Payment Gateways: Understanding what is a payment gateway and how it works



A payment gateway enables retailers to accept credit card transactions (the agency managing your payment systems). It connects payment processors (the agency that bills the card) and merchant account providers.

Gateways are transaction services – typically supplied at an additional cost – that handle credit card transactions via a credit card terminal for e-commerce sites or in-person establishments. Square, Stripe, and PayPal/Braintree are all popular payment gateways.


What is a Payment Gateway?

A payment gateway securely delivers online payment data to the processor to complete the transaction’s lifecycle. Additionally, it permits card-not-present purchases, primarily for eCommerce websites. Consider it your business’s online point-of-sale terminal.

The distinction is that a payment processor supports the transaction. In contrast, a payment gateway is a technology that permits communication between you and your clients regarding the approval or denial of transactions.


Why do you need a Payment Gateway?

A payment gateway’s purpose is to create a secure and frictionless experience for your customers. The intention is primarily to enable your customers to make transactions across many channels and use any popular payment method. A merchant can save money by eliminating the need for many vendors and streamline operations with top-of-the-line software integration and sophisticated reporting when using a high-quality payment gateway.



Payment Gateway vs Payment Processor: Understanding the difference

The most frequent application of a gateway is to collect payments for goods and services online. Gateway technology has evolved to provide a seamless purchasing experience across all sales channels and devices in today’s payments landscape. Along with eCommerce transactions, a gateway can be used to link payments with accounting or customer relationship management software and process transactions at a point-of-sale system or on a mobile device.


What is a Payment Processor?

A payment processor facilitates the transaction by communicating data between you, the merchant, and the issuing bank. The payment processor provides credit card machines and other payment processing equipment. To begin accepting credit cards, you must first establish a merchant account with a merchant service provider.


Payment Processor vs Payment Gateway

A payment gateway is not available with all merchant account providers. Some suppliers employ a third-party payment gateway, which might be inconvenient if there is a disagreement. When you have an issue, who should you contact?

Going with a single provider for a merchant account and a payment gateway may be ideal. Using a payment gateway to process integrated payments securely can help eliminate errors, speed up transaction processing, and make reconciliation easier.

If you don’t want to invest in credit card readers or have an eCommerce website, you can process transactions using a virtual terminal as long as you have an Internet or data connection.

The terms “processors” and “gateways” are frequently used interchangeably. There are, however, a few significant distinctions:


  • A payment processor is an organization that processes and sends payment information
  • A payment gateway also validates cash transfers between customers and sellers
  • It entails providing critical data to an issuing bank, such as a debit or credit card number connected to a bank account
  • Although the distinction may appear insignificant at first, the gateway can be thought of as the general infrastructure at the level of purchase
  • Like a payment gateway, a payment processor might comprise both a hardware and a digital component — or it can conduct the processing solely through software
  • The processor is where the issuing bank “scans” the card and processes the data


Merchant Account vs Payment Gateway

Merchant accounts are holding accounts that collect information about payment transactions. This is where monies are maintained for any business that accepts card payments. Once the payment has been verified, the monies are transferred to your business bank account.

Meanwhile, a payment gateway connects a customer’s bank to your merchant account, allowing funds to flow into the latter after a payment transaction is cleared.


How do Payment Gateways work?

The transaction flow is the same whether you use a virtual or physical payment gateway. However, internet and mobile payments use digital capture files to hold credit card data rather than the output from a credit card reader.

Below we have highlighted how does it work:

1. The customer makes a credit card payment through the merchant’s e-commerce site or a credit card reader.


2. The payment gateway:

    • Sends transaction data to the receiving bank (the acquirer or merchant bank)
    • Identifies the credit card company (American Express, Discover, or MasterCard) that issued the customer’s card.
    • Routes transaction data to the appropriate payment switch

3. After routing the request to the issuing bank, the payment switch routes the transaction data to the appropriate credit card network.

4. The issuing bank employs fraud detection methods to ensure the transaction’s validity and that the customer has sufficient credit in their account to complete the purchase.

5. The issuing bank either rejects or accepts the transaction and relays this information to the payment gateway and merchant bank via the credit card network. It is analogous to a train travelling between stations, with the conductor conversing with the station master at each stop.

At the point of sale, payments are validated by the issuing bank (through the payment gateway). A validated transaction indicates that the bank has reserved the funds, but the merchant has yet to receive payment. When customers check their credit card statements, this appears as a “pending” transaction.

After some time, the merchant must balance payments, include gratuities if appropriate, and manually submit a batch capture, or “processing” file, for each pending credit card transaction.

At this point, the pending transactions have been devoted. This means that the merchant now has the right to the cash withheld by the issuing bank. The funds are subsequently sent to the merchant’s bank and can be accessed as soon as they are credited to the merchant account.



Types of Payment Gateways

1. Hosted payment gateways

This form of gateway redirects the user away from your site’s checkout page. When clicking the gateway link, your consumer is directed to the Payment Service Provider (PSP) website. In hosted payment gateways, the customer enters their payment information and is then returned to the merchant’s website to complete the checkout process.

2. Self-hosted payment gateways

Your customer’s transaction information is collected here on your website. After requesting the information, the information gathered is sent to the payment gateway’s URL. Several gateways require payment information to be sent in a specific format, while others require a secret key or hash key.

3. API hosted payment gateways

Customers must enter their debit or credit card information directly on the merchant’s checkout page, and transactions are handled via an Application Programming Interface (API) or HTTPS inquiries.

4. Local bank integration

This gateway takes the customer to the payment gateway’s website (the bank’s website), where they enter their payment and contact information. After completing the payment, the customer is redirected to the merchant’s website, and the payment notification information is delivered.



Payment Gateways: Limitations and drawbacks

When you choose a payment gateway, you must be aware of and accept certain limits, the majority of which are inherent in the payment gateway system. We’ll go over some of the major limitations of payment gateway systems in detail:


Not all types of payments/cards are accepted by Gateways

Most gateway providers promote the universality of their services. However, they do not always state when their gateway cannot accept transactions from specific processing portals or card issuers.

For example, Adyen defines which transaction types it may take in regions like Europe and North America. Still, it does not specify what it cannot accept (and where).

Before making a decision, it’s critical to understand your consumers’ needs, the limitations, and what’s not included. Consider PayPal, which has a yearly transaction volume of more than $500 billion. If your gateway provider cannot accept PayPal, there is something wrong with your gateway pick.


International shoppers may not have a payment alternative

Consider that Alipay is far more accepted than payment options that may be popular with clients in the United States in China. Businesses that want to reach a big international audience must be sure their payment gateway solution can handle it.

Some payment gateway systems charge the same fee for domestic and international transactions. However, others, such as Amazon Pay, charge more for “cross-border” purchases.

Use solutions like Webinterpret, which can link to your e-commerce site and perform a localized foreign checkout procedure that allows you to receive cash in 25 different currencies.



Security Concerns

Are you aware that almost a third of shoppers delay purchasing due to security concerns?

While a high-quality payment gateway is expected to be secure, there are some security vulnerabilities to be aware of:


  • Malware – Malware that secretly accesses user accounts can process seemingly-valid transactions through secure payment gateways, even if the transaction itself is a hoax.
  • Mobile transaction issues – Even if you have control over most of the security during the transaction, you still don’t have control over who can access your customers’ mobile devices.
  • Data breaches – TLS encryption allows many payment gateways to handle the processing of sensitive data such as card information. However, once the data is on a server, it remains a risk.


Payment Gateway: Features and Functionality


  • Anti-fraud measures – As technological improvements continue, so does the average cybercriminal’s skill set. It is critical to utilize a cutting-edge fraud protection service. Ideally, one that provides cybersecurity intelligence to reduce fraud rates and accept more real transactions.
  • Tokenization – This contributes to payment card security. It safeguards your sensitive data when it enters your site and is sent to the card network.
  • Recurring Payments – Creating a payment schedule that benefits both parties ensures that payments are always delivered on time. This enhances customer retention, increases cash flow, and gives your consumers flexibility and convenience.
  • Software Integration – Integration with the payment gateway you use to run your business will undoubtedly improve accuracy, save time, and allow you to adapt your present software platform.
  • Hosted Payment Form – This is a secure method of accepting e-commerce credit card payments without using a shopping cart. By hosting the form, the provider ensures that sensitive transaction data does not pass via your platform, reducing your liability and the scope of your PCI.
  • Virtual Terminal – A virtual terminal converts your PC into a POS system with an internet connection, allowing you to accept payments by email or over the phone. Consider it similar to a terminal “in the cloud” All you have to do is sign up for the gateway to start accepting recurring or one-time ACH, debit, or credit payments.



Should you consider using multiple Payment Gateways?

The following are some of the advantages this strategy can provide for your e-commerce platform:


  1. Making the process easier for your customer

Allow your customers to choose what and when they want it. The utilization of a payment gateway that is MasterCard and Visa compatible will cover most of your operations. Additional credit card payment alternatives, on the other hand, will provide your consumer with greater convenience and lessen friction throughout the checkout process.


  1. Provide everyone with a backup plan.

Contrary to popular belief, It’s pretty easy to live without a credit card. As an e-commerce store, your role is to provide a variety of payment alternatives – such as Apple Pay, Venmo, or PayPal – so that your consumers can easily complete secure online transactions.



Payment Gateways: Frequently Asked Questions

What is the distinction between a virtual terminal and a payment gateway?

A virtual terminal – sometimes known as a cloud POS or web POS – is software that allows you to accept payments from any device (such as a tablet, phone, or desktop).

Virtual terminals are ideal for businesses that can function without an online store but require remote payments through fax, mail, or phone.

In contrast, a payment gateway enables you to accept credit card transactions (whether online or in-person) by transferring funds between a payment processor and your business account via a credit card processor or terminal.

How much does a Payment Gateway cost?

The majority of service providers are secretive regarding the prices of their credit card machines. Each payment may have varied fees connected with it, and it is not always clear why such charges are (or are not) applied to a specific transaction.

Aside from a per-transaction fee, several payment processing and payment gateway providers charge some or all of the following:


  • Higher fees on credit cards such as American Express.
  • Chargeback/refund fees
  • Batch fees
  • Initial setup expenses
  • PCI-compliance fees
  • Membership fees
  • Monthly account charges

I have a payment gateway provider. Do I need to be PCI compliant?

Of course. Every merchant who handles credit card data must be PCI-compliant. Operating a PCI-compliant gateway is just one component of that need.


Next Steps

Finally, before registering with a payment gateway, ensure you conduct the essential research and establish no hidden prices or charges. It is also critical to understand how they interact with your current solutions.


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