What Are Payment Gateways?
A payment gateway is a digital technology merchants use to accept contactless payments, including with credit and debit cards. A payment gateway can be explained as a special encryption that secures sensitive data, like bank card numbers, while it passes between the customer and merchant.
Then, this transaction gateway passes the necessary information to the merchant's bank and the acquiring bank (or other financial institution that partners with the merchant to furnish bank card processing services).
A digital payment gateway responds to the authorization of bank cards and ensures that the money is transferred to the merchant account. Such a solution usually includes special monthly charges and per-transaction commission.
How Payment Gateways Work
The e-payment gateway is a crucial element of the transaction processing system, as it transmits customer information to the merchant acquiring bank. They play a pivotal role in e-commerce by enabling customers to safely pay online using various payment methods. But how exactly do payment gateways work behind the scenes to securely authorize and process payments?
In this paragraph, we will provide an overview of the step-by-step process of how payment gateways operate. We will outline the flow of data between the customer, merchant, payment gateway, payment processor, card network, and issuing bank during a transaction. Examining the sequence of events from payment initiation to confirmation will shed light on the hidden complexities of online payments. So, read on and find out all the ins and outs of the process.
Key Stakeholders
As a rule, a payment gateway system includes several key players. We describe all stakeholders in the list below:
- Merchant or Vendor. It's an e-commerce company selling products or services.
- Buyer or Cardholder. As the name implies, it's a customer buying the goods.
- Issuing bank. It's a financial institution where the buyer has an account.
- Card companies. They manage bank cards. These companies are Mastercard, Visa, Maestro, and American Express.
- Acquiring bank. It's a financial organization that manages customers' accounts.
Process Breakdown
Traditionally, the process of payment gateway usage consists of five steps. You can familiarize yourself with each of them in the schematic image below:
- The cardholder indicates the payment details in the particular field on the site.
- The e-commerce site transmits information to a payment gateway platform.
- The transaction gateway dispatches securely protected data to the card company.
- Card schemes confirm payment; the gateway transmits the data back to the vendor.
- The acquiring bank sends money from the buyer's issuing bank to the seller.
Payment Gateway Vs. Payment Processor VS Payment Service Provider
Online payments involve several key players that work together behind the scenes to complete transactions. Payment gateways, payment processors, and payment service providers are three critical components of the digital payment infrastructure. The meaning of payment gateway can be perplexing for newcomers to understand. Numerous customers confuse it with "payment processor" or "payment service provider." Though they are related, there are important distinctions between their roles.
In this paragraph, we will provide a brief overview of what payment gateways, processors, and service providers are and how they differ. We will explain the core functions of each payment entity and what value they add in processing online payments. We propose dealing with such terms and provide a table where you can find essential information about these three concepts.
| Payment Gateway | Payment Processor | Payment Service Provider (PSP) | |
|---|---|---|---|
| What is it? | A special software that is responsible for successful online payments. Simply put, it's a virtual place on the merchants' website where customers securely enter their payment details. | A platform that connects the merchant's bank and the buyer's bank. | A third party company that enables businesses to perform online payments. It includes a payment gateway, processor, customer account, and other features to process all transaction stages. |
| What is the main task? | The payment gateway acts as a sort of intermediary. It transfers payment information between a customer, a merchant, and the financial institutions involved in a transaction. | As a rule, merchants or business owners need payment processors to accept online transactions and charge the fees. | PSPs combine bank card processing from countless customers under one super-size merchant account. Besides, PSP prevents fraud activity and is responsible for chargebacks. |
| What does it do? | It verifies the legitimacy of the customer's bank information. Also, it accepts and processes online transactions. |
It handles all the logistics of payments by debit/credit card. It processes but cannot authorize the transactions. |
It brings all financial parts together (the merchant, client, payment gateway, and payment processor). Also, it provides point-of-sale (POS) solutions and prevents fraud activity on the merchant site. |
Types Of Payment Gateways
As we can see, payment gateways play a crucial role in e-commerce by facilitating online payments between customers and businesses. There are a variety of payment gateway options and solutions available, each with their own unique features and benefits. In this paragraph, we will provide an overview of the main types of payment gateways and how they work.
Commonly, the payment getaways are divided onto three primary categories: redirect, self-hosted or on-site payments and hosted or off-site payments. We will explore the key distinctions between these gateway models and discuss the advantages and disadvantages of each type, so keep reading and see for yourself.
Redirect
The redirect online payment gateway takes the buyer to the payment processor to complete the transaction. Frequently, the website opens a new window where the customer should indicate their financial details. After the procedure, the buyer is automatically redirected back to the vendor's page. For instance, redirect gateways are PayPal and Stripe.
This type of transaction gateway is the most reliable and convenient for clients and merchants. Still, the gateway provider limits merchants' control over the customers' checkout experience due to Payment Card Industry Data Security Standard (PCI DSS) certification.
Self-hosted Or On-site Payment
It's an example of a payment gateway that enables customers to pay directly on the merchants' online platforms. Obviously, checkout occurs on the vendor's site or a mobile application, guaranteeing complete control of the transaction procedure.
Importantly, the merchant must operate according to the PCI DSS certificate to collect payment information under security protocols. Then, the data must be sent from the vendors' website to the transaction gateway for authorization and processing.
Hosted Or Off-site Payment
This type of secure payment gateway is a mix of the two previous examples. Here, customers need to indicate payment details on the vendors' website using an API (unique mechanisms that allow two software components to communicate with each other by a set of protocols and definitions). You may count on a customizable checkout experience with advanced security.
In other words, the buyer purchases the desired goods or services at the vendor's venue, and the payment information goes through the API services for processing. As an example, we can note the Square POS system.
Examples Of Payment GatewaysNow, when you realize the features of transaction gateways and the nuances of their work, it's time to learn the top-rated options. We've included the finest payment gateway services in our review below.
Square
Monthly or annual fees:
- 2.6% + $0.10 for card present
- 3.5% + $0.15 per manually entered card transaction
Payment processing fees
2.9% + $0.30 per online transaction
Square is a global payment gateway provider and bank card processor with over 4 million sellers globally. The company accepts payments from the US, Australia, Canada, Japan, Spain, the UK, etc. The website provides payment solutions for all business sizes that require effective methods of bank card processing for in-person payments. Square software solutions are provided via Reader SDK, Terminal API, and POS API. The clients can enjoy quick registration, end-to-end encrypted payments, live phone customer support, and flawless fraud prevention.
Adyen
Monthly or annual fees:
Custom pricing
Payment processing fees
- Swipe/tap/dip: 2.6% + $0.11
- Key-in: 3.5% + $0.15
- Online: 2.9% + $0.30
Adyen offers global transaction solutions, accepting more than 30 currency options. The brand has 27 offices worldwide and can accept a plethora of payment methods, including credit cards and various wallets, such as Apple Pay.
It is worth noting that Adyen cooperates with well-known brands, such as Microsoft, Uber, and LinkedIn. So, If you want to get your personal merchant payment gateway and quickly become one of the leaders on the market, Adyen is a great solution to consider. However, the pricing structure of this company is quite complex and depends on the type of payment system and card issuer. This amount can be either fixed or as a percentage of the transaction amount. Thus, it is difficult for the client to calculate the commission level.
Stripe
Monthly or annual fees
$10
Payment processing fees
- 2.9% + 30¢ per successful charge for domestic cards
- + 0.5% for manually entered cards
- + 1.5% for international cards
- + 1% if currency conversion is required
Stripe is quite a famous company worldwide. It offers payment gateways focused on mobile e-commerce, non-profit organizations, and SaaS transactions. You can internalize the payment gateway into your online business by setting up more than 135 currencies.
This company will be a good choice for e-commerce businesses and online stores that need instant payments in local payment methods. Thus, you can lower the fees for your clients.
PayPal
Monthly or annual fees
no monthly fees or set-up costs
Payment processing fees
- Swipe/tap/dip: 2.6% + $0.10
- Key-in: 3.5% + $0.15
- Online: 2.9% + $0.30
This payment gateway is an example of a redirect type. PayPal is available in over 200 countries, supports 25+ currencies, has over 400 million clients worldwide, and has gained an excellent reputation as a global provider.
PayPal's transaction gateway can be easily set up for both startups and existing businesses and is suitable for point-of-sale and mobile payments. However, PayPal charges relatively high fees (2% to 5%) and is selective when cooperating with different businesses around the world.
How To Choose The Best Solution
Selecting the right payment gateway is a critical decision for any online business, since it impacts transaction efficiency, client experience, and costs. With so many options on the market, it can be challenging to determine which solution best fits your needs. In this paragraph, we will provide an overview of the key factors to consider when evaluating payment gateways to find the ideal fit.
Generally, before selecting the finest solution, we recommend considering your business model, fees, target audience, settlement speed, security measures, fraud protection, transaction volume, and other insights. Now, let's discuss all the criteria in more detail.
Pricing
The cost of developing and integrating a payment gateway is a critical point you should pay attention to. We advise evaluating several companies' offers and seeing what is included in the price. Be sure to consider the scale of your business, as the cost may differ for startups and large companies. Therefore, you may stick with a reasonable cost according to your needs.
Free Trial Availability
We advise you to pay attention to the availability of a free trial version before starting to use the chosen method for payment processing. This opportunity enables you to familiarize yourself with the system and its available functions.
Using a free trial version allows you to accelerate a decision on the pricing plan and features you really need. Since developers realize the importance of this function, some companies tend to provide such an exclusive opportunity for its potential clients.
Fees
You should check out the commissions the chosen company offers to ensure it will suit your business. In most cases, payment gateway platforms charge a fee per transaction. The percentage may vary depending on your chosen provider's policy and transaction volume. Moreover, software suppliers may offer fixed sums of set-up and monthly fees.
Besides, some companies may include commissions for such factors as exchange rates and customers' payment methods. Do not overlook to ensure the payment provider does not have hidden fees like paying for advanced security and more. Furthermore, you need to familiarize yourself with chargeback and refund fees to realize the amount you must pay in these cases.
Integration
We also advise picking a payment gateway, considering its application programming interfaces (APIs) and possible connection with the current technical platforms you utilize for recurring billing. It is vital that when a client makes an online payment, the relevant invoice is automatically updated in your accounting system. It will significantly save you time. The rightly chosen gateway should be integrated with other payment systems hassle-free and simplify online transaction management.
Customer Payment Solutions
Flexibility is one of the critical aspects when looking for a payment gateway. You should review various providers and select one that offers a payment processing system that will be most convenient for your clients. We recommend considering such payment methods as credit cards (MasterCard and Visa), mobile payments (Apple Pay and Google Pay), e-wallets, and cryptocurrency.
Security And Encryption
Last but not least, you should check out encryption methods used for users' data security. Payment gateways handle private information like credit card numbers and bank details that cybercriminals are actively trying to obtain and exploit. Strong data encryption converts this information into coded data strings that are useless to fraudsters without the encryption keys to decipher them. The best choice is cooperation with PCI-compliant companies that operate according to the PCI DSS. Thus, you can be sure of safety transactions and payment information protection.
Failing to prioritize security and encryption leads to vulnerabilities that put customer payment information at risk and expose businesses to data breaches, which can destroy consumer trust and cause major financial and reputational damage. Investing in a payment gateway with state-of-the-art encryption, proactive fraud monitoring, and airtight security protocols should be a top priority to keep customer data locked down.
Final Thoughts
A payment gateway is indispensable for small and large e-commerce businesses that want to accept secure and convenient online payments for their goods or services. Now that you know all the essential information about payment gateways, payment gateway process, stakeholders, and other details, you definitely realize your business needs to find the ideal payment solution. Picking a reliable partner for processing payments is really challenging, as there are so many companies on the market.
The optimal gateway for your business will integrate smoothly, offer competitive fees and global payment options, provide top-notch security, and give you the control needed to deliver an excellent customer experience. With this foundational knowledge, you are equipped to thoroughly evaluate payment gateways and select the ideal partner for your online objectives.
