Learn what a payment gateway is and its role in processing customer payments.
Key takeaways:
If you’re a newly minted small business owner, you’ve likely heard the terms “payment gateway” and “payment processor” used interchangeably. And while most modern payment processors include a built-in payment gateway, they’re technically different.
In this guide, I’ll explain how a payment gateway works and whether you need to set one up. Rest assured, if you’re using platforms like Stripe or Shopify, you’re already covered.
A payment gateway acts as the middleman between your website or point-of-sale (POS) system and a payment processor. Think of it as the digital equivalent of a point-of-sale terminal in a brick-and-mortar store.
When customers enter their payment information on your website, the payment gateway authenticates and encrypts the data to protect it from fraud. It then sends the encrypted information to the payment processor. From there, the data is transmitted to the customer’s bank to approve or decline the payment.
Without a payment gateway, your online store can’t securely accept payments. Thankfully, this technology is usually packaged with most e-commerce platforms, such as Shopify and WooCommerce.
Payment gateways come in various forms, each geared for different business needs. These are the main types and common examples:
Hosted gateways redirect customers to a secure page outside your website to complete the payment. The shopper is then sent back to your site after their payment is processed.
This type is straightforward to set up, making it ideal for beginners. However, the downside is that redirecting customers away from your site disrupts the checkout experience. Indeed, jumping from your site to PayPal and back creates extra friction at a crucial moment.
Self-hosted gateways allow you to collect payment information directly on your website. This in-house approach grants you full control over the checkout process.
However, this strategy requires higher technical expertise and strict adherence to the Payment Card Industry (PCI) standards. Plus, you’ll still need to work with a third-party company to build your system.
With API gateways, customers stay on your website throughout the entire checkout process. You integrate the gateway via an application programming interface (API), which delivers a seamless user experience.
This setup promises more flexibility and branding opportunities. But it also requires advanced technical know-how. Many people resort to hiring freelance software engineers using sites like Upwork and Fiverr to build out and maintain this system.
These are gateways connected directly to a local bank. As a result, you’re entirely dependent on one financial institution.
This method isn’t common among e-commerce businesses based in the U.S., but they’re widespread in countries with lower credit card penetration. Regardless of geographic location, they’re often more complex to set up but typically boast low transaction fees. Some people also value the local aspect as a matter of personal preference.
Here’s how the payment gateway works, step-by-step:
A payment gateway facilitates data communication and encryption, whereas a payment processor handles the actual transaction. The processor takes the payment information captured via the gateway, communicates with the customer’s bank, and ensures the transfer of funds from buyer to seller.
In simple terms:
Many providers, like Stripe or PayPal, marry these services so you don’t have to set up each one separately. This combination makes it easier for small business owners as you can get both functions in one package.
Read more:
Here’s how you can select the best payment gateway for your business:
For online-only businesses, hosted or API-based gateways are more suitable since you won’t have to handle in-person bank cards.
Meanwhile, brick-and-mortar shops with e-commerce components are better candidates for gateways integrated with POS systems. That way, you can process physical credit and debit cards.
Also, consider the types of payments you plan to accept — for example, if you’d like to accept cryptocurrency payments, you’ll need extensive integration and cryptocurrency support.
See: The best crypto payment gateways for businesses
Some advanced gateways require more custom programming and ongoing maintenance, resulting in more expenses. Meanwhile, simpler options like Shopify Payments only charge for credit card processing costs. Carefully examine the fine print to determine if you can afford your preferred provider.
A seamless checkout process can reduce cart abandonment rates. Choose a gateway that offers a fast, secure, and smooth user experience. Shopify and PayPal both offer a one-click payment feature that accelerates the checkout process. Custom API integrations that eliminate sending customers elsewhere can also reduce friction.
Confirm that the gateway provider complies with PCI standards to keep your customers’ data safe. Otherwise, you run the risk of being exposed to potentially devastating data breaches and fraud.
Search for a provider that boasts top-notch customer service, especially if you’re new to online payments. Real client reviews on sites like Trustpilot can help you reckon a company’s support quality.
A payment gateway is a technology that transmits payment information securely from a website to a payment processor. It authenticates payment data, encrypts the information before sending to the payment processor, and ensures that payments are completed safely.
Any business looking to accept online or mobile payments needs a payment gateway. If you’re setting up an e-commerce store or offering online services, you’ll need one.
Yes, if you want to accept online payments. If you use platforms like Stripe, Shopify, or PayPal, the gateway is already included.
Sign up with a payment service provider like Stripe, PayPal, or Authorize.net. They will guide you through the setup process. Many providers are simple enough that you can opt to install it on your own.
It allows you to accept payments securely, which builds trust with your customers and boosts sales.
Fees can add up, particularly for small businesses with tight margins. Additionally, technical setup can be challenging for self-hosted or API-based gateways.
Ian is a content writer for TechnologyAdvice.
