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Key Takeaways

Cash Mountain Ahead: The ecommerce industry is set to explode, with projections hitting nearly $7 trillion in sales by 2024. This figure emphasizes the significant growth and potential profitability within the online retail sector.

The Unsung Hero: A payment gateway operates as the ecommerce equivalent of a POS system, securely authorizing and processing online payments, offering a bridge between merchants and customers' banks for a variety of payment methods.

Secure Gatekeeping: Payment gateways not only facilitate a multitude of payment options but also ensure security and PCI compliance, reducing merchants' liability and improving the checkout experience to decrease cart abandonment rates.

The Global Connector: Beyond simplifying and securing transactions, payment gateways enable global sales by supporting multiple currencies and international payments, providing a scalable solution that grows with the merchant's business.

Choosing the Right Gate: Selecting the ideal payment gateway involves considering supported payment methods, security features, cost, ease of use, international support, customer service, scalability, and the provider's reputation to ensure a smooth, secure checkout experience.

The ecommerce industry is projected to grow to nearly $7 trillion in sales in 2024, an increase of 8% from 2023.

This vast mountain of cash doesn’t even account for all the selling that goes on IRL—it’s purely from online shopping.

To capture some of these online sales, you need to create a checkout experience that feels safe, easy, and accommodating. That means PCI compliance, simple checkout processes, and multiple popular payment options.

After all, these shoppers are offering up their sensitive credit card information to you.

Unlike the in-person brick-and-mortar store experience with point-of-sale (POS) terminals, where you tap to pay with your credit or debit card, the online experience is all virtual.

Payment gateways—like PayPal, Stripe, and Square—are doing the heavy lifting for you in these virtual exchanges.

Today, we’re going to dig into all things payment gateway. Exciting, right? Well, you got this far, so keep scrolling and learn more.

What is a Payment Gateway?

what is a payment gateway illustration

A payment gateway is a service that securely authorizes and processes online payments for ecommerce brands.

It acts as a bridge between your merchant account, your payment processor, and your customer’s bank, allowing you to accept credit cards, digital wallets, Buy Now Pay Later (BNPL), and even cryptocurrency.

It operates all day, every day, so sales can come in at any time while you spend your time growing other parts of your online business.

Benefits of using a payment gateway

While you can’t really get away without using an online payment gateway for your online store, you should understand the benefits of using one all the same. Using a great one can yield even more benefits.

These benefits include:

  • Secure data transmission. Payment gateways provide a secure method to transmit sensitive payment data, using encryption and fraud detection tools to protect against hacking and data breaches. This reduces the merchant's liability for storing customer payment information.
  • PCI compliance. By using a payment gateway, merchants can offload much of the burden of complying with PCI-DSS (Payment Card Industry Data Security Standards) requirements, as the gateway handles and secures the payment information.
  • Multiple payment options. Gateways allow merchants to accept a variety of payment types beyond just credit cards, such as debit cards, digital wallets (PayPal, Apple Pay), and even cryptocurrencies in some cases. This provides more options for customers.
  • Improved checkout experience. Payment gateways can be seamlessly integrated into the merchant's website to provide a smooth, familiar checkout process for customers, reducing cart abandonment.
  • Automatic recurring billing. Some gateways offer automatic recurring billing capabilities, which is useful for subscription-based businesses or companies that need to charge customers on a regular schedule.
  • Global payments. Gateways connect to multiple payment processors, allowing merchants to accept payments internationally and in various currencies easily.
  • Fraud prevention. Many gateways provide advanced fraud detection services like AVS (Address Verification System), CVV filtering, velocity checks, etc. to help merchants identify and prevent fraudulent credit card transactions.
  • Scalability. Cloud-based payment gateways can easily scale up or down based on the merchant's transaction volume, allowing small businesses to grow without overhauling payment systems.

How a payment gateway works

Making payments online is mundane from the outside. We all do it constantly, and in a matter of seconds, it’s done. But, behind the digital curtain, a lot is happening.

First, let’s look at all the parties involved in this process.

The key players:

  • The customer: Initiates the transaction by finding products they love, adding them to their shopping cart, and checking out.
  • The merchant (that’s you!): Provides the products or services that the people love, and facilitates the payment process.
  • The issuing bank: The financial institution that has issued the customer’s credit or debit card.
  • The acquiring bank: The bank that maintains your merchant account and processes your card payments.

The payment gateway process:

  1. Your customer selects items to purchase on your website and proceed to the payment page, entering their precious card details.
  2. Your payment gateway, a secure intermediary service, encrypts your customer’s sensitive card data to prevent unauthorized access.
  3. The gateway performs fraud checks and, if everything looks legitimate, sends the encrypted payment information to your acquiring bank.
  4. Your acquiring bank forwards the transaction details to the appropriate card network (e.g., Visa, Mastercard, American Express, Discover, etc.).
  5. The card network communicates with your customer’s issuing bank, which verify the bank account’s validity and available funds.
  6. The issuing bank either approves or declines the transactions based on their findings.
  7. The decisions travel back through the same channels to your website, which then displays a confirmation for your customers or requests an alternative payment method.
  8. If approved, your acquiring bank captures the funds from the issuing bank and deposits them into your merchant bank account, completing the transaction.

Whew. Online payments seem simple, but many things have to go right for you to get that money from your customer.

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Types of payment gateways

Before you run out and choose your payment gateway, take a few minutes to learn more about the types of payment gateways available.

Hosted

This payment gateway redirects customers from your site to the payment service provider’s secure hosted payment page to handle the payment.

You’ll recognize this if you’ve ever paid for anything online with PayPal, where you’ve been whisked off to their secure payment page before coming back to the store.

Examples: PayPal, Authorize.Net, WorldPay

Self-hosted

In this type, the payment gateway is integrated into the merchant’s checkout page. Customers enter their payment details directly on the checkout page instead of being temporarily redirected elsewhere.

Examples: Stripe, Square, Shopify Payments, Braintree

API-hosted

API-hosted gateways use an API to collect payment details on the merchant’s checkout page and handle the payment processing securely elsewhere.

This gives you complete control over the design of your ecommerce website, as you don’t have to worry about sending the customer elsewhere to complete a transaction.

API-hosted payment solutions also make it possible to customize the checkout experience, reinforcing your brand image.

Examples: Adyen and Authorize.Net both offer API-hosted options

Local bank integration gateway

Local bank integration offers basic functionality for brands that want to get up and running without investing in more robust payment solutions.

This type of payment gateway directs the cardholder to a bank’s website and directs them to enter their card details. After providing this information, the customer goes back to the merchant’s website and receives an approval or denial message.

Subscription/recurring payments

For brands that plan to take recurring payments for a subscription product, these payment gateways help simplify this more complex and frequent transaction.

Examples: Chargebee and Recurly

Cryptocurrency gateways

While not the most popular currency for ecommerce customers, there’s also a payment gateway designed to accept payment in cryptocurrencies like Bitcoin and Ethereum.

Examples: Coinbase Commerce, BitPay, CoinPayments

Payment Gateway vs Payment Processor: What’s the Difference?

Payment gateways and payment processors are two parts of the same process.

A payment gateway is the messenger, securely transmitting data between the merchant and the payment processor/bank.

A payment processor takes over after the data has been transmitted to facilitate the authorization and movement of funds.

Here’s a quick comparison:

Payment GatewaysPayment Processors
FunctionTransmits transaction data securelyHandles the actual transaction and funds transfer
RoleFront-end transaction aspects (encryption, fraud detection, authorization)Back-end tasks (communication with banks, fund settlement)
ExamplesPayPal, Stripe, Authorize.NetFirst Data, Chase Paymentech, Global Payments
User InteractionCustomers interact during checkoutCustomers do not interact directly
ScopeData encryption and transmissionFund transfers and settlement
Security FocusData encryption, fraud preventionTransaction execution and fund movement
OperationCollects payment details and sends to processorCommunicates with issuing and acquiring banks
Workflow IntegrationInitial stage of transaction (data collection and secure transmission)Authorization and settlement stage (fund movement)
A quick comparison of two very similar seeming ideas

What Should You Look For in a Great Payment Gateway?

Finding the right payment gateway for accepting payments online isn’t too hard. There’s tons of options and many of them are really great. Yet, you still have to choose.

Let’s dig into what you should be looking for as you choose your payment gateway.

  • Supported payment methods. You know what payment methods your customers love, so this should be an easy initial filter in your search. Make sure it accepts payments from your ideal credit cards, digital wallets, local options, and crypto, if you want that).
  • Security. While most of the major gateways on offer are PCI compliant, there are more security considerations to think about, such as encryption (i.e., TLS and SSL), tokenization, fraud detection, and security audits. You want the most secure option you can get.
  • Transaction fees and other costs. Pricing is a concern for any part of your tech stack, but transaction and processing fees will be multiplied by the number of your orders (which will hopefully be many and increasing). Consider all costs related to your payment gateway to keep your bottom line intact.
  • Ease of use. Your payment gateway obviously needs to be easy for you to implement and use on the backend, but it must also be user-friendly and intuitive on the frontend. The nicer your checkout experience is, the more likely they’ll return for more.
  • International support. Not all stores have global aspirations, but for those that want to expand internationally, it’s essential to have foreign currency support and international payment options available.
  • Customer support. You are a customer, too, and this is a high stakes product. If you can’t accept sales for some reason, your payment gateway better be on it ASAP. So, look for 24/7 support via phone, live chat, and email.
  • Scalability. You want to grow your store and the number of sales that ring up within it. So, your payment gateway must be able to scale with you, capable of handling regular volume and seasonal spikes.
  • Reputation. There are reviews for everything these days, which means consumers can be well-informed going into a big purchase. Before choosing a payment gateway, read reviews about it and get an understanding of their reputation.

The Best Payment Gateway Solutions For Your Store

Luckily for you, The Ecomm Manager has done some legwork here.

You can check out our guide to the top 20 payment gateway providers to get all the details, but I’m going to share our top ten picks with a short summary of who each is best for.

And, here’s a high level look at where costs start with each option:

Tools Price
Stax Pay From $99/month
Payment Depot From $79/month
Shopify POS Plans start at $31/month
QuickBooks Online From $15/user/month
Helcim From 0.50% + $0.25 per transaction
Clover From 2.3% + $0.1 per transaction
Merchant One From $13.95 plus 0.29% + 1.55% per transaction
Square From $36/month plus 2.9% + $0.30 per transaction
Stripe From 2.9% + 0.30 per transaction
Braintree Plans start at 2.9% + $0.30 per transaction
Preview Image - <h2 class="c-block__title b-summary-table__title c-listicle__title h3" > Compare Software Specs Side by Side</h2>

Compare Software Specs Side by Side

Use our comparison chart to review and evaluate software specs side-by-side.

Compare Software

With that, you should have exactly what you need to make the best decision for your ecommerce checkout experience.

Final Thoughts

In truth, payment gateways are fairly simple (despite the 2,000+ words here explaining it). But, that doesn’t dilute their importance for ecommerce merchants.

Understanding what goes on behind the scenes only serves to highlight why picking the right payment gateway really matters.

These digital messengers handle sensitive customer data and control the customer experience at the peak of the sales journey. You gotta choose wisely.

To have a chance at grabbing part of that $7 trillion in sales, you need to do the most. Make every part of your store, from homepage to checkout, the best possible experience, and customers will hand over their cash.

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Payment Gateway FAQs

Of course, there are always a few extra questions to answer. So let’s get into them real quick before wrapping it up.

How much does a payment gateway cost?

Payment gateway service costs vary based on factors like transaction volume, payment methods accepted, and pricing model. Common fees include setup fees, monthly fees, and per-transaction fees ranging from 2-4%.

Payment aggregators like Stripe and Square offer flat-rate pricing without interchange or monthly fees, ideal for lower-volume merchants. Higher sales may benefit from interchange-plus pricing despite more complex fees.

Are payment gateways secure?

Payment gateways have several features designed to promote fraud detection and prevent unauthorized access to a customer’s financial data.

For example, each gateway has to comply with Payment Card Industry Data Security Standards (PCI DSS).

PCI-compliant gateways must be built on secure networks, have industry-standard firewalls, and protect stored cardholder data.

These security measures make online transactions safer. PCI compliance also gives your customers a reason to trust you, helping you build your brand while you process payments.

For best results, your website should use the Secure Sockets Layer (SSL) to prevent hackers from intercepting sensitive data.

Can I use multiple payment gateways?

Yes, it’s common for merchants to use more than one payment gateway.

Reasons include enabling a broader range of local and international payment methods, added redundancy in case one gateway experiences downtime, accessing different capabilities/features from various gateways, and negotiating better pricing across multiple providers.

What reporting/analytics features do payment gateways provide?

Most payment gateways provide detailed reporting on transactions including sales volumes, payment methods used, declines, and chargebacks.

They offer analytics dashboards visualizing sales trends, checkout conversions, and customer purchasing behaviors. Through customizable reporting and integration with BI tools, merchants gain real-time insights into payment processing activities and performance metrics to optimize their payments strategy.

Sean Flannigan
By Sean Flannigan

Sean is the Senior Editor for The Ecomm Manager. He's spent years getting to know the ecommerce space, from warehouse management and international shipping to web development and ecommerce marketing. A writer at heart (and in actuality), he brings a deep passion for great writing and storytelling to ecommerce topics big and small.