What is a payment gateway?

Increased internet use and ecommerce sales are driving payment gateway revenue.

In 2021, global payment gateway revenue reached $26.8 billion USD. It’s predicted to have a compound annual growth rate (CAGR) of 16.1% from 2022 to 2030.¹

But what is a payment gateway, and how does it work? This article will go through the ins and outs of payment gateways.

Receive international payments
with Wise Business

What is a payment gateway?

A payment gateway allows merchants to accept card payments from their customers.

The payment gateway connects your customer's card information to their issuing bank. The bank then authorizes the payment. From here, the merchant can collect their funds.

Payment gateways come in a variety of forms. From online payment processing portals on websites, to card-reading technology in retail stores.

Read on to discover:
How does a payment gateway work? What are the types of payment gateway? Example of a payment gateway Benefits of using a payment gateway What to consider when choosing a payment gateway for your business

How does a payment gateway work?

The payment gateway is the messenger in the card processing procedure. It facilitates the exchange of card information.

Let’s break down the card transaction process:

First, a customer enters their card information at the checkout. Then, the payment gateway sends it off for authorization. It arrives at the bank your merchant account is with. From here, it's sent to the relevant card payment network, for example, Visa or Mastercard. The card payment network then sends this information to the customer's bank. Your customer's bank then needs to confirm the cardholder and that funds are available. Once verified, the information travels the same way back to the payment gateway. The payment gateway either approves or denies the payment to the merchant.

What are the types of payment gateway?

Not all payment gateways are the same. While they perform the same function, how they integrate into your website differs.

Here are the four different types of payment gateway:

Hosted payment gateway

A hosted payment gateway simplifies your life.

Your website will redirect your customer to a separate webpage when they click “Buy now”. This webpage is a payment service provider (PSP), which hosts a payment gateway. Here, your customer is able to enter their card information. Once that’s done, they’re sent back to your website.

A hosted payment gateway is easy to set up and integrate into your online store. On top of this, it’s secure, with fraud protection and PCI compliance. The drawback is that you can’t control your customer’s checkout experience - this is in the hands of the PSP. Additionally, webpage redirection disrupts the customer’s experience. This can lead to higher rates of cart abandonment.

Self-hosted payment gateway

A self-hosted payment gateway may be the way to go if you want greater control.

Your customer can enter their card details into your checkout portal. Your website encrypts and then sends these details to a third-party payment gateway.

Transactions using self-hosted payment gateways are quick. This is because your customer isn't redirected to a separate webpage. Likewise, as the merchant, you have full control over your customers’ checkout process.

The drawback of this payment gateway type is that you don’t have a technical support team. This means you have to solve any technical difficulties yourself. You’ll also need to be PCI DSS compliant. This is because you store your customers’ card information on your servers, not the host’s servers.

API-hosted payment gateway

An API-hosted payment gateway gives you full control.

With an API-hosted payment gateway, you handle the whole payment process. This means you can customize every step of your customers’ payment experience.

API-hosted payment gateways often support specialized payment methods. For example, deferred or recurring payments.

With an API-hosted payment gateway, you bear all the responsibility for security. You’ll need to be PCI DSS compliant and in possession of an SSL certificate.

Local bank integration gateway

A local bank integration gateway is a quick and easy way to set up a payment gateway.

When a customer wants to buy a product, your website will send them to the bank’s website. Here, they'll enter their payment information. After doing so, they’ll return to your website.

With local bank integration, you can't control your customer’s checkout experience. Additionally, it doesn’t support specialized payment types. This makes it more suitable for one-off purchases only.

Example of a payment gateway

Now that we know how a payment gateway works, let’s run through a few examples.

Some of the top payment gateway providers are:

• Stripe
• PayPal
• Square
• Payoneer
• Adyen
• 2Checkout
• Braintree

You can read more about each of these in the guide to the Top 7 best payment gateways.

Is PayPal a payment gateway?

PayPal is a payment aggregator. But, they do offer their own payment gateway, called Payflow.²

Depending on customization levels, you can either choose Payflow Link or Payflow Pro. Payflow Link hosts a checkout template. The Payflow Pro version lets you completely customize the checkout.²

Is Google Pay a payment gateway?

In short, no - Google Pay is not a payment gateway. Google Pay is a digital wallet that allows customers to pay at checkouts with one-click. It can be an available payment method on payment gateways.

Benefits of using a payment gateway

The checkout process can make or break a sale. Customers often lose trust or interest when the checkout isn't smooth. Having a reliable payment gateway is key to preventing abandoned carts. And preventing abandoned carts prevents lost sales.

A payment gateway that is quick will make for a smooth checkout process. It should avoid redirecting your customers to a separate webpage. And it should support their preferred payment methods.

Having a payment gateway connected to your brand encourages customer trust. These small factors all add up to securing your sales.

Increased security is another benefit of using a payment gateway. Customer card information is always encrypted, which ensures its protection. This in turn makes your business more secure from fraud, generating customer trust.

What to consider when choosing a payment gateway for your business

When choosing a payment gateway, there are some important factors to consider.

Compatibility

Different payment gateways suit different business types and industries. Some payment gateways work better for physical transactions. And others are better for ecommerce sales.

Payment gateways that support popular payment methods are also key. For example, recurring payments are important for subscription service-based businesses.

Ensuring that a payment gateway is compatible with your business is crucial.

Speed

Self- and API-hosted payment gateways don’t redirect your customer to another webpage. This makes for quicker transactions.

You'll also want to know the settlement time a payment gateway offers, so you can know when to expect your funds.

Integrations

You need to consider how you will integrate a payment gateway in your current business. If you already have a payment processor, you’ll need to see if you can use a third-party payment gateway. You’ll also need to consider any changes to current software or websites that will need to happen.

Fees

As with any new business tool, you’ll need to consider the costs of prospective payment gateways. Data security compliance fees, set-up fees, and authorization fees are a few of the costs to look out for.

Security

Payment gateways handle sensitive card information. This means they need certain industry specific security standards. For example, all payment gateways need PCI DSS compliance. Compare the security of prospective payment gateways to see which one is the most secure.

Customer support

You may need less or more support in the event of technical problems. You should check out what support is available to you, as well as at what times.

Supported payment types

If you have many international customers, then your payment gateway should support them. This means that it should support their preferred currency. Additionally, it should support their preferred payment method. Payment methods vary by country, so this is important to check.

Receive payments from international customers? You can use Wise Business to save money on cross border fees.

Wise is a smart online alternative to traditional banks. With Wise Business, you can get ten local account details including EUR, CAD, and GBP. You can receive payments into these balances with ease and then send, spend, or exchange at the real mid-market rate. You can create a Wise Business account and link it to Stripe, for example, to receive EUR, GBP, USD, AUD, NZD, SGD, RON, PLN and CAD payments with no extra hassle.

Conclusion

A payment gateway is the bridge between your customer and their bank. It transfers encrypted card data, ensuring you receive payment. It’s a type of transaction processing technology.

A reliable payment gateway increases customer trust. This results in more sales, translating to increased revenue for your business.

---

Sources:

1. Payment Gateway Market Size
2. Payment Gateway vs. Processor: What's the Difference? - business.com

All sources checked March 24, 2023.