What Is Payment Gateway? Analysis of Features, Benefits, and Pricing

Paying online takes the hassle out of purchasing. You won’t have to go to the nearest ATM or carry cash, and you can pay remotely should you wish. This is why payment gateways became very popular since their inception in the mid-2000s. Moreover, as the demand grew, businesses had to keep up with consumers’ preferences for payment options. This is because missing a payment avenue could mean revenue loss.

So, if you want to expand payment options for your customers, you are in the right place. In this article, we will discuss–What is payment gateway? We will outline its common features, their general benefits, and costs. In this way, you will better understand how to set these up for your use.

What is payment gateway?

To understand what is payment gateway, let us look at its definition. A payment gateway is an example of financial technology that businesses use to accept debit or credit card payments. This is an umbrella term for physical devices and digital gateways. This means card readers that brick-and-mortar stores use and digital portals that online shops have are payment gateways. They also happen to be the most secure and straightforward way for merchants to accept payments for goods or services.

Is a payment gateway secure?

Gateways secure information using SSL encryption. They take this step before they send the data to the credit card network (MasterCard, Visa, Discover, etc.). In this way, the customer’s credit card information is transformed into codes. This happens in transit to the banking institution. This step also makes certain that the transaction is legitimate and verifies the buyer’s data. Additionally, the encryption will prevent fraudsters from taking advantage of the data while it is processed in the payment chain.

Stripe is a well-known payment gateway recognized for its secure customer interfaces and card and e-wallet support.

How a Payment Gateway Works

When talking about what is a payment gateway, it is important to get a general idea of how it works. It is also essential to know that it does not work by itself. There are several components in the payment process and the payment gateway is only one of them.

To start, these are the main players of payment: the customer, the merchant, the issuing bank, the acquiring bank, the payment gateway, and the payment processor.

First, a customer places an order on the merchant’s website. They submit that order from the cart by clicking the checkout button.

Then, the merchant relays the order information to the payment gateway. This is where customers decide which payment method to use among those that the merchant supports. Once they decide, the transaction is directed to the acquiring bank through a payment processor.

The issuing bank or the card association or network then receives the transaction information. Visa, MasterCard, or another card network verifies whether there is enough credit or debit. Once it confirms, it sends a response to the processor.

After which, the payment processor forwards the response to the payment gateway. The latter sends the response to the merchant’s interface to complete the payment processing. But in case the card is declined, the customer has to go back to the step where they choose a payment method and input their card information.

While it seems like a long-winded process, it usually takes less than 10 seconds to finish. In some cases, it is done in two to three seconds.

What is the difference between a payment gateway and a payment processor?

Is there a difference between payment gateway and payment processor? The short answer is yes. Though you can sometimes hear the two terms spoken in one breath or read in the same sentence, they are actually two different things. However, their functions are related to one another.

We have previously discussed what is payment gateway so let us look at what is a payment processor. It mainly serves to analyze and relay the transaction data from the merchant to the issuing bank. Payment processors authorize fund transfers. Additionally, it connects the two with the acquiring bank (WLPayments, 2022). As consumers, we do not usually see these at work because they are operating under the hood.

This means that payment gateways are front-facing while payment processors work behind the scenes.

Types of Payment Gateway

Like other software categories, payment gateways have different types. Generally, there are three. These are:

• On-Site Payments. On-site payments platforms, as the name suggests, allow businesses to collect online payments from their websites. They give businesses more control from the back-end to the front-end customer experience. However, small mistakes and inefficiencies may cost poor customer experience and even security breaches. As such, these are typically used by large businesses with a sizable amount of resources.
• On-Site Checkout, Off-Site Payment. With this, businesses allow their customers to check out their purchases on the website but payment processing is conducted through the payment gateway’s back-end. While you may not have control over the user experience, this provides a more secure back-end process as it is outsourced to your provider, which should have better and specialized security for payment processing.
• Redirects. Redirect gateways, as the name states, take the customer to a payment gateway page to complete a transaction. This type of payment gateway is usually employed by smaller businesses to provide some sense of security that their payments are being handled by a trusted brand.

Features of Payment Gateway

Reliable top-shelf payment gateways have the following key features:

• Payment methods. Payment gateway software are capable of accepting payments made with MasterCard, Visa, American Express, and the like. This is regardless of the location of the bank that issued the credit card or debit card. They can also take payments using PayPal for online transactions.
• International payments. The internet has brought the world closer to consumers. As such, it is important for businesses to make payments easy for international customers. This is possible with payment gateways since these enable multi-currency and international transactions. And depending on the gateway provider, the interface can have multiple languages.
• Invoicing. It can be convenient to have a payment gateway since it can generate invoices. This removes the need for integrating with an invoicing tool and accelerates the transaction.
• Security. Financial technologies need to have tight security and payment gateways are not exempt from this. They are compliant with the latest security standards and offer protection through tokenization and encryption. The best payment gateway systems also have anti-fraud solutions.

Braintree secures transactions in accordance with Strong Customer Authentication (SCA) standards.

Benefits of Payment Gateway

The following are the benefits that you can enjoy by implementing a payment gateway:

• Online payments. If you have an online business, then you would benefit greatly from a gateway. This financial technology will allow you to accept online payments. This mode of payment has already been gaining popularity, but because of the COVID-19 pandemic, it has experienced a surge in popularity. In fact, there was a six-percentage-point increase in the share of Americans using online payments in 2020 from 72% in 2016. In 2021, the share increased to 82%. To survive, businesses have to cater to the demand. And they have to have the most popularly used platforms.
• Multiple payment methods and currencies. Gateways do not limit payments you can accept to just credit or debit cards. In many cases, they can also let you support payments made via PayPal and similar. Additionally, they allow you to take payments in other currencies. The latter makes your business more attractive to international buyers.
• Secure payments. Payment gateways encrypt data to ensure that the information is safe during transit. This will give you and your consumers peace of mind that the payment information is not stolen.
• Anti-fraud safeguards. In case the credit or debit card is being used illegitimately, the payment gateway can help detect it. It can do so during the authorization part of the process. Thus, consumers are protected from fraud.

Examples of Payment Gateway

Now that we know what is payment gateway, let us check some of the most common payment gateways that you may have used or encountered already:

Melio

Melio. This is one of the fastest-growing payment gateway solutions for small businesses in the United States. Just like top platforms, it offers a competitive 2.9% transaction fee but charges nothing for authorization. Moreover, ACH or bank transfers are always free to send and receive. Plus, it also doesn’t charge for sending physical checks for payments via USPS.

PayPal

PayPal Payments. This is one of the earliest and most popular payment gateway solutions. It is a convenient method to send and receive payments. The technology allows merchants to accept online payments securely and expeditiously on their websites, mobile apps, or directly via email. Plus, it lets businesses create merchant accounts where they can access tools to help them manage their gateway settings.

In one survey, the top online payment solutions used by Americans in the past 12 months were PayPal (89%), followed by Venmo (30%), Apple Pay (21%), Amazon Pay (20%), and Visa Checkout (16%).

Amazon

Amazon Pay. This particular gateway is purposely designed for Amazon merchants and customers. With this, your shoppers can pay for their purchases using their Amazon credentials. It also has the additional capability of processing payments by voice through Alexa.

Stripe

Stripe. This is another well-known payment gateway option. It is known for its cloud-based infrastructure that ensures tight security. Because of this, it can help merchants prevent fraud. With this, you can also settle disputes.

Braintree

Braintree. A PayPal company, this platform offers global ecommerce tools for merchants to reach international customers. It is easy to integrate with this gateway because of its all-in-one SDK.

Cost of Payment Gateway

Payment gateway pricing is very competitive. And, it revolves around 2.9%. In fact, several leading ones such as Amazon Pay and Stripe have total transaction fees of 2.9% for processing, plus $0.30 for authorization per successful payment made on their platform. So, for businesses, they can actually use multiple payment gateways without resulting in much change to their bottom lines. The same transaction fee is charged by Melio—one of the fastest growing payment gateway solutions—but without charging for authorization. Moreover, what makes this platform unique is that bank transfers and sending checks via USPS are always free. So, this is really what makes it a popular choice among those in the know.

However, it is good to note that for some platforms, fees for international transactions may have different rates. For instance, for Amazon Pay, the cross-border processing fee is 3.9% while the authorization fee stays the same. While both aforementioned platforms have no setup and monthly fees, there are also those that charge for these services.

Authorize.net, for instance, charges no setup fee while having a monthly gateway fee of $25. It, however, retains the competitive 2.9% + $0.30 competitive pricing. It is also good to note that there are more specialized payment gateways that do not follow this pricing. Verifone, formerly 2Checkout, only offers global payments services. So, instead of having a different rate for domestic transactions, it has steady pricing of 3.5% + $0.35 per successful sale. Furthermore, like other top platforms, there are no setup fees. Clients only pay when they start selling.

Of course, you should expect different payment gateways to have different pricing plans. This is because some offer specialized services, add-ons, and features. Moreover, some providers may also charge for integrations. So, you make sure you investigate individual payment gateway pricing plans in great detail before committing to one. The most important things to check are setup fees, monthly fees, transaction fees, and international processing fees.

Payment Gateway Buying Factors

Business Location. Usually, this is not a big consideration as online transactions, in essence, can be conducted from anywhere around the globe. However, as discussed, there could be different rates for international transactions. And, if a good chunk of your target customers is situated abroad, then you would need to make sure that you comply with local standards, laws, and regulations. Hence, you would need to choose payment gateway providers that cater to these concerns and multi-currency support.

Popularity. This may just be the most important consideration of all. You must choose payment gateways that are popularly used by your target market as you want to make transactions convenient for them. What’s the use of having a payment gateway that nobody that matters to your business ever uses?

Cost and Payment Terms. This is another important consideration when choosing the best payment gateway solution for your business. It’s because costs such as transaction and authorization fees will affect your profit margin. So, it is best to take this into account when pricing your goods or services sold online.

Nature of Business. While there are many general solutions for online payments, there are specialized platforms designed specifically with particular operations in mind. For instance, there are platforms that specifically cater to online betting and gambling businesses. Also, there are platforms that specialize in growing ecommerce businesses by not only providing payment gateway services but also other features such as web catalog creation.

Device Compatibility. This is really important when you have a brick-and-mortar storefront. You wouldn’t want to make your customers wait or add some unnecessary hassle because your devices used for online payments don’t function seamlessly with your payment gateway of choice. Ensure that you avoid such by researching which hardware goes well with your payment gateway system—be they card readers or mobile phones/tablets.

PayPal Payments Pro has a table of fees that is attractive to merchants because it covers a wide range of payment and transaction types.

Payment Gateway Trends

Invisible Payments. More and more customers prefer to pay via an online gateway for their everyday needs. Hence, this customer behavior is pushing processing to be more invisible. This means that transactions are now blended into everything and normalized. And, customers won’t have to enter their information repeatedly just to pay. So, choose payment gateways that support payments from credits/rewards, device authorizations, and e-wallets.

Contextual Commerce. Merchants are now looking to provide buying opportunities outside of the traditional storefront relationships. The strategy is to provide purchase channels cleverly and seamlessly into online activities such as consuming content. This not only allows companies to personalize their offerings further but also makes it more convenient for customers to make purchases.

Mobile Commerce. According to recent online payment software statistics, mobile commerce is poised to be the norm. In fact, in various markets and geographies, it is one of the most preferred modes of payment. In 2021, mobile commerce grew by 29.8% compared to 2016 levels, reaching the lion’s share of 72.9%. Expect this share to increase in the future as mobile apps have also been replacing then conventional forms of in-person checkout such as cash and credit/debit cards.

More Competitive. As discussed, the cost of payment gateway services tends to converge at the 2.9% transaction fee range. This is especially so for the top services such as Stripe and Amazon Pay. Competition, however, will not only revolve around the traditional areas of fees, speed, security, and ease of use. Expect payment gateway services to incorporate other end-to-end features such as online storefront builders and content management modules.

Potential Issues with Payment Gateway

International Transactions. International transactions are notorious when it comes to delays. However, the cause is not always inefficiency. At times, the delays are due to the hoops transactions that users need to go through because of fraud detection protocols. Depending on these and other regional compliance procedures, international payments may take as long as five days. Usually, however, gatekeepers clear them in one or two days. This makes it inconvenient for both the buyer and the seller. Also, as mentioned, cross-border transactions typically have higher fees. To avoid such issues, carefully choose payment gateways that are known for quick, safe, and affordable international transaction services.

Integrations. Typically, users experience difficulties when incorporating payment gateways into their software architecture. Issues include compatibility with devices and the lack of data exports. And, these are not minor ones. Firstly, device incompatibilities may not only cause unnecessary hassle to customers but also inconvenience business owners and staff. This negatively contributes to the overall user experience with your brand. Secondly, lacking data exports won’t allow businesses to use their own data for analysis or simply port it over to their accounting software. Fortunately, there are platforms that provide APIs or have native integrations with other software solutions. You just need to look for them.

Fraud. The latest ecommerce fraud statistics show that with the rise of online payments comes an increase in defrauding attempts. In fact, researchers found that successful monthly attempts have risen from 43% to 48% for medium to large retailers. On the other hand, it increased by 27% for smaller retailers in 2020. With this taken into consideration, you’ll need to partner with payment gateway providers with rigorous enterprise-level security protocols. Moreover, it is also better to choose one that has extensive fraud detection and prevention features. And, fortunately, the top and most popular payment gateway solutions have them.

Is it important to have a payment gateway?

Yes, having a payment gateway is essential. Without it, you cannot accept debit or credit card payments. Customers will be unable to pay using their selected online payment system like PayPal either. Even if you allow bank transfer payments, it can still be a hassle. It will likely turn off potential purchasers because it does not guarantee security.

With a payment gateway though, you can cater to a wide audience locally and nationally. Apart from that, you will be able to reach customers outside the border. This means even if your buyer lives in Europe or somewhere in Southeast Asia, they can pay for their purchases with peace of mind. This is because they know that a payment gateway protects them from fraud. Plus, it can prevent hijacking of their payment information.

For your business to be successful in interfacing payment gateways, you can follow these payment gateways integration tips.

By Jenny Chang

Jenny Chang is a senior writer specializing in SaaS and B2B software solutions. Her decision to focus on these two industries was spurred by their explosive growth in the last decade, much of it she attributes to the emergence of disruptive technologies and the quick adoption by businesses that were quick to recognize their values to their organizations. She has covered all the major developments in SaaS and B2B software solutions, from the introduction of massive ERPs to small business platforms to help startups on their way to success.