A payment gateway is a must-have for online stores. In fact, research from 2023 shows that 69% of Americans said they’ve used a digital payment method in the past 3 months when making a purchase . And the best way for online businesses to start accepting payments is with a payment gateway.
But hold on: If you’re wondering what a payment gateway is, and just why exactly you need one, we’ve got you covered.
In this article, we’ll explore the ins and outs of payment gateways including how they work and how you could go about implementing them in your business.
TL;DR
- A payment gateway is a solution that securely reads and transfers a customer’s payment information to a merchant’s bank account—both for online and in-person transactions. Payment gateways are increasingly important as eCommerce and online transactions continue to rely on credit card payments and other mobile payment solutions to simplify payments.
- Benefits of using a payment gateway include a simplified purchasing experience for customers, increased operational efficiency, and PCI compliance.
- When looking for a payment gateway, make sure it easily integrates with your payment processor, offers transparent pricing, allows you to white-label the payment experience, and has great customer reviews.
What Exactly Is a Payment Gateway?
Simply put, a payment gateway is a solution that securely reads and transfers a customer’s payment information to a merchant’s bank account—both for online and in-person transactions. Think of it as a cash register, except that the payments it processes are non-cash. These may include credit cards, debit cards, eChecks, and digital wallets (like Google Pay, Apple Pay, Amazon Pay, PayPal, Venmo, etc.).
Essentially, it’s a piece of software that creates a secure tunnel for customers to connect with and transfer funds to merchants in online transactions. It’s also the software in your POS system or card readers that processes the customer’s payment data in a brick-and-mortar setting. The job of the payment gateway is to capture payment info securely, make sure that adequate funds are available in the customer’s account, and get the merchant paid.
You can think of payment gateways as a middleman between your store and your customer’s credit card. Such solutions are increasingly important as eCommerce and online transactions continue to rely on credit card payments and other mobile payment solutions to simplify payments.
Popular payment gateways include Authorize.net, Stax, Stripe, Adyen, and Square. Some of them also offer a merchant account (besides the payment gateway). Most payment gateways come with features like fraud detection and data encryption that are specifically geared towards keeping your customers’ payment information secure.
If you’re handling cardholder data, you’ll need to think about aspects such as payment processor partners, PCI DSS compliance, and point of sale transactions in addition to various payment methods as credit card transactions and general commerce continue to evolve.
It’s important to ensure that you are PCI compliant, even if you’re a smaller business. If you’re not, you can be charged a monthly fee for non-compliance, and can end up facing a class action lawsuit and fines as high as $10,000 a month and $500,000 per incident.
Thankfully, those who run retail stores, need to process credit card or digital payments, or want to grow their business in a simple and straightforward fashion, can rely on payment gateway providers like Stax to guide them and simplify their payment processing operations.
Payment Gateways vs Payment Processors
Before moving on, it’s important to understand the differences between a payment gateway and a payment processor as these are often confused. While they do sound quite similar, and are in many ways complementary to each other, there are a few key differences to be aware of.
A payment processor is a company that acts as the intermediary or middleman between the two banks: the issuing bank and the acquiring bank. The issuing bank is the bank of the customer, while the acquiring bank is the merchant’s bank (in other words, the one acquiring the funds). Payment processors verify the payment details, ensure there are enough funds (if the purchase is made with a debit card), make sure there’s no fraud being committed, and essentially give the green light for the transaction to go through.
Meanwhile, as we’ve already discussed, a payment gateway is the technology that actually transmits all the information, and basically is a digital version of a point-of-sales (POS) terminal. A payment gateway must be used together with a payment processor, whereas the reverse isn’t the same, as a payment processor can be used for in-person payments.
In other words, if you’re going to make digital payments or venture into the world of eCommerce, you’ll need to have a payment gateway like Stax.
What Is a Payment Gateway Account?
It’s an account or a payment processor solution that allows you to accept debit card and credit card payments from your customers in online and brick-and-mortar settings.
When connected to a website or a point of sale (POS) system, the gateway processes the credit card’s keyed-in or physically-captured information safely and securely. If the transaction is authorized, the solution initiates the process of transferring funds into your merchant account.
This is a simple solution that works for businesses and their customers. However, there are a lot of moving parts involved. To understand this better, first, let’s take a look at the key stakeholders involved in the process.
Key Stakeholders Involved in Payment Gateway Processing
The following stakeholders are involved in any payment processed via a payment gateway:
- The customer (or cardholder) who makes a purchase.
- The merchant (or business) that makes the sale.
- Card networks (like Visa, Mastercard, etc.) that manage the customer’s card.
- The customer’s card-issuing bank that holds their credit card account.
- The merchant’s bank (or acquiring bank) that holds the merchant’s business account.
How Does a Payment Gateway Work?
As discussed above, payment gateways are the intermediary between your store and your customer. The gateways authorize the customer’s payment and encrypt the cardholder information. It then confirms the payment with the issuing bank and deposits the money into the merchant account. The gateway itself, besides being secure, is an easy way to facilitate online transactions for your store.
The gateway performs this function by connecting to debit card/credit card networks such as Visa, Mastercard, Discover, or American Express. It also reaches out to the credit card issuer, which is the issuing bank or financial institution that provided the card to your customers.
After connecting to the network and issuer, the gateway verifies the validity of the customers’ credit card information and overall transaction data.
Once the gateway receives an answer from the issuer regarding the availability of funds and the authenticity of the information, it passes on the acceptance or the rejection of the transaction to you and your customer. This allows you to confirm whether a transaction has been validated.
Here’s a more fleshed-out look at how payment gateways work:
- The customer initiates a transaction by entering their data on the merchant’s eCommerce site or by using their credit card in a brick-and-mortar store.
- The payment gateway passes along the customer’s credit card information to the acquiring bank (i.e., the entity that processes payments on behalf of the merchant).
- The payment processor interfaces with the customer’s card network (e.g, Visa, Mastercard), which then routes the transaction to the issuing bank (the bank that issued the credit card to the customer).
- The issuing bank verifies that there are funds available in the customer’s account to cover the purchase amount. This step is also used to determine whether or not the transaction is fraudulent. From there, the bank will approve or decline the transaction.
Benefits of Using a Payment Gateway
While the process involves intensive PCI compliance security, and encryption methods to connect with the credit card issuer, the gateway ensures a simplified process on the front end to streamline the customer experience
For instance, if the customer is processing the credit card payment online by themselves, they can enter the card details and then wait for just a few seconds before seeing whether their credit card payment has gone through or not. Since the gateway is usually integrated within your website or app, this doesn’t require your customer to go through any complicated processes. They need to enter necessary information such as their name, card number, card expiration date, and CVV code.
Similarly, suppose the transaction is being performed through payment hardware such as a POS terminal. In that case, it only takes a few seconds after swiping, dipping, or tapping the card to know if the transaction is authorized or not. This process also doesn’t ask for any complicated details and requires the card to be present with an authorized user.
Due to this mechanism, the gateway acts as the backbone of any merchant account setup. Without the payment gateway’s encrypted and robust connection to the card issuer and network, it’s not possible to authorize or confirm transactions. Keeping this in mind, a gateway account is essential to every business and organization that wants to accept credit card and debit card payments.
Can Payment Gateways Be Bundled with Other Merchant Account Services?
Many standard merchant service providers bundle these services with their online or in-person hardware solutions from the start. These offerings are mostly seen with online payment gateways.
However, they are also available for brick-and-mortar solutions that ensure you don’t have to run from one provider for POS hardware to another for a gateway account and to another for a gateway account. With that being said, this model can sometimes limit your flexibility in terms of choosing a combination of solutions.
There are many hardware manufacturers that need a third-party payment gateway provider for their POS equipment to come to life. The process to benefit from these types of offerings is made easier by contacting payment providers rather than equipment manufacturers. These providers can help you find the right combo of hardware and software solutions that are the perfect fit for your needs.
Whether you want to use your gateway account in an in-store or online setting, you must pick your gateway account with support for multiple networks in mind. This makes sure that you can easily accept payments from major networks and don’t have to turn away any customers.
Why Should You Use a Payment Gateway?
Payment gateways secure your transactions so you can stay PCI compliant. Remember, any business that handles cardholder data needs to be compliant with PCI Data Security Standards, so usinga gateway is the best way to do this for your online store. The gateway encrypts the cardholder’s data so the information stays safe and secure, and you can partner with a provider like Stax that takes care of all PCI compliance so you don’t have to spend any extra time thinking about staying compliant.
Payment gateways also give your customers a quick, seamless checkout experience. Adding too many steps, like creating an account to check out, can bring down a customer’s experience. This can make them less likely to want to shop at your store again–and less likely to finish their transaction. But payment gateways don’t disrupt the checkout process. Plus, using a payment gateway allows you to offer more payment options to your customers, increasing the likelihood of them completing their purchase.
In short, payment gateways allow you to seamlessly accept payments and encrypt the information so checkout is easy and secure, while also creating operational efficiency through automated systems that minimize the need for manual transaction processing.
What Is a Payment Gateway Fee?
The payment gateway fee largely depends upon the provider that you choose. That being said, the fee payment model usually stays the same across different payment gateway providers.
For instance, it is a usual practice for payment gateway service providers to attach a fee to each transaction that gets processed by the solution. In many cases, this includes a percentage of the whole transaction amount and a flat rate on top. Some providers can also include their additional pricing on top.
Transaction fees can also change due to various other factors. For instance, if you are processing a Visa or a Mastercard payment card, the fee may stay on the average rates mentioned above. But if you accept payments through an American Express card, the charges may rack up to a higher amount.
Different tiers of payment cards also play their part. Some credit cards that fall under the processor’s rules are considered “qualified” and have their payments processed at a lower fee. Whereas, other cards are deemed “non-qualified” and have their transactions completed at a higher charge.
Other charges such as monthly subscription fees may also apply to a payment gateway solution. This particular fee is usually quite nominal and may fall across a wide range. With that being said, these estimates can easily change depending on the provider that you end up selecting. While this is usually a small charge, it’s important to compare it with other providers to make sure that you are not paying more than your fair share of costs.
There are also several other fees that may relate to a payment gateway account. Some services set a monthly minimum threshold for processing payments at their usual transaction rate. If this threshold is not met, you may need to cover additional charges out of pocket. Many payment gateway services maintain this model to protect their expected revenues. If you can’t fulfill your expectations with the number of transactions, these payment gateway solutions tend to recover their losses through this monthly minimum fee.
There are also other fees related to payment gateway solutions that can depend on the provider and your business industry. While most of the additional fees are not high in cost on their own, they can run past a certain level when you add them all together. That’s why you need toremember these charges and ask your potential payment gateway provider what hidden fees they may charge, and see what other providers might offer in terms of the overall cost.
Since the overall fee for your payment gateway account will vary based on the provider themselves, it’s important that you do your due diligence and learn about all the involved costs before you sign up for such a service.
At Stax, we offer transparent pricing through our subscription-based model, saving you up to 40% in processing fees with a 0% markup on direct-cost interchange, no hidden fees.
What Should You Look for in a Payment Gateway?
When it comes to choosing a payment gateway, security is a huge concern. You need to be PCI compliant as a business owner, so ensuring the payment gateway you useencrypts cardholder data is a must.
You should also make sure your payment gateway integrates with your shopping cart. Many online shopping carts allow for customization so you can create a branded experience from end to end. This is often referred to as white labeling, which allows you to fully personalize the payment experience with your brand style.
Stax’ payment gateway easily integrates with major commerce platforms like Vend, WooCommerce, and Shopify. Stax also offers a payment API, allowing you to set up custom integrations for your specific needs.
Your payment gateway and payment processor should allow for easy integration when it comes to using their technology. Some merchant service providers charge a fee for setting up or providing you with a payment gateway, with a recurring charge every month. Be on the lookout for this extra fee. As mentioned earlier, be critical when researching platforms: ask directly if they charge additional fees, and if possible, go with a provider that offers subscription-based pricing, like Stax.
Finally, take a look at what reviews have to say, in particular on third-party review sites like G2 or Capterra, as this helps you get a better understanding of what your potential future payment gateway can be like. Take a close look in particular at any problems that customers had, and how the company solved them. If there are a lot of complaints about poor customer service, you might want to think twice about partnering with that payment gateway provider.
Payment gateways are absolutely necessary for online stores and eCommerce. And the right processor can help you save money on credit card processing without adding on extra fees.
How Do You Integrate With a Payment Gateway?
Integrating a payment gateway solution into your business isn’t difficult. Several payment providers come with an integrated option, which means you do not have to buy your hardware POS equipment and your payments account from different solutions. This is especially true for online payment gateway services, which are offered directly by payment processors without hardware requirements.
Whether you are finding the best payment gateway solution for a brick-and-mortar solution, an online store, or a hybrid business that caters to both models, you don’t have to go through strenuous processes if you know what you are doing.
While a payment gateway for an in-person solution often comes in a ready-to-use offering, setting up an online payment gateway is also not difficult. You need to sign up with the service and integrate its back-end solutions on your website.
From there, you can quickly start accepting credit card and debit card payments on your terms through your shopping cart. Payment gateway solutions also allow you to accept recurring payments conveniently, which adds to their overall ease of use.
Different Types of Payment Gateways
With that, it is essential to remember that you might have to choose between different types of solutions when it comes to online payment gateways. Some payment gateways may allow you to integrate the interface within your website itself. Whereas others might redirect the customer to the payment gateway’s page.
In general, there are three types of payment gateways:
- On-site (or Self-hosted). In this case, the checkout and payment processing is entirely handled by your own servers (which is usually the case with larger businesses).
- Off-site (or Hosted). In this case, the checkout happens at your site or physical store but the payment processing takes place on your payment service provider’s servers.
- Redirects. In this case, the customer is redirected to a processor (like Stripe or PayPal) to complete the transaction.
How Simple Is It to Optimize Credit Card Payments Through a Payment Gateway?
Overall, integrating a payment gateway into your day-to-day solutions is not a necessarily challenging task. While the first few steps may seem stressful, you can breeze through them with the help of the right provider. As long as you reach out to a solution that strikes the perfect balance between a user-friendly and cost-effective approach, you can process customers’ payment transactions with the utmost peace of mind.
If you are thinking about fees or payment types, in addition to PCI compliance and securing payment information, remember that payment solution providers like Stax are there to help.
Stax ensures that you understand more about merchant account providers and the payment options available so that you can best optimize your eCommerce sites, process payments, and have easy-to-use solutions that help your small business thrive.
With Stax Pay, it’s now easier than ever to implement payment gateways and online shopping carts, with no setup fees or contracts.
Whether you’re starting up an online store or looking for a better-integrated payments solution, the right payment gateway will make checking out convenient for customers.
Learn more about our retail payment processing solutions. To see if Stax Pay is a fit for your retail business, contact us to set up a consultation.
Quick FAQs about Payment Gateway
Q: What is a Payment Gateway?
A payment gateway is a secure solution for transferring customers’ payment information to a merchant’s bank account during online and in-person transactions. It acts as an intermediary by capturing payment data securely, confirming adequate funds in the customer’s account, and processing payments on behalf of the merchant. Popular payment gateways include Authorize.net, Stax, Stripe, Adyen, and Square.
Q: What is the difference between a Payment Gateway and a Payment Processor?
While payment gateways authorize transactions and communicate with banks, payment processors facilitate the actual transfer of payment data between card-issuing banks and acquiring banks for fund transfers. Both payment gateways and payment processors work together to complete online transactions.
Q: How does a Payment Gateway work?
payment gateway connects to debit/credit card networks such as Visa and Mastercard and verifies customers’ transaction data. It authorizes the transaction, confirms funds’ availability, and deposits money into the merchant account, securely facilitating online transactions for the store.
Q: What are the key benefits of using a Payment Gateway?
Payment gateways offer a secure, PCI-compliant method of processing online transactions. They make it easier for customers to complete transactions without going through complicated procedures while also providing security through encryption and fraud detection features. It can also offer more payment options for your customers, reducing the risk of cart abandonment.
Q: How do I integrate a Payment Gateway into my business?
Integration can be simple if you choose a provider that has an integrated solution. For online payment gateways, sign up with a service and integrate their back-end solutions on your website. For in-person solutions, many payment gateways come with a ready-to-use offering that easily syncs with your POS system.
