What is a payment gateway and why you need one

What do customers value most about their checkout experience with a business? The right answer is security, convenience, and flexibility in payment options. Regardless of your business type, a payment gateway is your only way to accept online payments and give your customers the payment experience they want.

Throughout this article, we will explore the definition of a payment gateway, how it works, and how to choose the best payment gateway for your business. So let’s get to the point!

What is a payment gateway?

A payment gateway is a piece of software responsible for collecting, encrypting, and transmitting payment information between issuers, acquirers, PSPs, and card networks. It acts as a communicator between all participants in online payment processing.

Whether you're a small e-commerce business or a large international corporation that accepts thousands of digital payments daily, a payment gateway is something you can't do without. It has been specifically designed to make the online checkout process safe and smooth. Payment gateways allow merchants to securely accept various payment methods and quickly reach global markets. Still, the main task of any payment gateway is to prevent payment data from falling into the wrong hands.

For maximum security, the payment gateway software uses encryption — a method of encoding sensitive cardholder data using a combination of symmetric and asymmetric cryptographic algorithms. A secure payment gateway will use SSL encryption to protect your customers’ information from data breaches and fraud. Plus, each payment gateway must be PCI DSS certified to ensure that the provider's infrastructure is protected at all levels.

How payment gateways work?

Let’s say you own an e-commerce store. A buyer who wants to purchase on your site will enter their card details on the payment page and click the "Buy" or "Pay" button. While the checkout process only takes a few seconds, several steps take place during this short time.

Now you’ll find out how each online transaction is processed and how the payment gateway is involved.

• The payment gateway collects the customer's payment data, encrypts it, and transmits it to the payment processor.
• Then the information is sent to the merchant’s acquiring bank.
• The acquirer sends a request to the card network (Visa, Mastercard, or other) serving the cardholder.
• The card network contacts the customer’s issuing bank, which authorises the transaction and sends a confirmation back to the card network and acquirer through the gateway.
• Finally, the payment gateway informs the customer that the payment was successful.

Payment gateway vs payment processor: are they different?

The short answer is yes. While a payment gateway is a front-end technology that collects and encrypts customers' card data, the payment processor's main task is to relay information between issuing and acquiring banks, ensuring the smooth movement of funds.

💡 MORE: Payment gateway vs payment processor: is it the same?

As you can see, the payment gateway acts as a kind of router in every online transaction. However, different types of payment gateways have various features that can change the generally accepted processing procedure. Let’s take a sneak peek at the most common payment gateway types.

Payment gateway types

Payment gateway software boasts a variety of integration methods. Let’s get familiar with each of them.

Third-party solution provider

Partnering with a third-party solution provider is a commonly used method for setting up a payment gateway on a website or app. This approach is favoured by businesses of all sizes because of its ease of implementation and minimal technical knowledge requirements. Moreover, it provides access to a range of payment processing capabilities.

Despite these advantages, working with third-party payment gateway providers can limit a business's control over the payment process. This can result in a lack of branding opportunities and reduced revenue due to high transaction fees. Furthermore, third-party providers may impose certain restrictions on the types of businesses they work with, as well as limitations for turnover sizes, chargeback rates, transaction quantities, and amounts.

Self-hosted payment gateway

Sometimes customers prefer to make payments without being redirected to third-party services. In this case, the optimal solution would be a self-hosted payment gateway and hosted payment page. However, such payment gateways require your organisation to be PCI-certified. With a hosted payment page, the entire payment journey takes place on the merchant’s side, and the customer doesn't need to leave your website to complete it. After the customer’s payment details are collected, they’re sent to the payment gateway’s URL using a special format or secret code.

Self-hosted payment gateway and hosted payment page give merchants complete control over transactions. The only bit of bad news — this integration type doesn’t provide technical support, leaving the merchant responsible for security.

API payment gateway

With API or non-hosted payment gateways, transactions are handled using API (Application Programming Interface) or HTTPS queries. Payment gateway APIs give merchants the power to streamline and customise the checkout process from request to confirmation, keep their data in sync, and drive revenue. Let's find out how payment gateway API works.

How payment gateway API works?

Application Programming Interface is a documented interface that allows applications to communicate and use each other's data or functionality in their work. Thus, a payment gateway API integrates with your company’s infrastructure to connect your checkout system to a third-party payment service provider. As part of the transaction, your website collects the customer's account information, such as card number, and sends that information to the gateway using an Application Program Interface (API) for authentication. As soon as a payment is completed, you will be notified about it in your database.

API-hosted payment gateway gives merchants control over the user interface and expands the possibilities for customising the payment page. At the same time, the checkout will be easy and clear for the customers. This solution makes it easier for businesses to accept multiple payment methods in various currencies without losing their brand identity.

White label payment gateway

In addition to the three types of payment gateways described above, there’s a beneficial option for companies wishing to provide their own merchant services. It’s a white label payment gateway — a turnkey solution offered by payment providers that allow businesses to offer processing services under their own brand.

The white label business model is a great way to enhance your offering and quickly enter the merchant services market. It frees you from the burden of developing your payment gateway software, undergoing PCI DSS assessment, and ongoing infrastructure maintenance. Run your own scalable payment business by relying on a ready-made system with technical support included.

💡 MORE: How to integrate a payment gateway to a website

Which payment gateway is better to choose?

If you collect all the providers offering a payment gateway among their services, you’ll get an impressive list. But which of the hundreds can be considered the best?

A well-designed payment gateway will possess four main features:

• Decent selection of payment methods. When your customers get to the checkout, they want to see the option they are used to paying with. That’s why your business success largely depends on the most widely-used payment methods available.
• Customisation. Consistent branding at every stage of interaction with your site helps build an impeccable shopping experience. The payment gateway API integration will give you the flexibility to customise UI and allow you to tailor the checkout page for any device.
• Multicurrency. What about growing international sales? Support for multiple currencies is crucial here. Some checkout solutions enable merchants to display prices in customers’ local currency, while others only allow manual currency selection.
• Security & Compliance. We believe this point needs no clarification. Your payment gateway provider must comply with renowned industry security standards, securely store information, and have all the tools needed for fraud prevention.

Making the final choice, of course, is based on your individual business needs and capabilities. The size of your business also influences a lot. With extensive industry expertise and a deep understanding of the market, we at Corefy know which payment solution can satisfy all your business needs. Get in touch with us to get qualified assistance in choosing payment methods and providers.