Imagine you run a brick-and-mortar store and a customer comes into the shop and wants to pay for a product. But, they don’t have any cash and would like to pay with a credit card. To accept the customer’s payment, you’ll need a payment gateway, or point of sale (POS) terminal to obtain payment information by card or mobile device.
If you can’t accept their card, you might lose them as a customer to the competing store next door.
Want to launch an e-commerce store as well? You’ll also need a payment gateway to accept customers’ payments.
An online payment gateway takes the form of a checkout portal like HubSpot’s One Page Pay where customers can enter credit card or payment gateway service provider information. Popular payment gateway service providers include PayPal and Apple Pay.
Ultimately, any business that wants to accept credit cards and online payments needs a payment gateway.
In this guide, we cover everything you need to know about payment gateways:
- How a payment gateway works
- Who’s involved in a payment gateway
- Types of payment gateways
- Frequently asked questions about payment gateways
What is a payment gateway?
A payment gateway transfers a customer’s payment information to a seller’s bank account, ensuring the customer has enough funds to make a payment.
Payment gateways are often confused for payment processors, but there’s a distinction. A payment gateway is the technology sellers use to accept payments, transmitting the customer’s payment information to the seller to get the seller paid. A payment processor transfers transaction data, handling the exchange of information between the customer and the seller.
How a Payment Gateway Works
A payment gateway plays an integral role in the overall payment processing system. It is the front-end technology that sends the customer’s payment information to the seller’s acquiring bank.
As technology evolves, so do payment gateways. In the past, POS terminals used magnetic strips and the seller collected paper signatures from customers. Today, chip technologies and contactless purchases like Apple Pay expedite the payment gateway process.
Payment Gateway Examples
Below is a quick list of some of the payment gateways you might interact with on a daily basis.
- PayPal: PayPal is one of the most popular redirect payment gateways that is equipped with a robust anti-fraud team. With currency and cart compatibility, merchants also choose PayPal for its versatility.
- Apple Pay: Apple Pay payments are processed through a compatible credit card. Many brick-and-mortar merchants use Apple Pay for its ease of use.
- Square: This is a popular payment gateway for mobile and in-person transactions.
- Stripe: Merchants choose Stripe for easy setup and customization options. Stripe also boasts tactics that simplify the checkout process, like one-click checkouts.
The technology powering a payment gateway might seem complicated, but a payment gateway transfers the customer’s payment to the seller’s bank account within seconds. The graphic below breaks down the steps involved.
Payment Gateway Steps
The customer enters payment information, which can include credit card or PayPal credentials.
Upon receiving the information, the payment gateway verifies if the issuing bank has funds available to cover the transaction.
The payment gateway sends encrypted payment information to prepare for transaction processing.
The card scheme approves and processes the transaction, then the payment gateway sends the information to the seller to complete the transaction.
The payment gateway sends the information from the customer’s issuing bank account to the seller’s bank account so that the seller can be paid.
Who’s involved in a payment gateway?
There are several actors involved in a payment gateway: seller, cardholder, issuing bank, card scheme, and acquiring bank. In this section, we’ll break down the roles they play.
The seller, or merchant, is the entity that is paid for selling a product or service. The seller accepts the payment from the cardholder or customer.
The cardholder is the customer purchasing a product or service from the seller. Purchases can happen in-store or online.
The issuing bank is the bank that is in charge of the customer’s account.
A card scheme is the credit card company that manages the credit card. Examples include Discover and Visa.
The acquiring bank is the bank that is in charge of the seller’s account. The seller’s account receives money from the customer’s account through a payment gateway transfer.
Types of Payment Gateways
There are several different types of payment gateways: redirects, front-end checkout, and on-site. Each method has unique benefits and challenges.
A redirect payment gateway takes the customer to a payment page to finish the transaction. PayPal is a popular example.
When the seller uses a redirect payment gateway like PayPal, PayPal handles the transaction processing, which can alleviate the burden on the seller’s end. However, it is an extra step for the customer to visit a different payment page.
With a front-end checkout, the checkout occurs on the seller’s site, but the payment processing takes place in the backend. Stripe is an example of a front-end checkout payment gateway.
An on-site payment gateway handles the entire checkout process on the seller’s site. Because of the complexity, this method is preferred by large businesses. With this method, the seller has more control over the process, but also more responsibility in maintaining the front-end and backend.
Frequently Asked Questions About Payment Gateways
Here, we answer some of the most common questions merchants may have about payment gateways.
What is the difference between a payment gateway and a payment processor?
A payment gateway is the technology that transfers a customer’s payment information to the seller so the seller can get paid. A payment processor moves the transaction through the processing network and sends the billing statement.
Why use a payment gateway?
Sellers can save time by using a payment gateway since they don’t have to manually input customer information; a payment gateway automates that process. This frees up time for the seller to focus on their business instead of tasks that can be handled with technology.
When a customer makes a purchase, a payment gateway encrypts sensitive information like credit card payments, ensuring a secure transaction. Moreover, in the context of crypto payment processing, a payment gateway also becomes crucial for facilitating secure cryptocurrency transactions, offering customers even more payment options and potentially expanding the customer base.
How can a seller accommodate customers’ different payment options?
Stacking payment gateways means incorporating multiple payment gateways on your site to accommodate different customer needs.
A Baymard institute study found that 9 percent of customers abandon their cart during checkout because there are not enough payment options. Additionally, Nearly 30 percent of Americans don’t have a credit card, according to a Nilson report. By including both credit card payments and digital payment options like PayPal, Apple Pay, and Google Pay, customers have more payment options.
What makes a payment gateway secure?
A payment gateway has to comply with Payment Card Industry Data Security Standards. One of these standards is encryption: a payment gateway uses their own code to encrypt customer data.
Encryption means concealing the data so that it is unreadable to entities other than the payment gateway. Tokenization protects customers’ credit card information by replacing their data with a unique identifier called a token. The token securely stores data the customer needs to make a future purchase.
How much does it cost to set up a payment gateway?
Payment gateways are essential for businesses.
No matter what industry you're in, or how big or small your business is, having a payment gateway is a critical part of the payment processing system.
The seamlessness of a payment gateway that automates processes, secures sensitive customer information, and provides customers with more payment options can improve customer satisfaction and even benefit your bottom line.
Thankfully, it is not too complicated to set up a fail-proof payment gateway. To learn more about HubSpot's new B2B Payments solutions, click the banner below.