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What is a Payment Gateway and When Do Businesses Need One?

By Megan Doyle

U.S. consumers have grown used to simple and fast e-commerce transactions that a few years ago might have seemed like magic. Regardless of the time of day or what country a company is based in, someone can add an item to their cart, enter their payment information, and confirm the purchase—all in a matter of seconds. But without behind-the-scenes utilities like payment gateways, e-commerce wouldn’t be possible.

Payment gateways enable a merchant to accept online B2B and consumer payments by linking their e-shop to a payment processing network and their merchant bank account.

 

What is a Payment Gateway?

 

In simplest terms, a payment gateway is the online equivalent of a point of sale (POS) system in a physical store. A payment gateway facilitates e-commerce transactions in the same way a POS system transmits a customer’s credit or debit card information to a payment processor.1 The only difference is that a payment gateway allows payments to be processed as “card-not-present” transactions, in which a card’s EMV chip or magnetic strip cannot be verified. Instead, the merchant must rely on information entered by the customer.2

 

Instead of a physical device, payment gateways are software applications that securely send credit and debit card transactions from the merchant’s website to the payment processor for authorization.3 Transaction details are then returned to the website for confirmation in near real-time.4

 

All online transactions, whether credit card, debit card, e-check, or cryptocurrency, rely on payment gateways.5

 

Payment Gateways vs. Payment Processors: What’s the Difference?

 

Although they’re both involved in an e-commerce transaction, payment gateways are not to be confused with payment processors. Payment processors analyze and securely transmit transaction data. They evaluate a transaction’s validity in real-time by contacting the customer’s issuing bank. Payment gateways, on the other hand, act as a buffer between the merchant website and the payment processor.

 

Since e-commerce transactions are considered card-not-present transactions, there’s a higher risk of fraud. As a result, merchants might be charged a higher fee by their payment processor compared to an in-person, card-present transaction.6

 

How Payment Gateways Work

 

Payment gateways are a front-end process that play a vital role in all e-commerce transactions. The process might seem simple on the surface, but there’s a lot that goes on behind-the-scenes—most of which happens in near real-time:7,8

 

  1. A customer goes to a merchant’s website, chooses the items they want, enters their payment information into the payment gateway, and confirms the order.
  2. The payment gateway uses secure socket layer (SSL) encryption to safely transmit the customer’s payment information and transaction request to the merchant’s payment processor.
  3. The payment processor routes transaction data to the relevant financial institution or card issuer for validation.
  4. Depending on whether the information is submitted correctly and the consumer has funds available, the transaction is approved or denied.
  5. If the transaction is authorized, the issuing bank transmits the authorization back to the card issuer, then to the merchant’s business, and finally back to the payment gateway.
  6. Confirmation appears on the merchant’s website, the merchant fulfills the order, and funds are transmitted from the customer to the merchant’s account, typically within 1-3 days.

 

What to Look for in a Payment Gateway Service Provider

 

To establish a payment gateway, merchants can enter into a partnership with an acquiring bank or they can choose their own third party dedicated payment gateway system.9 Not all payment gateways are built the same, and many have different capabilities and functions. For example, some might offer secure payment information storage capabilities so customers don’t have to re-enter payment information. Others might offer ways to integrate sales with business accounting software, among other features.10

 

In addition to specific features and functionality, some experts recommend businesses consider the following when choosing a payment gateway service provider:

 

  • Network security. According to a Shape Security report from 2018, about 90 percent of total login attempts to online retailers’ websites were illegitimate hacking attempts.11 Businesses must ensure customer’s data is secure, especially for card-not-present transactions.12
  • User experience. As of 2019, about 69 percent of global online carts are abandoned13, sometimes due to non-user friendly payment gateways. If a payment gateway is confusing, requires too much personal information, or takes a long time to go through, customers may turn elsewhere.14
  • International payment options. E-commerce allows global commerce at the click of a button, meaning businesses can easily expand their horizons by allowing global sales and accepting domestic and international payments.15
  • Cost and fees. Some payment gateways have fees like monthly processing minimums. Businesses may wish to shop around to find a payment gateway that fits their budget.16

It’s worth noting that it’s possible for companies to use multiple payment gateways simultaneously if there isn’t one service that meets all of their needs.17

The

Takeaway:

Any business that wants to accept online payments—whether through credit card, debit card, e-check, or even cryptocurrency—typically uses a payment gateway. Payment gateways read customer payment information, encrypt the data, and send it to a payment processor for authorization. The payment processor authorizes the transaction and informs the payment gateway so the merchant can then finalize the transaction.

Megan Doyle - The Author

The Author

Megan Doyle

Megan Doyle is a business technology writer and researcher based in Wantagh, NY, whose work focuses primarily on financial services technology.

Sources

1. “What Are Payment Gateways and Payment Processors?,” Business2Community; https://www.business2community.com/strategy/payment-gateways-payment-processors-01777693#8cm2sDDRilkhhqDM.99
2. “What is a Payment Gateway and What is its Role in Ecommerce?,” Due; https://due.com/blog/what-is-a-payment-gateway/
3. “Payment Gateway,” Investopedia; https://www.investopedia.com/terms/p/payment-gateway.asp
4. “Payment gateway: the technology behind the sale,” PayPal; https://www.paypal.com/us/brc/article/what-is-a-payment-gateway
5. “What is a Payment Gateway and What is its Role in Ecommerce?,” Due; https://due.com/blog/what-is-a-payment-gateway/
6. Ibid.
7. Ibid.
8. “Payment Processing 101: What’s the Difference Between a Payment Processor, Payment Gateway & Merchant Account?,” Ecommerce Platforms; https://ecommerce-platforms.com/ecommerce-selling-advice/what-is-difference-between-a-payment-gateway-payment-processor-and-a-merchant-account
9. “Payment Gateway,” Investopedia; https://www.investopedia.com/terms/p/payment-gateway.asp
10. “What is a Payment Gateway and What is its Role in Ecommerce?,” Due; https://due.com/blog/what-is-a-payment-gateway/
11. “Payment Gateways: Keeping Your Ecommerce Transactions Safe + Customers Happy (2019),” Big Commerce; https://www.bigcommerce.com/blog/payment-gateways/
12. “Payment gateway: the technology behind the sale,” PayPal; https://www.paypal.com/us/brc/article/what-is-a-payment-gateway
13. “Online shopping cart abandonment rate worldwide 2006-2019,” Statista; https://www.statista.com/statistics/477804/online-shopping-cart-abandonment-rate-worldwide/
14. “Payment gateway: the technology behind the sale,” PayPal; https://www.paypal.com/us/brc/article/what-is-a-payment-gateway
15. Ibid.
16. Ibid.
17. “Payment Gateways: Keeping Your Ecommerce Transactions Safe + Customers Happy (2019),” Big Commerce; https://www.bigcommerce.com/blog/payment-gateways/

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