What do customers value most about their payment interaction 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.
This article will break down the definition of a payment gateway, explain how a payment gateway works, and which one is best for your business. So let’s get to the point!
What is a payment gateway?
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.
A payment gateway is a piece of software responsible for collecting, encrypting, and transmitting payment details between issuers, acquirers, PSPs, and card networks. It acts as a communicator between all participants in the online payment processing.
Payment gateways have been specifically designed for industries where online payments are indispensable. They 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 reliable 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 does it work?
Let’s say you’re an e-commerce store. A buyer who wants to purchase on your site will enter their payment details on the checkout page and click the "Buy" or "Pay" button. While the transaction 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.
As you can see, the payment gateway acts as a kind of router in every online transaction. However, different types of payment gateway 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.
Hosted payment gateway
As the name suggests, a hosted payment gateway is hosted by your payment service provider. It takes the customers away from your site’s checkout page to complete the payment process. Upon confirmation, the customer then gets back to your site and receives a successful payment notification.
This type of payment gateway integration is considered the easiest way for merchants to start accepting digital payments. Hosted payment gateways eliminate the need to obtain PCI DSS compliance because its entire infrastructure is protected and maintained by a third-party provider you cooperate with.
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. However, this option is only suitable for PCI-certified organisations. With a self-hosted payment gateway, the entire payment journey takes place on the merchant’s side. 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 gateways 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 payment process from the request to confirmation, keep their data in sync, and drive revenue.
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. 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.
If you're wondering how to integrate a payment gateway into a website, the process is detailed in our previous article.
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 used to pay with. That’s why your business success largely depends on the most widely-used payment methods availability.
- 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.
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.