By Megan Doyle
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.
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
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
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
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:
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
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 is a business technology writer and researcher based in Wantagh, NY, whose work focuses primarily on financial services technology.
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/
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
17. “Payment Gateways: Keeping Your Ecommerce Transactions Safe + Customers Happy (2019),” Big Commerce; https://www.bigcommerce.com/blog/payment-gateways/