accounting platforms, email marketing tools, CRM databases, business intelligence, and ERP frameworks.
• Global & alternative payments: Accepts 150+ international and alternative emerging payment types from Alipay to Visa to PayPal to cryptocurrency that international customers may try to utilize.
• Developer docs & support available: Clear API documentation, sandbox testing accounts, code libraries in various languages, and 24/7 technical support teams available for any custom integrations needed.
• Rigorously vetted security & compliance: Adheres to rigorous PCI DSS certification using tokenization, multi-factor authentication, activity logging, automated encryption, vulnerability testing, and third-party audits validating that truly robust protocols are followed consistently.
• Proven scalability history: Demonstrated experience with zero platform degradation supporting Black Friday-sized traffic surges for merchants scaling up to process over $50M+ annually even during volatile peaks.
• Multi-currency payouts: Allows even smaller businesses with international customer bases to present prices in 100+ local currencies while getting paid out in their preferred currency denomination quickly with rolling settlements.

When evaluating the capabilities of potential providers, also confirm the payment gateway’s URL where customers enter the payment page using proper encryption. Most payment gateways should offer a simple SSL scan to validate payment page security. Besides, weigh each against these core criteria vital for seamless, secure payment acceptance. Choose an enterprise-grade partner up to the task.

Payment Gateway vs. Payment Processor: what’s the difference

Though often used interchangeably, online payment gateways and payment processors serve very distinct roles:

• Payment Gateways act as the middleman to safely route encrypted payment transaction details between the customer, merchant, and payment processor via secure APIs and bank interfaces. They enable merchants to accept online payments without ever directly handling raw credit card data, storing cardholder information, or touching sensitive financial account numbers that could jeopardize compliance certifications if exposed.
• Payment Processors on the other hand handle the actual transmission of a cardholder’s transaction authorization request to the issuing bank that manages that customer’s financial account. Processors verify whether sufficient funds are available to cover a transaction, facilitate the movement of money between appropriate accounts via settlement, and approve or decline purchases. This requires managing official financial relationships and risk exposure.

Some providers like Stripe and PayPal blend both payment gateway provider and processor functionality into their payment services. Yet in practice, the technology layers remain distinct:

• Payment gateways securely collect payment information, encrypt it, and route those transaction details to processors using tokenization without storing confidential data. This protects merchants from the burden and liability of direct card data handling. The gateway manages the communication layer.
• Processors in turn sanitize payment packets, submit key details to proper issuing banks and card networks to adjudicate transactions, handle irrevocable settlement transfers of cash in and out of accounts, and absorb fraud dispute risk liabilities for purchases gone awry according to card network regulations and local governance laws.

So in practice, payment gateways route information while payment processors move money by working directly with the financial institutions and systemic banking infrastructure involved in electronic payments. Gateways sit in front as protective middlemen avoiding exposing merchants to the most sensitive cardholder account data that only processors trained and authorized to directly handle financial transactions can access.

Examples of Payment Gateways

Merchants wanting a white-label payment gateway solution can potentially utilize an existing provider’s infrastructure as a starting point for customization. Well-known online payment gateway providers include:

PayPal

• Most globally used online wallet & alternative payment provider.
• Offers the ability to directly pay with PayPal balance or link cards to fund card payments.
• Strong fraud analysis and buyer protections give recourse in problematic transactions.
• Most customized offerings focused on large enterprise partners vs small merchants.

Stripe

• Broad tools for handling intricate billing models – subscriptions, invoicing, marketplaces, and more.
• Code-friendly with extensive APIs and support for developers building complex payment flows embedded into custom payment platforms.
• Components can be used independently or collectively for modular flexibility.

Square

• Strength with unified in-person point of sale (POS) and e-commerce inventory/order/customer management.
• Payment gateway hardware and software solutions provide end-to-end capabilities physical retail stores need alongside selling online.
• Better suited for multi-location retailers vs pure-play online sellers.

Amazon Pay

• Simple integration allows millions of Amazon customer accounts to easily pay on independent merchant sites. Customers skip checkout with saved buyer and payment data.
• Merchants must have existing Amazon seller accounts to get paid out. Not accessible for non-Amazon sellers.
• Can drive increased conversion by leveraging Amazon’s buyer protections and dispute resolution.

Apple Pay

• Enables direct integration with Apple Wallet for fingerprint-authenticated payments from iOS devices and Macs.
• Complements traditional payment methods rather than fully replacing them. Most impactful for apps, mobile sites, and POS integration.
• More niche ability to date relative to mainstream payment card acceptance.

Adyen

• Advanced data science capabilities for detecting and preventing fraudulent transactions with machine learning algorithms analyzing billions of data points.
• Unified platform from a single vendor covering most needs from POS, online, and mobile e-commerce channels for large enterprises.
• International payout capabilities in over 150 currencies with faster settlements.

Authorize.Net

• A long-standing, stable gateway is suitable for subscription billing and invoicing recurrences.
• Integrated payment pages and flows for handling preorders and order updates.
• Compatible with third-party commerce platforms like Shopify and Wix enabling unified management.

How to integrate Payment Gateway into your business efficiently?

Best practices when setting up a gateway include:

• Rigorously test full payment cycles in sandbox account mirroring live configuration before going public to surface bugs.
• Start gateway development against lower-traffic staging sites before pointing production DNS.
• Consult support knowledge bases for detailed instructions on optimal integration methods specific to the internal tech stack.
• Isolate payment functions into separate microservices, avoiding tightly coupling gateway dependencies into core application code.
• Create modular front-end payment components reusable across properties as payment methods evolve.
• Implement intelligent retry mechanisms and queueing to gracefully handle intermittent connection issues to payment providers.
• Conduct load tests above normal and peak projected capacity forecasts to confirm adequate headroom.
• Develop automated reconciliation reports tallying gateway settlement deposits and order management statuses for accurate books.
• Securely store transaction references and notes on failures/retries for easier tracing and debugging.

With their ability to support evolving consumer preferences for transacting online while bringing enterprise-grade tools to users of all sizes, payment gateways drive the growth of omnichannel commerce. Integrating the right solutions seamlessly and cost-effectively is integral for unlocking the web’s endless business potential.

How Wallester can help with payment solutions

While payment gateways handle transaction processing, businesses often need additional financial infrastructure to create comprehensive payment solutions. Wallester complements payment gateway functionality by providing:

• Card issuing infrastructure allowing businesses to create and manage both virtual and physical payment cards
• Real-time transaction monitoring and spending controls for more effective security
• API-driven platform for smooth integration with existing payment gateways
• Customizable white-label solutions for businesses wanting to offer branded payment products
• Full compliance with European banking regulations and cross-border payment capabilities

This combination of payment gateway services and Wallester’s card issuing platform allows businesses to build complete, secure payment ecosystems. Companies can leverage Wallester’s infrastructure alongside their chosen payment gateway to offer improved payment capabilities to their customers.