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What Is A Payment Gateway & How Does It Work For Your Online Store?

QUICK SUMMARY

Collecting payments online is slightly different than collecting them at a brick-and-mortar store. When you have a physical location, customers can use a point-of-sale (POS) terminal to make in-person payments with credit cards and debit cards. If you sell products and services online, your customers may be thousands of miles away from you, creating the […]

Collecting payments online is slightly different than collecting them at a brick-and-mortar store. When you have a physical location, customers can use a point-of-sale (POS) terminal to make in-person payments with credit cards and debit cards. If you sell products and services online, your customers may be thousands of miles away from you, creating the need for a virtual option. A payment gateway fills that need.

In 2022, the ecommerce industry accounted for more than $5 trillion in revenue, making it one of the biggest drivers of economic growth. One of the easiest ways to increase revenue is to offer multiple payment options to your customers. After all, not everyone feels comfortable turning over their debit card or credit card information to a total stranger. If you offer at least one alternative, you can capture part of this market, maximizing your profit potential.

In this article, I’ll tell you more about payment gateways and how they can help you collect online payments from your customers.

What Is a Payment Gateway?

A payment gateway is a portal that transfers data from your merchant account to your payment processor. This is what allows you to accept credit cards, debit cards, and other payment methods from online shoppers.

The beauty of a payment gateway is that it works 24/7, allowing you to make sales even when you’re sleeping or busy with other things.

How Does a Payment Gateway Work?

Before we explain how a payment gateway works, you should know about all the parties involved in completing an ecommerce transaction.

Customer: A customer initiates each transaction by visiting your ecommerce website and adding products or services to a shopping cart.
Merchant: This is you! As a merchant, you make physical or digital items available to customers all over the world.
Issuing bank: The issuing bank gives your customers payment cards, enabling them to buy from you.
Acquiring bank: This is the financial institution that maintains your merchant account and processes your card payments.

Here’s an overview of how a payment gateway works:

A customer visits your website, views your products or services, and decides which one(s) they want to buy.
The customer goes to your payment page and enters their credit card number, expiration date, and security code.
Your payment gateway checks for signs of fraud and encrypts the customer’s card data to prevent unauthorized access.
The acquiring bank sends the payment information to Visa, Mastercard, Discover, American Express, or another card scheme.
The issuing bank checks to make sure the account is valid, that it validates the information provided by the card scheme, and authorizes (or declines) the transaction.
The acquiring bank sends an approval or denial message to the payment gateway. If the payment is approved, your website displays a payment confirmation. If the payment is denied, your website asks the customer to provide a different payment method.
Your site makes a card capture request. This puts a “hold” on the customer’s card and reduces their available credit.
The acquiring bank collects the money from the issuing bank and puts it in your merchant bank account.

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

Types of Payment Gateways

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

Self-hosted

With a self-hosted payment gateway, you collect the customer’s payment information right on your website. This gives you more control over the process.

Stripe and Shopify are examples of self-hosted gateways used in ecommerce.

Hosted

Fully hosted gateways redirect customers to another webpage to complete each transaction. The other webpage is owned by a payment service provider or a company that handles payments for online merchants.

PayPal is probably the best example of a fully hosted gateway. PayPal has all the infrastructure needed to process a secure payment and send the customer back to your company’s website.

API-hosted

API-hosted gateways use an application programming interface (API) to collect payment details and handle payment processing. 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.

Local bank integration

Local bank integration offers basic functionality for business owners who want to get their companies 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.

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

Payment gateways and payment processors are two different things.

An online payment gateway is what verifies a customer’s card information before transmitting it to the payment processor.

The payment processor transmits credit card information between a POS system and the customer’s issuing bank.

Payment Gateway Q&A: Answers to Your Most Pressing Questions

If you’re ready to start accepting credit card payments, a payment gateway is a must. Here are the answers to some of the most frequently asked questions about this type of technology.

How much does a payment gateway cost?

Pricing depends on many factors, such as what type of software you use and how many credit and debit card transactions you expect to process each month. You may need to pay setup fees, transaction fees, interchange fees, processor markup, and/or monthly fees.

A transaction fee is a flat fee charged for every transaction completed via the gateway. Interchange fees are the fees set by companies like Visa and Mastercard. Processor markup refers to the amount of money charged by the payment processor. These fees are in addition to the interchange fees set by credit card companies.

If your online business does less than $100,000 in online sales each year, consider using a payment aggregator with your payment gateway. Aggregators like Stripe and Square charge fixed rates, allowing you to avoid interchange fees, setup fees, monthly fees, and processor markup.

Why do I need a payment gateway?

Accepting payments online is one of the best ways to increase your revenue. The right payment gateway makes credit card processing easy, allowing you to make more sales without introducing more products or services.

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.

Do payment processors work on mobile devices?

About 33% of Americans use a mobile device to shop for products and services on a weekly basis.

Whether you want to accept credit cards or give your customers buy now, pay later (BNPL) options, you need a payment gateway service that works on smartphones and tablets.

The good news is that many payment gateway providers offer this functionality.

Get More Payment Tips And Solutions For Your Ecommerce Business

A payment gateway is just one part of how your online store handles transactions with your customers. Learn more about what it takes to make your checkout experience as smooth as can be with more great content from ECM below.

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