Payment Gateways 101: A Complete Guide To Payment Gateway Processors

If you’ve ever purchased something online, you’ve used a payment gateway. Payment gateways are what make eCommerce possible. And yet, payment gateways tend to be a source of confusion for merchants. What is a payment gateway and is it different than a payment processor? Who needs one? And what tasks are payment gateways for specifically?

In this article, we’re going to explain what a payment gateway is, how it works, where you can get one, what features to look for, and how much you can expect to pay for one.

Looking for a payment processor instead? Check out the best credit card processing companies for small businesses.

What Is A Payment Gateway?

A payment gateway is an application that connects an eCommerce merchant’s website to the customer’s issuing bank and all other parties involved in the transaction. Acceptance or denial of the payment is then securely transmitted back to the merchant and customer.

Payment gateways can also process direct transactions using alternate payment methods, including ACH payments, bank-issued debit cards, or even cryptocurrency.

How Does A Payment Gateway Work?

Here’s a quick rundown of how payment gateway credit card processing works.

1. The Customer’s Payment Is Handled By Your Gateway

After placing an order, the customer’s payment information is then securely uploaded to the payment gateway system. The gateway encrypts this information and sends it to your merchant account or a third-party processor.

2. The Credit Card Association Charges A Fee & Sends The Payment To The Issuing Bank For Approval

The transaction data is routed to your credit card association (think Visa, etc.), which then charges the processor an interchange fee if the transaction is approved. The transaction is then either approved or declined by the customer’s issuing bank.

3. The Authorization Goes Back To You

After authorizing or declining the transaction, the issuing bank transmits this information back to the credit card association. From there, it goes back to your merchant account/processor, then to your gateway, then to your website, where you and your customer learn of the approval or denial of the transaction.

4. Funds Are Sent To Your Merchant Account & The Transaction Is Processed

Assuming the transaction is authorized, the issuing bank releases the funds to the acquiring bank to cover your customer’s order and the fees owing to all parties to the transaction. The acquiring bank then sends the funds to your merchant account and alerts your processor.

5. Your Business Receives The Transaction Proceeds

The processor, credit card association, acquiring bank, and the issuing bank all get a cut of the processing fee. The remaining funds get deposited in your business’s bank account. Merchants usually receive their funds within 48 hours. If the transaction is declined, your funds might be held while the processor investigates.

Payment Gateway VS Payment Processor

You’ll often see the terms payment gateway and payment processor in close proximity to each other, and they can sound pretty similar. They are, however, not interchangeable terms.

When it comes to a payment gateway vs. payment processor, the key elements to remember are that a payment gateway handles the eCommerce portions of your transaction, including encryption transmission of data between parties. A payment processor will typically provide a merchant account or aggregator service. It’s also responsible for transmitting credit card information to the issuing bank for approval.

You’ll need a payment processor for both eCommerce and brick-and-mortar transactions. Payment gateways are necessary for eCommerce, but may not be required for in-person transactions, depending on your processor. That said, payment gateways may still be used for POS transactions to add security features or accept additional payment methods or currencies.

Payment Gateway VS Merchant Account

When it comes to a payment gateway vs. a merchant account, you might be wondering what the difference is and if you need both or just one of them.

A merchant account is an account that accepts payments from your customers after the payments have been processed. Your merchant account allows payment card funds to be sent by the acquiring bank and processing charges to be deducted by the processor before sending the funds to your checking account. Note that this is distinct from your business checking accounts. Merchant accounts only have one purpose, and that’s settling credit card fees.

You’ll need a merchant account or a third-party processor to accept credit cards. Some payment gateway services may offer merchant accounts as part of a bundle, but merchant accounts are not a feature of payment gateways themselves.

Types Of Online Payment Gateways

An internet payment gateway can be offered in one of three ways.

Redirect Gateways

A redirected gateway is the simplest and least expensive way for a merchant to implement gateway services for web payment. When a customer goes to check out after putting items into their cart and is taken out of your online store and sent to a separate site (often a PayPal page) to complete the transaction, this is known as a redirect.

A redirect is convenient for the seller, as the redirected gateway lets another platform handle the task of processing the payment. However, it also entails the merchant having less control over the process. Additionally, the customer may not appreciate having to complete their purchase on another site or may lose trust in the payment process, both of which can result in lost sales.

Checkout On-Site With Off-Site Credit Processing

With this kind of payment gateway, the customer checks out on your site, but the gateway directs the payment to be processed off-site. This is what happens when you use Stripe as your online payment gateway.

Off-site processing allows the merchant to avoid having to process payments on-site and doesn’t fluster the customer by taking them to another website to complete a purchase. However, the seller is still relinquishing control to the off-site gateway. You may get blamed for gateway problems over which you have no control.

On-Site Gateway & Processing

On-site processing is the preferred solution for larger, well-resourced businesses. In this setup, the gateway and the payment processing all occur on your server — essentially, you handle everything.

This kind of gateway setup ensures that you retain control over each step in the checkout process. You won’t be reliant on another service to provide a good experience to your customers. However, you’ll be responsible for any problems that arise, and you’ll need to have the capacity to handle this responsibility.

8 Considerations In Shopping For A Credit Card Payment Gateway

Not all website gateways are created equal. Let’s go through some of the options you may be looking for in a gateway, depending on your business’s needs.

Do You Need Recurring Billing?

Subscription-based billing is generally a feature of payment gateways, and one of their more attractive features for merchants who make most of their sales in-person.

The quality of this support can vary. Be aware that the subscription management system may not allow for easy pricing changes, reporting may be too basic to be useful, and other limitations may apply. Check out our guide to recurring billing for more information on the subject.

What Payment Types Do You Want To Accept?

If you’re running an eCommerce business, you’ll certainly want to be able to accept credit and debit cards. However, as the payment universe continues to expand, you’ll need to consider accepting other forms of payment as well. If you want to accept payments via PayPal, Venmo, Apple Pay, Click To Pay, eCheck (ACH), and/or crypto payments, research different gateways and processors to make sure the one you ultimately choose offers support for the kinds of payments you want to accept on your website.

Do You Have International Customers?

If you intend to sell primarily to the domestic market and don’t anticipate expanding into the international market in the future, you don’t need to concern yourself with this. However, if you do intend to sell to customers outside the US, you’ll need a gateway with international capabilities.

Of course, good international merchant support entails support for multiple currencies and international credit cards. That’s not where things end, however. Consider that different markets have different preferences when it comes to payment types as well. You may also want support for handing foreign tax systems, such as VATs (value-added taxes). If you intend to sell internationally, research the features you’ll need, then make sure your chosen gateway provides everything required to realize your international plans.

How Much Customization Do You Need?

One of the best features of payment gateways is that they’re generally “plug-and-play,” meaning you can set them up on your website without having to do any coding. However, some merchants will need a higher degree of customization. Thankfully, most gateway providers offer a number of APIs (application program interfaces) that let you customize how the gateway functions on your website. Such APIs can help you manage your customer data, track inventory, and more.

What Payment Gateway Integrations Do You Need?

You may need functionality beyond what the gateway itself provides. For that, you’ll need a gateway that integrates with other payment and eCommerce services. The payment gateway integration process can be easy or difficult, depending on how or what you’re integrating.

Accounting-wise, most major payment gateways will integrate directly with QuickBooks, potentially saving you many hours of manually transferring transaction data into the program. You might require a shopping cart integration as well.

Should You Use Multiple Internet Payment Gateways?

If you find a gateway that provides most of what you need but doesn’t support all the payment methods you want to accept, you can integrate with additional payment gateways that accept other payment methods. Many merchants do this by offering PayPal Checkout as an option for their customers, though there are other options.

What Security Features Do You Need?

For modern eCommerce outfits, PCI compliance is a must. Several gateways on the market today simplify PCI compliance for eCommerce merchants. Transactions are conducted on the gateway provider’s servers, not the server hosting your website. Because the gateway interface is integrated into your website, the customer never needs to leave your site to complete an order. With this arrangement, you don’t need to maintain a secure network to be PCI compliant, though it’s still a good idea, of course.

All payment gateways encrypt sensitive credit card information before they pass it along to the processing bank. It’s a bonus if the gateway also offers tokenization, a complex process that further protects your customers’ credit card information.

Do You Want A Standalone Or Integrated Payment Gateway?

Many third-party payment processors (Square, Stripe, PayPal, etc.) offer integrated payment gateways with their services. In the case of Stripe, for example, there is no way to just get a Stripe gateway–it’s part of the entire service.

This isn’t the case for most merchant account providers. Typically they’ll offer you a choice of compatible payment gateways. In most cases, this will involve some extra monthly or per-transaction fees to use the gateway.

How Do I Choose A Payment Gateway?

Payment gateways perform the basic function of facilitating the processing of credit card transactions over the web and bring a host of security and fraud prevention features that protect both you and your customers. Make sure these features are included when choosing a payment gateway.

Integrations with online shopping carts and accounting software (such as QuickBooks) make running your business smoother and more efficient. eCommerce businesses would be well-advised to look for such integrations when shopping for a credit card processing gateway. They’ll make your life easier!

While not every business needs a payment gateway, every business can usually benefit from some aspects of a gateway. Since there are gateways that come with little to no additional cost, it makes sense to consider using one even if you do not absolutely need one.

Need more help choosing a payment setup? Check out these helpful resources!

• The Best Payment Gateway Providers For Online Businesses
• Payment Processing 101: Everything You Need To Know To Get Your Business Up & Running

Merchant Gateway FAQs: What You Need To Know