What is a payment gateway and how does it work?

Payments

0 min read

As the first step in the payments journey, the payment gateway plays an important role. Here, we explain what a payment gateway is, how it works and how to choose a payment gateway.

If you accept credit or debit cards online, you will need to use a payment gateway. This tool allows your business to accept payments from its customers. 

Find out in this article:

  • What a payment gateway is
  • How a payment gateway works
  • What role a payment gateway plays in the payments lifecycle
  • How to choose a payment gateway for your business
  • The benefits of using a provider who owns and operates its own payments gateway

What is a payment gateway?

A payment gateway allows businesses to accept payments from customers online. It allows the customer to initiate a transaction and informs them whether it is successful or not. It essentially serves the same function in the digital economy as that of a POS device in the physical economy.

How does a payment gateway work?

Payment gateways are the rails that pass the information from the merchant to the issuer and back to the merchant. The information that they pass is a request to the card issuer, who can then approve or decline the transaction depending on the customer’s bank account. The payment gateway then passes this approval or decline back to the merchant.

Payment gateways are typically used for card payments, but they can also facilitate alternative payment methods.

  

Given the sensitivity of the information being transmitted, payment gateways must secure customer and financial data. They use a variety of technologies to do this. These include network tokenization and encryption in accordance to standards like PCI compliance.

  

What is network tokenization?

Network tokens are unique digital identifiers used to supply a tokenized value instead of the primary account number (PAN) in all parts of the payment chain. These tokens replace sensitive card data, like the account number and expiration date on the front of a card used for payment, without exposing the actual account details.

How does tokenization work?


  1. A customer enters their account number, security code and other payment information (e.g. at checkout or when setting up a digital wallet)
  2. The merchant’s payment service provider requests a network token from the card scheme
  3. The card scheme shares the network token with the card issuer
  4. The card scheme shares the network token with the merchant’s payment service provider
  5. The merchant processes the payment using the network token

How does a payment gateway impact the customer experience?

The checkout is an important part of your customer’s experience on your site. Keeping every part of this experience as seamless as possible will prevent cart abandonment and the loss of a sale.

  

That’s why payment gateways need to evolve as technology, and consumer expectations change. It is vital that they adapt as the way customers expect to pay evolves. 

When choosing a payment gateway, you need to consider integration methods and global functionally for your checkout page.  How will your customers experience it? Does the page offer local payment methods? 

Sending a customer to a checkout page that they are not familiar with or that is not on brand with your business can be a jarring experience for them as they could think the page is fraudulent. Similarly, directing your customers to a page to put in their details with no local payment methods gives your shoppers more opportunity to abandon their purchase—as well as making them suspicious. 

How to choose a payment gateway

Although payment gateways perform the same function, not all are created equal. Here are eight considerations to bear in mind if your business is choosing or changing a payment gateway.

1. Compatibility with your website, app and physical point-of-sale terminals

Some gateways are strong in ecommerce, others in traditional face-to-face sales, and others in both. Equally, some gateways have developed features for specific industries, geographies or business models. Ensure that a prospective gateway is a good fit for the way your business trades.

2. Integration

If your business already has relationships with other suppliers, evaluate the costs or changes to equipment, online payment pages etc. required to integrate with a prospective gateway. 

3. Speed of settlement

Quiz a prospective gateway on settlement times, plus whether funds are settled gross or net of fees and charges, as this will directly impact your cash flow. 

4. Card and local payment types offered

Different countries have their own preferred ways of paying and being paid. Ensure a prospective gateway can cater to these, depending on your target customers as well as where and how you trade.

5. Fee structure

Gateways will have a range of fees and charges for things like set-up, authorization and data security. Understand the fully loaded costs and contract terms to make effective comparisons between gateways.

6. Security certifications

Check the security policies, procedures and certifications of a prospective gateway. They must have the necessary accreditations to store, process and transmit sensitive customer and financial data. Any organization that is involved in processing, transmitting or storing card data must be PCI compliant —ensure anyone you are working with is certified.

  

7. Value-added services 

Consider what other services are available from a prospective gateway to drive smarter decisions and growth. This includes data analytics, fraud and risk management.

8. Support available 

Ensure that you are comfortable with the level of support you would receive from a prospective gateway. For example, dedicated technical and customer support in your time zone and language.

Part of a full payments stack

Payment gateways are a vital step in the payment process—and the digital economy. Once the payment gateway has collected the customer’s card information, it will then be up to the payment processor to use that information to contact the customer’s bank and the merchant account so that one can be debited and the other credited. 

Finding a unified payment solution that takes care of both these steps and the others in the payment lifecycle will help your business simplify the process and deliver a frictionless customer journey. Finding a partner that operates end-to-end will ensure that all your data comes from one source so that transactions can be processed faster with less downtime and more accuracy.

Is Checkout.com a payment gateway?

Yes, Checkout.com is a payment gateway, an acquirer and processor. Checkout.com offers these in an end-to-end solution. Transactions can be processed faster with less downtime and more accuracy, helping merchants increase acceptance rates and drive overall growth.

To find out more about the payment lifecycle, discover what Checkout.com can offer merchants.

  

Keep up-to-date with all things payments

Written on Aug 23, 2022 by

Renee Howard

Technical Product Marketing, Checkout.com

Keep up-to-date with all things payments