What is a Payment Gateway? Examples and How It Works

Did you know that online shoppers today are abandoning their carts at an alarming rate? According to Statista, 70.19% of online shoppers are abandoning their carts in 2024. 

The common causes for this are slow checkout, limited payment options, and security worries.

Each time a customer clicks away, you’re losing revenue. A frustrating payment process makes potential buyers second-guess their decision and leave without completing the purchase.

This is where payment gateways can help. Having the right payment gateway on your website can increase confidence for customers when they make purchases on your site, as they know their sensitive informations are protected. It also ensures a smooth customer experience with convenient payment options, ultimately enhancing the checkout process and boosting sales.

In this article, we’ll explore everything you need to know about payment gateways.

A payment gateway is a technological platform that securely transfers sensitive financial information, such as credit card details, to validate and authorise transactions before completion. It is typically used to accept card payments.

It acts as an intermediary between the merchant, the customer, and the acquiring bank. The gateway ensures that the transaction is encrypted and secure, protecting both the merchant and the customer from fraud, while also validating that the customer has enough funds to complete the transfer.

Think of it as the virtual equivalent of a point-of-sale (POS) terminal used in physical stores.

A payment gateway does a few key things:

• Secures Data: It encrypts sensitive payment information, such as cardholder names and card numbers, to protect it during transmission over the Internet.
• Sends for Payment Authorization: It transmits the payment details to the payment processor, which verifies with the bank or card provider to ensure the transaction is legitimate and that the customer has sufficient funds.
• Manages the Front-End: Payment gateways handle the checkout experience, collect information, and inform customers whether their payment has been approved or rejected.

A payment gateway is an essential component of the electronic payment processing system, enabling secure transactions between customers and merchants. To better understand how payment gateways function, let's break down the process and see how they operate on ecommerce websites.

1. Order: Once customers enter their payment details and submit the information on the merchant's website, the payment gateway encrypts the customer's private information and sensitive card details using technologies like Secure Sockets Layer (SSL) or Transport Layer Security (TLS). The gateway also performs fraud checks using fraud-detection algorithms, address verification (AVS), and CVV checks.
2. Request:  The encrypted information is then sent to the payment processor and the acquiring bank, which is the financial institution that handles the payment on the merchant’s behalf. At this stage, additional layers of fraud protection, such as those from card schemes, are applied. The acquiring bank then sends the transaction details to the customer’s bank (also known as the issuing bank) to request authorisation.
3. Authentication and Verification: The issuing bank verifies the transaction by checking the card's validity, the available credit or funds, and conducting further fraud detection measures as necessary.
4. Approval: The issuing bank responds to the payment processor with either an approval or a decline. The payment processor then communicates this outcome to the payment gateway.
5. Send: The payment gateway updates the merchant's website on whether the transaction has been approved or declined. If approved, the customer receives a confirmation message. If declined, the customer is prompted to try an alternative payment method. The payment gateway signals the website to proceed with the transaction. The payment processor is then responsible for transferring the funds. 

You may have heard of both payment gateways and payment processors. While they both play a role in processing transactions, they are not the same and serve distinct functions.

In short, a payment gateway manages the front-end experience, ensuring payment details are securely transmitted. Meanwhile, a payment processor works behind the scenes to approve the payment and transfer the funds.

Here’s a quick breakdown to clarify how each works.

In most cases, you need both a payment gateway and a payment processor for online payments. The gateway is what gets the customer’s information to the processor securely, and the processor makes sure the money moves from the customer’s bank to yours. Some providers bundle both services together, which can simplify things for businesses.

There are many payment gateways in the market. Here are some popular examples:

• Stripe: A globally recognised payment gateway offering simple APIs for businesses of all sizes to accept payments. It serves retailers, subscription services, software companies, and marketplaces, supporting over 135 currencies. Stripe is considered one of the best payment gateways in Hong Kong, the top payment gateways in Singapore, and several other countries.
• PayPal: One of the most widely used payment gateways, known for accepting credit card payments and offering cart integration. It’s a familiar name for both businesses and individuals.
• Opayo by Elavon (formerly Sage Pay): A well-known payment gateway in the UK and over 30 other countries. It has extensive experience serving industries like hospitality, restaurants, and retail. Opayo supports over 100 currencies.

Other popular names include Authorize.Net, Square, Adyen, and Fondy.

There are several types of payment gateways, each differing in how they are integrated into your website or digital platform and how they process payments to your account. Let’s explore the main types.

With a redirect payment gateway, the gateway is not embedded within the merchant's website; instead, customers are redirected to a secure payment page to finalise their purchases.

A well-known example of this is the PayPal payment gateway, which sends customers to its own platform to process their banking details and complete the transaction before directing them back to the merchant's site.

These gateways are easy to integrate and provide strong security since transactions are handled on the servers of established payment platforms. This convenience makes them an ideal choice for small and medium-sized online businesses. However, this approach provides less control over the payment experience and adds an extra step that slows down the checkout process.

An on-site payment gateway enables customers to remain on your website throughout the payment process.

With on-site payment gateways, you can gather customer payment information directly on your site without requiring a redirect. Typically, your website must encrypt the buyer's credentials and adhere to PCI DSS standards before sending the data to the gateway. 

This gateway make the process faster and giving you more control over the user experience. However, this increases the merchant responsibility for data security. 

Another widely used payment gateway solution is API-hosted. An API (Application Programming Interface) is a set of protocols that enables two software to communicate.

With this solution, customers can make a purchase on the merchant's website, while the payment is processed in the background via an API from a third-party service. The information is then collected securely through a trusted third party without the merchant handling it directly. 

Although this solution is convenient, it does limit control over the customer journey since merchants cannot monitor the entire payment process. They must trust the quality of the payment gateway's service.

Setting up a payment gateway may seem technical, but with the right provider and preparation, it’s a manageable process. Here’s a step-by-step guide to setting up a payment gateway.

The first step is selecting a type of payment gateway and payment gateway provider that suits your business needs. Consider factors such as supported currencies, payment methods (credit cards, digital wallets, and more), integration options, security features, and transaction fees.

Additionally, ensure your site is compatible with the chosen payment gateway by checking with your web hosting provider. For example, Shopify supports integration with over 100 different payment gateway providers.

To process payments through a gateway, you may need a merchant account. This is a special type of bank account where funds from credit or debit card transactions are temporarily held before being transferred to your business account. 

Some payment gateways provide an integrated merchant account, while others may require you to set up a separate one.

If you have your own website, the next step is to ensure your checkout page has SSL encryption to protect sensitive customer information. If you don't have SSL, you will need to purchase a certificate from a trusted provider. 

If you are using an ecommerce platform like Shopify, it’s very likely that they have an option for you to enable SSL. Your URL should appear as https:// if you have SSL.

Most payment gateways offer an API that allows you to connect their services to your site using codes. While the integration process may vary between gateways, they typically provide documentation to guide you.

Some platforms offer plugins or extensions to simplify the process. For example, if you're using WordPress, you can easily add payment gateway plugins like Stripe or PayPal without needing to code.

Security is critical in payment processing. Make sure that your gateway is PCI compliant, which is a standard for securely handling card transactions. You may also want to enable fraud detection tools and features like 3D Secure or address verification systems (AVS) to reduce chargebacks and fraudulent activity.

Before launching, it's essential to test your payment gateway. Most providers offer a sandbox environment that allows you to simulate transactions without using real funds. During testing, make sure that transactions are processed seamlessly, payment details are transmitted securely, emails and receipts are sent to customers, and your website redirects correctly after payments.

Most payment gateways offer real-time notifications about transaction statuses and provide reporting tools to help you track payments, refunds, and chargebacks. You can use these to consistently monitor transactions, especially in the early stages.

Not all online payment systems work the same way. They may all follow a similar payment processing infrastructure, but they have specific limitations, making some gateways better for your business than others.

Before choosing one to work with, consider what services they offer and whether they are what your customers need to use.

Each payment gateway has regions they support and those they do not, which affects their ability to serve businesses in certain jurisdictions or to receive payments from specific areas. 

Similarly, each gateway has its own list of supported payment methods and card networks, meaning they might not work with others outside of this list. 

It's important to research the market you are targeting and determine if the payment gateway solution you are considering supports local payment preferences. For example, while credit cards are widely used in the U.S. and Europe, many Asian markets prefer options like Alipay and WeChat Pay in China or Paytm in India. Understanding these preferences and choosing a gateway that accommodates them can enhance your sales potential.

If you plan to sell products or services internationally, it’s crucial to evaluate how well the payment gateway accommodates cross-border transactions. 

Start by ensuring the gateway can handle your preferred currencies. Allowing your customers to pay in their local currency significantly enhances their shopping experience and reduces cart abandonment.

Additionally, international payments come with complex regulatory requirements, so ensure the payment gateway complies with the laws of the countries in which you want to operate, including data protection regulations like GDPR in Europe and anti-money laundering laws.

One of the main reasons why customers abandon their carts on a website is because they worry about the security of the payment gateway.

When choosing an online payment platform, consider these key factors:

• Encryption: Ensure the gateway uses strong encryption, like TLS, to protect sensitive customer data during transactions.
• Malware Protection: Malware can expose users' passwords and card information. Inquire the payment provider about how they combat malware. 
• PCI Compliance: Verify that the payment solution adheres to Payment Card Industry Data Security Standards (PCI DSS). Established by leading credit card companies such as Visa, Mastercard®, and American Express, these security standards are designed to safeguard your customers' sensitive data and payment information. 

Payment gateways charge fees, which can vary significantly among providers. The common types of fees are 

• Transaction Fees: Charged per transaction, these fees can be a flat rate or a percentage of the sale.
• Monthly Fees: Some gateways charge a monthly service fee to access their platform.
• Currency Conversion Fees: Charged if you accept payments in multiple currencies.
• Refund Fees: Fees for processing refunds, which can vary by provider.

While lower processing fees may be appealing, ensuring the safety of your customers' transactions is far more important. If a gateway offers significantly lower fees, verify its security measures. 

Ecommerce fraud can be costly, especially if it affects multiple customers. If a payment platform's low fees lead to higher spending on security, investing in a more secure option may be the better choice, even if it’s more costly. 

If your business is registered in Hong Kong, Singapore, or the BVI, and you need a business account that can connect to payment gateways while supporting multiple currencies, consider Statrys.

With Statrys, you can link your account to popular payment gateways like PayPal and Stripe. The account also enables you to receive, send, and hold 11 major currencies. So, you can convert funds when the exchange rate is favourable for you.

Our service is entirely online, providing you with access to your account anytime, anywhere. Read more about our features below.