What Is a Payment Gateway?

Updated on December 21, 2021
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payment gateway

Ever wonder what happens after you punch in your credit card information and click the “order now” button when purchasing something online? The answer is a complex transfer of information between multiple stakeholders, all of which occurs in a matter of seconds. This entire process is made possible using something called a payment gateway.

A payment gateway is an important service in the world of ecommerce. It exists so that transactions can take place in situations where a physical credit card is not present and a merchant cannot verify a customer’s identity. Having a good payment gateway for your ecommerce business allows you to accept various forms of payment and guarantee your customers’ personal information is secure.

Payment gateways can be a fairly ambiguous subject, given that they take place behind the scenes of a transaction. In this guide we’ll break down what a payment gateway is, how it works, and what it can do for your small business. We’ll also offer up some payment gateway options that you can invest in to ensure an optimal checkout experience for your customers.

Payment Gateway Definition

A payment gateway is a software application that plugs into your ecommerce platform to authorize online payments. Think of it as a virtual version of the credit card reader you might use to make payments at a brick-and-mortar store. When a customer makes a payment online, the payment gateway establishes a connection between your ecommerce platform and its payment processing system. This is needed because it is prohibited to send transaction information directly from a website to a payment processor, due to security reasons.[1]

Once the payment is processed and approved, the payment gateway receives the funds from the payment processor and deposits them in the merchant account. The merchant account is a bank account that allows your business to accept different types of payment, such as credit and debit card payments. A merchant account should be separate from a business bank account. Both ecommerce and brick-and-mortar retailers need a merchant account in order to accept credit card payments, but only ecommerce businesses need a payment gateway.

payment gateway

How Payment Gateways Work

Now that we have the basic definition down, let’s get into the nitty-gritty of how payment gateways work.

Step 1: The Customer Submits Their Information

When a customer submits their credit card information on your ecommerce platform, the payment gateway goes to work. First, the customer’s web browser sends the information from their browser to your ecommerce platform. Once your ecommerce platform receives the information, it will send it along to your payment gateway via an encrypted connection. Encryption is the process of encoding a message in such a way that only authorized parties can access it.

Step 2: The Payment Gateway Passes Along the Information

The payment gateway will forward the transaction information to the payment processor used by the bank you have your merchant account with. A payment processor is a company authorized to process credit and debit card transactions between buyers and sellers. In this situation, the payment gateway is acting as the middleman between the merchant and the payment processor.

Step 3: The Payment Processor Verifies the Transaction

The payment processor will then contact the issuing bank of the credit card to ensure the funds are available and the card is legitimate. The processor will also connect with your merchant account to deposit funds when available. The purchase will then either be approved or declined by the credit card’s issuing bank. Regardless of the result, the information is relayed back through the payment gateway to the ecommerce platform.

Step 4: If Approved, the Sale Is Executed

If the credit card’s issuing bank approves the transaction, the merchant’s ecommerce platform will complete the transaction. The payment processor will then release the funds into the merchant’s account.

All of this occurs within a matter of seconds. It is important to note that you can integrate your payment gateway and merchant account with a payment processor. Companies that offer this service are known as payment service providers (PSP), such as Stripe or Square. More on that later.

payment gateway

Payment Gateways for Small Business Owners

If you sell online, you need a payment gateway. But how do you know which one to choose? Well, a good payment gateway actually offers a whole lot more than just the secure transfer of information. Here are some things to consider when making your selection:


There are three costs typically associated with payment gateways: setup fees, monthly fees, and transaction fees. If you opt for a separate payment gateway and merchant account, there are also fees you will have to pay on the merchant account, such as setup fees, software or equipment fees, monthly fees, early cancellation fees, and processing fees, among others.

Depending on the type of business you operate and your payment needs, it may be cheaper to go with a PSP. These businesses don’t charge monthly fees but tend to have higher per-transaction fees.


Your customers aren’t going to hand over sensitive financial information if they don’t feel your website is secure. Furthermore, you don’t want your website to be hacked and your customers’ information to be stolen. While most payment gateways come with a variety of security features, the best have point-to-point encryption and a gateway that meets Level 1 PCI compliance standards.

Accepted Payment Methods

Selecting a payment gateway that accepts a variety of different types of payment widens your sales net and makes your business seem more credible. Almost 60% of customers will abandon a transaction if their preferred payment method isn’t accepted.[2] In addition, 80% of customers feel safer submitting their credit card information if they see trustworthy card logos (Visa, MasterCard) displayed prominently in an online store.

Before selecting your payment method, do some research on your target market. What is their preferred payment method? Note that if you sell internationally, preferred payments methods may differ by country.


Because payment gateways are third-party applications, you will have to integrate them into your current platform. Make sure the payment gateway you select can be incorporated without causing too much disruption.

Payment Location

Certain payment gateways will allow you to complete the checkout process on your own platform, while others make you redirect to another site. Consider which type of experience you want for your customers when selecting a payment gateway. You could also redirect customers to a hosted platform within your site, such as Stripe, to complete the transaction.

Customer Service

An issue with your payment gateway means you will not be able to accept online credit card payments, which would probably cause a lot of problems for you and your business. Because of this, make sure you align with a payment gateway service that provides 24/7 support. The ecommerce business never sleeps, so you should be able to get the help you need at all times.

payment gateway

Top Payment Gateways

Now that we know what to look for in a good payment gateway, let’s see what some of our options are. We’ll look at both payment gateway providers and PSPs so you can understand your full range of options. Note that most payment gateway providers also offer a fully integrated PSP solution. Deciding which option is right for your business depends on your unique payment needs.

Payment Gateways


PayPal is perhaps the biggest name in ecommerce payment, and a good option for all businesses to consider. There are two payment gateway options offered by PayPal: Payflow Link and Payflow Pro. Both can be integrated fairly easily with a merchant account and ecommerce platform, and Payflow works with almost every payment type and payment processor. Payflow Link costs nothing to install and takes $0.10 of every transaction. At checkout, customers must enter their credit card information on a PayPal-hosted payment page or form embedded on your site.

With Payflow Pro, users will be charged a $99 setup fee and a $25 monthly fee, plus $0.10 per transaction. Payflow Pro boasts a fully customizable checkout experience, as well as added compliance features. Because Payflow is so cheap, many businesses offer it as a secondary payment gateway. Note that PayPal also offers a fully integrated PSP option.


Authorize.Net has been around since 1996, making it one of the oldest payment gateway providers out there. Over that time Authorize.Net has built up a comprehensive service that works for most small and mid-size businesses. Specifics include the ability to accept all major credit cards, debit cards, echecks, and digital payment methods like Apple Pay. Authorize.Net also accepts international payments from any country in the world (although your business has to be based in the United States, Canada, United Kingdom, or Australia) and integrates with most major ecommerce platforms.

It is free to sign up for Authorize.Net, but users will be charged a $25 monthly fee plus $0.10 on every transaction. If you don’t yet have a merchant account, Authorize.Net offers a bundled option with a payment gateway and merchant account. This plan also costs $25 per month, and Authorize.Net takes a 2.9% plus $0.30 cut on every transaction.

Amazon Pay

If you already sell your products on Amazon, Amazon Pay is a good payment gateway provider for you. With Amazon Pay, users can complete their transaction using their Amazon credentials, eliminating the need to punch in their credit card information. Amazon Pay also offers an API, meaning it can be customized to fit the look and feel of your website.

There are no setup fees, but Amazon Pay does take a 2.9% plus $0.30 cut on all domestic transactions. For international transactions, that number jumps to 3.9%.

Payment Service Providers


Stripe is a complete PSP with a payment gateway baked into the product. In addition, Stripe is designed specifically with ecommerce businesses in mind. Through Stripe, you can accept most payment options and build a customized checkout process using Stripe’s developer platform. Other features include the ability to save customer card information and view sales data and analytics.

Stripe charges 2.9%, plus $0.30 per transaction. There are no setup or monthly fees, and the funds arrive in your account on a two-day rolling basis. Note that with PSPs, funding holds and account freezes and suspensions are more common than with a merchant account. This is because PSPs assume a greater risk by providing you with the funds from the transaction upfront.


Square is an end-to-end payment processor that works directly with credit card payment gateways to securely route payments to the right place. Using Square, merchants can expect to see funds in their account in one to two business days. Square also integrates with a variety of ecommerce partners and offers APIs to integrate Square payments into your ecommerce platform. Similar to Stripe, there is no setup or monthly fee to use Square, and Square charges 2.9% plus $0.30 per transaction.

Closing the Loop on Payment Gateways

Payment gateways are an obscure piece of technology that play a vital role in the world of ecommerce. Without them it would be much riskier to purchase anything online. If you sell online, investing in a good payment gateway provides your customers with piece of mind and makes it more likely they will not abandon their shopping cart when it comes time to pay.

Many small businesses will find it more cost-effective to select a payment gateway that is part of a fully integrated payment service provider. But as your business grows and your transaction volume increases, a non-integrated payment gateway will probably offer you more value. Regardless of your payment needs, there are many capable solutions on the market that will provide you and your customers with a safe and easy way to buy online.

Article Sources:

  1. PCIComplianceGuide.org. “PCI FAQs
  2. CoxBlue.com. “Consumer Psychology and The Ecommerce Checkout – Stats Behind the Clicks