If you want to take credit or debit card payments on-site or online, you will need a payment gateway. Since many entrepreneurs and ecommerce managers are still uncertain about what this technology is and what it does, we’ve outlined everything to know about payment gateways and how they can help you scale your business.
Key takeaways
- A payment gateway is used to accept credit card or debit card purchases from customers.
- Merchants can use hosted, self-hosted, or API-hosted payment gateways.
- Payment gateways enable a convenient checkout process and improved customer experience. They also promote better security while allowing businesses to expand their customer base.
- Today’s top payment gateway service providers include Stripe, Amazon Pay, PayPal, and Apple Pay.
What is a payment gateway?
A payment gateway is what businesses and merchants use to accept credit or debit card purchases from customers. This technology reads and transfers payment data from a customer to a business bank account.
In person, a payment gateway is software built into physical card-reading devices in brick-and-mortar establishments. Online, it is a cloud-based technology that enables online payments, linking a paying customer to the merchant in ecommerce stores.
Recently, physical stores have begun accepting customer payments using Near Field Communication (NFC) technology or QR codes. These new technologies allow buyers to pay for their purchases using their phones on site, which helps improve the customer experience.
There are three common types of payment gateways: hosted, self-hosted, and application programming interface (API)-hosted. Let’s take a closer look at these options and their pros and cons.
Hosted payment gateways
In hosted payment gateways, merchants redirect their customers away from their checkout pages to a payment service provider (PSP) webpage. The buyer fills in their payment info on the payment page before they are sent back to the merchant site to complete the transaction. PayPal is one popular example of a hosted payment gateway.
One advantage of using a hosted payment gateway is that it enables transactions that are compliant with the standards set by the Payment Card Industry (PCI). This means all involved systems are secure, and buyers can trust you with sensitive transaction data.
However, since merchants are using an external payment gateway, they do not have complete control of the whole user experience.
Self-hosted payment gateways
If you want greater control over your business’s user experience, you can choose a self-hosted payment gateway, like Stripe or Shopify.
The difference between a hosted and self-hosted gateway: With the latter, stores collect customer payment details directly on their websites. Then, they send the collected data to the payment gateway’s URL. Some platforms require the payment information to be in a specific format, while others require a secret key or hash key.
One advantage of using a self-hosted gateway is that it enables a faster checkout process since the transaction is completed on the merchant site. Moreover, the merchant has full control over a user’s payment experience since there is no redirection to a different site for payment. This means you can customize the transaction flow to improve the payment process.
API-hosted payment gateways
API-hosted payment gateways are designed for businesses that want complete control of their website design. In this case, the payment details and processing are managed directly on the merchant website using an API.
This option offers a completely customizable checkout experience. Merchants can also integrate various setups, including tablets and mobile devices.
Although this option comes with significant advantages, it is also more costly. Business owners have to ensure that debit or credit card transactions made on the platform are secure.
They have to pay more for SSL certification, which enables an encrypted connection and authenticates a website’s identity. Merchants must also ensure that the payment process is compliant with the Payment Card Industry Data Security Standard (PCI DSS).
If you do not mind the additional expenses and require complete customization of the checkout process, using an API-hosted payment may be the best solution for your business. It enables secure and convenient transactions, which helps improve the customer experience.
How do payment gateways work?
There are several steps involved in the transactions enabled by payment gateways:
- The cardholder or the buyer starts the transaction by clicking the “buy now” button on the merchant’s website.
- Then, the payment gateway will check with the associated bank to ensure funds are available. This step ensures that the transaction will not exceed the buyer’s credit limit.
- Next, the card scheme, which refers to card companies like Visa or Mastercard, will receive encrypted card details from the payment gateway. After it approves the transaction, it will send the buyer back to the merchant’s page.
- Finally, the payment gateway will send the data to the acquiring bank or other financial institutions to transfer money from the customer to the merchant account.
This is why payment gateways are a crucial component of the electronic payment processing system. The technology sends customer data to the merchant acquiring bank, where the payment is processed.
Modern payment gateway solutions are also continuously evolving to address customers’ changing needs. In the past, buyers could only use credit cards on point-of-sale (POS) payment terminals using magnetic strips, and they had to sign documents.
But the advancement in chip technologies allowed merchants to replace the signature phase with a personal identification number (PIN). With this new payment method, customers only have to enter the number directly into the payment gateway hardware.
Today, buyers can use their phones to pay for purchases instead of using plastic credit cards and clunky payment terminals, creating a quicker and more convenient shopping experience.
Key benefits of using a payment gateway
If you’re still on the fence about using a payment gateway, read on to learn how it can benefit you and your customers.
Faster payments
As a business owner, you know how difficult it can be to get paid at all. Instead of suffering the hassle of agreeing to settle on a given date and then forgetting to do so, most buyers prefer to pay instantly.
Payment gateways empower customers to pay for their purchases instantly, which is a win-win situation for you and your clients.
Today, using payment gateways is the fastest way to process card payments. This transaction type is much quicker than manual purchase methods. Moreover, you can begin accepting card payments 24 hours after you pay your setup fees and implement your payment gateway.
Convenient process
Payment gateways enable your business to collect customer payments any time of the day. But this advantage is not only beneficial for you—it is also an appealing factor for your customers. Online shoppers sometimes make impulse purchases, so a payment gateway lets them place an order regardless of the time.
This benefit creates a pleasing experience for buyers, particularly those not available to drop by a physical store during its set hours. It also appeals to self-isolating buyers or those in areas under government restrictions.
When you integrate with an online payment gateway, you are letting your customers shop at their leisure, which is convenient for you and the buyer.
Better security
When you use a payment gateway, all transactions are encrypted to make sure the data is protected. This protection will help your business meet General Data Protection Regulation (GDPR) and industry-standard security requirements.
Secure payment transactions can protect the customer and you from malicious actors. Buyers will usually use more secure payment methods, so gaining their trust should be a priority.
Better user experience
Payment gateways offer useful new features to improve the user experience. Customers can place products directly in a shopping cart, save bundles, and add new items to their favorites when buying online. They can create a profile and store their credit card information to complete transactions with a couple of clicks.
Expands your customer base
With a payment gateway on your site, you can open up your business to a broader market. People from all over the world can access your shop and make secure transactions.
Secure payment options are becoming crucial for businesses to attract and retain customers, especially when running an online store. Many payment gateway providers now offer additional features like affiliate marketing partnerships to help funnel more leads to your business and attract more customers.
Payment gateway examples
Curious about your provider options for payment gateways? Below, learn more about some of the most well-known payment gateway service providers today.
PayPal
PayPal is popular as a payment gateway because of the platform’s strong reputation with customers and its multiple gateway options.
Its Payflow gateway comes with a free checkout payment gateway that PayPal manages or a service that offers checkout customization features.
With both options, the company adds fraud protection security for free. This feature provides extra assurance that your payment gateway is secure and can handle security threats as they occur.
Stripe
Stripe is a payment gateway provider that supports payment transactions in mobile ecommerce and software-as-a-service (SaaS) businesses.
The solution can also help companies with a large volume of transactions. For instance, Lyft, the famous ride-share firm, uses Stripe to support its mobile fleet of more than 700,000 drivers.
Apple Pay
Apple Pay, Apple’s payment gateway solution, is designed for a mobile payment structure, allowing merchants to manage payments using Touch ID and Face ID. Its focus is on buyers who want to maintain an e-wallet to make their purchases.
Amazon Pay
Amazon Pay is Amazon’s online payment processing service. Many firms have struck big by using the platform, with 200 million Amazon Prime members all over the world, making the solution one of the popular payment gateway options today.
Payment gateway FAQs
How much does a payment gateway cost?
Some payment gateway service providers offer purchase-based pricing, with percentage or dollar amount fees per transaction. Meanwhile, some providers require monthly subscription fees between $25 and $30.
Can I build my own payment gateway?
You can always make your own payment gateway if you cannot find an offer that fits your business needs. Creating your own solution also allows you to integrate more than just one payment gateway provider and prevents vendor lock-in.
But before deciding to make a payment gateway, you should research the costs involved. This can be pricey, so make sure you have the funds to make your own.
What is the difference between a payment gateway and a payment processor?
A payment processor relays transaction details to and from the buyer’s card-issuing bank and the merchant’s bank. Meanwhile, merchants use payment gateways to accept payments with a POS system, credit card reader, or software integration.
