The content of this article is provided for informational purposes only. You should always obtain independent business, tax, financial, and legal advice before making any business decision.
For consumers, completing a transaction – whether in person or online – is generally a seamless process. From quickly swiping or inserting your credit card into a point-of-sale system or entering your payment details on a website’s checkout screen, a transaction can be authorized and completed in seconds.
But behind the scenes, several sophisticated steps and precise systems are working together to move funds from buyer to seller – and a payment gateway is part of that magic.
Whether you’re new to the world of payment processing or a seasoned business owner looking to overhaul or expand your checkout options, read on to learn what a payment gateway is, how the payment gateway process works, how payment gateways differ from banks, and how to choose one for your own business.
A payment gateway is a digital service that facilitates secure and encrypted transactions between a merchant and their bank and/or processor after a purchase is made. In other words, it’s the bridge that enables the transfer of funds from the customer’s preferred payment method to the merchant.
In the same way that a point-of-sale terminal at a brick-and-mortar cash register looks at a card’s chip to check if the card is valid, an online payment gateway helps ensure payments are legitimate. Since you can’t access the physical card when processing an online order, the payment gateway handles the work for you.
Here’s a quick rundown on how the payment gateway process works:
Payment gateway providers include financial institutions (e.g., banks), dedicated payment service providers, and specialized fintech companies. PayPal provides payment gateway services, for example.
To see the payment gateway process in practice: when a customer shops on your website and enters their card details at checkout, the gateway encrypts that data, routes it to the payment network for verification, and returns an approval or decline – all within seconds. The customer sees a confirmation screen; the payment gateway handles everything in between.
You'll often hear the terms payment gateway and payment processor used interchangeably, but there are some major differences between them.
One of the biggest is that a payment processor alone doesn't help securely authorize a transaction. On the other hand, a payment gateway can both process and authorize a transaction:
Both a payment processor and a payment gateway are needed for online sales. PayPal provides both services.
Payment gateways and the bank serve very different purposes.
A payment gateway is the pathway where your customer’s credit card information travels securely through to your payment processor and then to the customer’s issuing bank. Think of it as an online version of the device in a store where you tap, dip or swipe your card.
The payment processor takes care of moving the funds from the customer’s bank to your merchant account.
The banks on either side of this transaction are where your customer’s funds come from or to where your sales ultimately land.
As a merchant, you should be aware of three main types of payment gateways: on-site payments; redirects; and checkout on-site, payment off-site.
When a business uses on-site payments, customers don’t have to leave a retailer’s website when completing a transaction, which creates a more seamless checkout experience.
This option is ideal for larger businesses that want to control the entire checkout experience via their own systems and servers. To that end, on-site payments give companies – particularly enterprise-level corporations with the means and support – more control and flexibility over payment processing.
Some companies allow alternative payment methods during checkout in a redirected payment gateway.
Small businesses might choose to use a third-party payment gateway to offer customers more varied ways to pay, as well as increased security of a larger payment platform.
As the name suggests, the front-end checkout process occurs on a merchant’s site, while the payment is through a separate back-end system.
A hosted payment gateway sends customers to a different website to enter payment details. This makes it easy to get started and helps ensure PCI compliance, but it doesn’t give you full control over the customer checkout experience.
A self-hosted payment gateway collects credit card information directly on your site, providing a more consistent brand experience. Since this option puts security responsibility on you, you’ll want a self-hosted solution that meets PCI compliance standards.
Depending on the type of payment gateway, your website's platform, and any additional features or customization your business needs, the payment gateway integration process will vary.
That said, it will typically involve these steps:
Not all payment gateways are created equal. If you want to accept online payments, it's worth taking the time to research your options and find one that best fits the unique needs of your business.
Here's what to look for:
As a merchant, it's important to protect your customers' credit card data. If customers don't trust your website with their information, they're unlikely to complete the sale. If you want to accept credit cards online, ensure your payment gateway is PCI-compliant.
While security is essential, you don't want your customer to go through the checkout process only to realize your website won't accept their preferred payment method. It’s important to ensure your payment gateway lets you process the payment types your customers prefer so they don't get frustrated or take their business elsewhere.
Your payment gateway needs to connect your website and merchant bank account with other processors. Choose a provider that makes it simple to implement and connect everything without unnecessary hassle.
When you sell online, there's no reason to limit yourself to only your local market. As ecommerce becomes more global, you may need to attract, nurture, and sell to customers internationally. That means your payment gateway should make it simple to accept more than just your local currency.
Depending on your business, you may need extra features that other merchants don't provide, like additional fraud protection, buyer authentication, or the ability to process recurring payments like membership fees.
If you accept (or want to accept) credit card payments online or on a mobile device, you’ll need a payment gateway. Without it, you won't be able to verify a customer's credit card information, process payments, or finalize the sale.
If your business is brick-and-mortar only, you might not need a payment gateway. Your point-of-sale terminal will authorize the credit card payment using the chip reader. But if you plan to offer a hybrid of online and offline sales, it can make sense to incorporate a payment gateway into both your ecommerce and in-store checkout process
An international payment gateway (or global payment gateway) enables businesses to accept payments from customers in different countries.
It facilitates transactions by handling currency conversions, complying with international regulations, and helping secure seamless payment processing for businesses selling to customers worldwide.
Average payment gateway fees can vary widely, depending on the provider and your requirements. Fee structures often include per-transaction charges, monthly platform fees, and one-time setup costs. Review and understand fees before choosing your provider.
PayPal provides both payment gateway and payment processing services, with flexible integration options built for businesses of all sizes. With Business Payments from PayPal, you get almost everything you may need to accept payments – including a full-service solution or a gateway that works with your existing merchant account.
Manage your business funds easily with PayPal’s digital wallet, and explore how the PayPal ecosystem helps simplify payments for merchants of every size.