What Is Payment Gateway? Definition, How It Works, and Examples

Payment Gateway

A payment gateway is a technological tool used by retailers to accept debit or credit card payments from customers. The term includes not only physical card-reading devices found in brick-and-mortar retail stores but payment processing portals found in online stores as well. However, brick-and-mortar payment gateways have in recent years started accepting phone-based payments using QR codes or Near Field Communication (NFC) technology.

  • Payment Gateways are consumer-facing interfaces that are used to collect payment information.
  • In physical stores, payment gateways are point-of-sale (POS) terminals that are used to accept credit card information via cards or smartphones.
  • Payment gateways are the “checkout” portals used in online retailers where customers enter credit card information or login credentials for services like PayPal.
  • Payment gateways differ from payment processors, which use customer information to collect payments on the merchant’s behalf.
  • There are also payment gateways to facilitate payments in cryptocurrencies like Bitcoin.

How Does the Payment Gateway Work

An electronic payment processing system’s payment gateway is a crucial component because it is the front-end technology in charge of transferring client information to the merchant-acquiring bank, where the transaction is processed.

Technologies for payment gateways are constantly changing to match new consumer preferences and technological advancements. In the past, terminals accepted credit cards using magnetic stripes and required a paper signature from the customer. With the development of chip technologies, the signature step can be entered directly into the payment gateway hardware in favor of a personal identification number (PIN). Today, contactless shopping is also available, with many customers now using their phones as payment devices rather than plastic credit cards.

Whether it is an in-store gateway or an online payment portal, a payment gateway’s structure differs. Online payment gateways would require an application programming interface (API) that allows the relevant website to communicate with the underlying payment processing network. A POS terminal that electronically links to the payment processing network over a phone line or an Internet connection will be used by the in-store payment gateway.

Payment Gateway Vs Payment Processor

Payment Gateway

A payment gateway is distinguished from a payment processor, a service that links a customer’s bank with a merchant account and facilitates the actual movement of funds. You can think of these as two parts of a transaction: a payment gateway collects the customer’s information for payment, and a payment processor uses that information to contact the customer’s bank and merchant account. crediting one account while debiting the other.

Payment Gateway Example

Merchants can access payment gateway systems through merchant-acquiring bank partnerships, or they can choose to have their own payment gateway systems. Large banks like Bank of America (BAC) and JPMorgan Chase (JPM) have sophisticated payment gateway systems that provide customers with their own merchant-acquiring bank services. Ultimately, merchants can choose from a variety of payment gateway technologies, as long as they are compatible with the merchant-acquiring bank they are using for payment processing.

A recent example of a payment gateway is Square (SQ), which places an emphasis on flexible mobile payments for retail businesses. The company’s Square reader technology allows customers to easily accept payments at ad hoc locations, such as conventions or farmers’ markets, or through roaming storefronts such as food trucks.

With the Square Reader payment gateway technology, a merchant can attach a small piece of hardware to their mobile phone that allows a customer to swipe their payment card for processing through the mobile phone’s electronic connection. The Square reader sends payment information to a merchant’s acquiring bank which then processes the information momentarily for the merchant.

New products are likely to continue to increase the versatility and speed of payment gateways. In recent years, blockchain startups have introduced payment gateways for cryptocurrencies as well.

How Payment Gateway Can Benefit My Business?

Payment Gateway

Facility: When you integrate with a payment gateway, it means that your customers can shop at any time, whether you’re viewing the store or not. Allowing your customers to shop at their leisure adds convenience for them and you.

Fast Payouts: As a business owner, you know that getting paid is downright difficult. Rather than go through the hassle of agreeing to pay on a certain day and then forgetting to do so, many customers prefer to pay right away and get it done. Payment gateways allow them to do so, making it a win-win situation for both you and your customers.

Better Protection: Customers’ number one concern with online payments is security. As of 2017, credit card fraud losses in the United States totaled $2.5 billion.

Using a payment gateway critically reduces the risk of credit card fraud for three main reasons:

The payment gateway receives the customer’s credit card information safely. This means only the customer and the bank that issued them will have access to their information.

Every payment gateway must be PCI DSS standards compliant, which means that they adhere to special security standards to ensure that your customer’s card information is processed securely.

A further security standard known as 3-D Secure is offered by card services. This requires the customer to create a password for each card used for online payment.

How Do I Integrate with the Payment Gateway?

You have a few options for integrating with a payment gateway depending on how you want to receive payments from your customers.

Payment Gateway

  • The first category of integration redirects your customer away from your business’s website to make the payment. It is suitable for businesses that do not receive a lot of online traffic. After your customer clicks the payment link, they are taken to your payment processor’s page to enter their card details and make a payment, after which they are redirected to your website. An example of such a payment gateway is PayPal. These payment gateways can be customized—by adding your business name or logo to the checkout page, for example. The drawback of this approach is that your business cannot control the entire user experience because the gateway is external.
  • With the next category, your customer remains within your website throughout the payment process and the payment is handled by a payment gateway. Once your customer enters the details within your business’s site, the information is sent to the URL of the payment gateway, where the actual transaction takes place. Since your customer remains on your website during the purchase and is not redirected, this type of payment gateway is better for businesses that get most of their revenue through online payments, as it provides a better customer experience. does. However, as you will be asking for your customer’s payment details through your website, you have to take necessary precautions to ensure that their information is secure.
  • The next type of payment gateway makes use of an API (Application Programming Interface). This type is similar to the previous type, in that customers enter their card details directly into the business’ online payment page, but here their payment is processed using an API. These payment gateways can be customized with your business name and logo and offer full control over the user experience. Businesses using these will have to take care of PCI compliance and SSL certification themselves.

Overall, payment gateways make online payment processing easier for your business and help you receive payments faster, more conveniently, and with better security. If you’re looking to receive payments online, or want to enhance a method you’re already using, you’re looking for a payment gateway.