What Is a Payment Gateway? How It Works and Example (2024)

What Is a Payment Gateway?

A payment gateway is a technology used by merchants to accept debit or credit card purchases from customers. The term includes not only the physical card-reading devices found in brick-and-mortar retail stores but also the payment processing portals found in online stores.

Brick-and-mortar payment gateways also have begun accepting phone-based payments using QR codes or Near Field Communication (NFC) technology.

Key Takeaways

  • Payment gateways are interfaces used to collect consumer payment information.
  • In physical stores, payment gateways consist of the point-of-sale (POS) terminals used to accept credit card information by card or by smartphone.
  • In online stores, payment gateways are the “checkout” portals used to enter credit card information or credentials for services.
  • Payment gateways are distinct from payment processors, which use customer information to collect payments on behalf of the merchant.
  • There are also payment gateways to facilitate payment in cryptocurrencies like Bitcoin.

How Payment Gateways Work

The payment gateway is a key component of the electronic payment processing system, as it is the front-end technology responsible for sending customer information to the merchant-acquiring bank, where the transaction is then processed.

In the past, terminals would accept credit cards using magnetic strips and required paper signatures from the customer.

With the development of chip technologies, the signature phase could be removed in favor of a personal identification number (PIN) entered directly into the payment gateway hardware. The accuracy of the entered identification number is handled using the Luhn algorithm. Today, contactless purchases are also available, with many customers now using their phones as payment devices instead of plastic credit cards.

The architecture of a payment gateway will differ depending on whether it is an in-store gateway or an online payment portal. Online payment gateways will require application programming interfaces (APIs) that allow the website in question to communicate with the underlying payment processing network. In-store payment gateways will use a POS terminal that connects to the payment processing network electronically using either a phone line or an internet connection.

Payment Gateway vs. Payment Processor

A payment gateway is distinct from a payment processor, a service that connects the customer's bank to the merchant account and facilitates the actual movement of money.

There are essentially two halves of the transaction: a payment gateway that collects customer information for payment, and a payment processor that uses that information to contact the customer's bank and the merchant account, debiting one account and crediting the other.

Note

A payment gateway collects customer card information and encrypts it for later processing. A payment processor uses that information to charge the customers' bank or credit card provider.

Example of a Payment Gateway

Merchants can gain access to payment gateway systems through merchant acquiring bank partnerships or they can use their own payment gateway system. Large banks such as Bank of America (BAC) and JPMorgan Chase (JPM) have sophisticated payment gateway systems that they offer to customers along with their own merchant acquiring bank services.

Ultimately, merchants can choose a variety of payment gateway technologies as long as they are compatible with the merchant acquiring bank that is being used for payment processing.

One recent example of a payment gateway is Square (SQ), which emphasizes flexible mobile payments for retail businesses. Block Inc.'s Square Reader technology allows customers to easily accept payments at ad-hoc locations such as conventions or farmer’s 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, which allows the customer to swipe their payment card for processing through the mobile phone’s electronic connection. The Square Reader sends the payment information to a merchant’s acquiring bank, which then processes the information for the merchant momentarily.

It is likely that new products will continue to increase the versatility and speed of payment gateways. In recent years, blockchain startups have even introduced payment gateways for cryptocurrencies.

How Much Does a Payment Gateway Cost?

Payment gateways typically charge a combination of initial setup fees, a flat monthly fee, and a small fee for each transaction. Some gateways may also charge a fraction of each purchase. For example, Square charges a 10-cent fee on most card transactions, as well as 2.6% of payment volume. Stripe charges 2.9%, plus 30 cents per transaction. There also may be fees for equipment and installation.

What Is a White Label Payment Gateway?

A white label payment gateway is a payment gateway whose branding can be customized according to their client's preferences. This allows merchants to receive payments through third-party services while using their own name and brand.

Can I Build My Own Payment Gateway?

While you could build a payment gateway from scratch, it would probably be too expensive to be worthwhile. The technology consulting firm Softjourn estimates that building a minimal gateway, to process credit and debit card transactions could cost a quarter of a million dollars, not to mention the additional headaches of international transactions, foreign currencies, and regulatory compliance.

Is Google Wallet a Payment Gateway?

Google Wallet, formerly known as Google Pay, is a digital wallet that makes it easier to interact with payment gateways. Instead of carrying around a credit or debit card, users can store encrypted card data on their phones, allowing them to safely pay without having their cards present.

Is PayPal a Payment Gateway or Processor?

While sometimes described as a payment provider, PayPal provides similar services to both a payment gateway and a payment processor. PayPal's merchant accounts share many properties with a processor, allowing merchants to safely accept and redeem payments to their bank accounts. PayPal also offers a gateway service called PayFlow.

The Bottom Line

Payment gateways, which are interfaces used to collect consumer payment information, are an important feature of the digital economy. By allowing customers to safely and securely share their credit card information, these systems reduce some of the barriers to online commerce.

While the first payment gateways consisted of simple card-reading devices, they are now sophisticated systems to collect and authenticate PINs, signatures, and other data for merchant transactions.

What Is a Payment Gateway? How It Works and Example (2024)

FAQs

What Is a Payment Gateway? How It Works and Example? ›

In physical stores, payment gateways consist of the point-of-sale (POS) terminals used to accept credit card information by card or by smartphone. In online stores, payment gateways are the “checkout” portals used to enter credit card information or credentials for services.

What is payment gateway with example? ›

A payment gateway is a technology platform that acts as an intermediary in electronic financial transactions. It enables in-person and online businesses to accept, process, and manage various payment methods—such as credit cards, debit cards, and digital wallets—in a secure and efficient manner.

How does payment gateway service work? ›

The payment gateway encrypts the card details, carries out fraud checks and then transfers the cardholder's information and transaction details to the merchant's acquirer. The acquirer relays the information to the card scheme (eg Visa, Mastercard) and onwards to the issuing bank.

How do payment gateways get paid? ›

Processing: The payment processor (who might also be your merchant bank) makes money by charging a fixed-rate fee every time you process a transaction — no matter whether it's a sale, a decline or return. Plus, it can charge fees for setup, monthly usage and even account cancellation.

Is PayPal a payment gateway? ›

No, PayPal is not a traditional payment gateway, but it does offer a payment gateway solution (Payflow) as part of its overall payment processing solutions.

What is the popular payment gateway? ›

The best payment gateways at a glance
Best forStandout feature
PayPalFirst-time usersExtremely simple setup
StripeAccessible analyticsFlexible, with a wide range of tools and plugins
Shopify PaymentseCommerce storesAll-in-one eCommerce solution
SquareSelling online and offlineIncludes a basic website builder
2 more rows
Jan 2, 2024

Is debit card a payment gateway? ›

These may include credit cards, debit cards, eChecks, and digital wallets (like Google Pay, Apple Pay, Amazon Pay, PayPal, Venmo, etc.). Essentially, it's a piece of software that creates a secure tunnel for customers to connect with and transfer funds to merchants in online transactions.

How much does it cost to use a payment gateway? ›

Payment gateways are typically bundled with payment processing services and usually involve a monthly subscription fee and a per-transaction fee. Subscription fees can cost anywhere from $0 to $99 or more each month. Per-transaction fees can be flat-rate or interchange-plus.

Why do you need a payment gateway? ›

Payment gateways not only enable online transactions but also improve overall business operations. By providing a more secure and efficient transaction process, enhancing customer experience and facilitating global reach, payment gateways are an important component of digital commerce.

What is the difference between payment and payment gateway? ›

The difference is a payment processor facilitates the transaction and a payment gateway is a tool that communicates the approval or decline of transactions between you and your customers.

How safe are payment gateways? ›

In fact, payment gateways are highly secure when they're setup and managed properly. They are used by most e-commerce sites, both large and small. In order to understand why, it is first important to understand how these systems work.

How long does it take to create a payment gateway? ›

On average, it can take anywhere from several weeks to several months to build a payment gateway, depending on multiple factors. Still, some more complex systems can take longer to develop.

How long does payment gateway take to payout? ›

Amount is credited in merchant's account in T+2 days after payment gateway deductions.

Is E wallet a payment gateway? ›

Regardless of its type, a digital wallet is a payment method. A payment gateway or payment processor, such as PagBrasil, on the other hand, works as a channel for the payment transaction between the buyer and the seller.

Is Amazon a payment gateway? ›

Amazon Pay is a payment option that enables merchants to streamline the checkout process, increase conversion rates, and build trust with customers.

How do I set up a PayPal payment gateway? ›

Please make sure to follow the instructions below carefully.
  1. Log in to your Create account.
  2. Click Shop from the top menu, followed by Payment Gateways.
  3. Click the Add Gateway button.
  4. Locate the PayPal gateway and click on it.
  5. Click the Connect with Paypal button.

What are the types of payment gateways? ›

How many types of payment gateway exist? There are four types of payment gateways: hosted payment gateway, API-hosted payment gateway, self-hosted payment gateway, and local bank integration gateway.

Is Google a payment gateway? ›

The Google Pay API is available for merchants and users in multiple countries or regions. Google Pay API for India operates on a unique India-only form of payment called Unified Payments Interface (UPI).

What is the difference between a bank and a payment gateway? ›

A payment gateway is a network that collects, verifies and performs fraud checks on customer's credit card information before sending it to the payment processor. A payment processor is a service that routes a customer's credit card information between the customer's bank and the merchant bank.

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