The e-commerce market continues to expand at an impressive rate, with online transactions accounting for 22% of total retail sales in the U.S. in 2023 — approximately $1.2 trillion, according to Digital Commerce 360 and U.S. Department of Commerce Data.
Having a reliable payment gateway is essential to meeting the growing expectations for a secure and seamless transaction experience. In this article, we’ll delve into what a payment gateway is, how it works, types of payment gateways, examples of payment gateways, how to choose the best one for your business and common challenges businesses face with integrating gateways.
What is a payment gateway?
A payment gateway is a piece of financial technology used to support electronic purchases. The digital service used in processing debit or credit card payments is responsible for capturing, encrypting, and transmitting the necessary financial information — and related authorizations — between all interested parties. As such, the technology serves as a bridge between the retailer, their acquiring bank, the issuing bank for the customer’s card, and any payment processors involved.
Payment gateways predominately support online transactions. However, some in-person point-of-sale platforms also leverage this technology.
How payment gateways work
After the customer has initiated a credit or debit card transaction, the gateway:
- Collects the relevant payment data (e.g., card number, customer name)
- Encrypts and transfers this information to the payment network, including the payment processor and the retailer’s acquiring bank
- Receives authorization — or a rejection notice — for the transaction from the payment processor or the issuing bank for the customer’s card
- Communicates to the retailer and customer the success — or failure — of the transaction
Most popular types of payment gateways
When selecting a payment gateway, businesses have several options depending on their needs and resources. Below are some of the most popular types of payment gateways, each offering varying levels of control, security, and convenience.
Self-hosted
Self-hosted payment gateways, typically used by larger businesses, offer a secure way to store and process financial data within the company’s IT environment. This approach gives merchants complete control over the payment process, allowing them to customize payment pages and implement security and anti-fraud measures. Of course, managing a secure payment getaway internally also comes with increased costs and the need for dedicated IT support and oversight.
Hosted
Conversely, hosted payment gateways offload all management responsibility to an outside provider. So, while the online checkout process will begin on the merchant’s web page, the buyer will subsequently be routed to a third-party site for the relevant gateway processes (e.g., data capture, encryption, approval). Only when the transaction has been finalized will the buyer be redirected back to the merchant site.
Relying on industry experts to oversee anti-fraud measures typically results in improved security standards. However, the user experience can sometimes be impacted, particularly if the hosted gateway doesn’t match the look or feel of the retailer’s e-commerce environment.
Application programming interface (API)
API payment gateways take a more hybrid approach, allowing retailers to outsource their backend security and processing burdens while providing a seamless checkout experience. Merchants can integrate the third-party gateway directly into their site, meaning the customer never leaves the retailer’s web environment.
Much like a hosted strategy, this approach simplifies sellers’ day-to-day gateway management. However, the business might require programmer-level expertise to set up or maintain the relevant APIs, a challenge for companies with limited IT resources.
Payment gateway examples
The following are some of the most popular payment gateway service providers:
Authorize.net: A wholly owned subsidiary of Visa, Authorize.net supports electronic payments in person, online, or via mobile devices. The business has been active since 1996 and currently supports over 430,000 retailers, handling over 1 billion transactions yearly.
Cardknox: Cardknox is an omnichannel payment gateway that emphasizes security and integration while readily accommodating the specialized needs of many industries, including healthcare, retail, and e-commerce.
Chase: More than just a credit card services provider, Chase delivers a broad suite of customizable payment solutions from mobile apps to POS terminals to its Chase Paymentech Orbital gateway.
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Cybersource: Supporting over 50 currencies, Cybersource Payment Gateway lets you accept credit and debit card payments from around the globe. The organization operates within the Visa network, extending access to over 200 acquiring banks and payment processors in over 160 countries and territories.
GoCardless: Focused on the European market, GoCardless is a fintech specializing in bank payment solutions, including recurring payments, direct debit processing, and open banking.
Network Merchants (NMI): In addition to its industry-leading payment gateway, NMI offers merchant acquiring, underwriting, onboarding, and management solutions.
PayPal operates one of the most widely recognized online payment systems in the world. Its Payflow Payment Gateway allows merchants to offer this well-recognized payment option directly on their e-commerce sites.
Stripe: With a stated aim to “increase the GDP of the internet,” Stripe delivers various payment-processing solutions alongside APIs for e-commerce websites and mobile applications.
Flywire: A global payments enablement and software company with a mission to deliver the world’s most essential and complex payments, it uses vertical-specific software and payments technology to integrate seamlessly into the A/R workflows of its clients in B2B industries worldwide. Flywire also integrates with leading ERP systems like NetSuite, helping organizations enhance the customer payment experience while eliminating operational challenges. Flywire supports over 3,700 clients with diverse payment methods in more than 140 currencies across 240 countries and territories.
How to choose the best payment gateway for your business
To make an informed decision, consider these factors when selecting a payment gateway for your business.
Security
Whether you self-host or rely on a third party, the responsibility for maintaining a safe, stable transaction environment ultimately falls on your business. So, whatever platform you choose, verify that it has sufficient encryption and anti-fraud capabilities to meet the Payment Card Industry Data Security Standards (PCI DSS). Even better, look for offerings that deliver additional validation tools.
Typically, you’ll want to stick with well-known brands with an established, documented compliance history. After all, if a data breach occurs — even if it’s not your business’s direct fault — your customers will likely hold you responsible.
Transaction fees
You’ll also want to consider the pricing structure for any online payment gateway you choose. Most models are consumption-based, charging per transaction. However, some plans might include recurring fees or set minimum processing thresholds. Before you decide, analyze your current and projected sales trends to determine the likely real-world cost of each platform.
Integration
Your payment gateway won’t exist in a vacuum. It must share data across your back office systems, from your sales tools to your customer relationship management (CRM) software to your accounts receivable (A/R) platform. So, ensure that your chosen solution can integrate seamlessly with your existing software investments. Fortunately, the most popular options are customizable and can readily communicate with common enterprise resources planning (ERP) platforms.
To further simplify integration, consider building a financial ecosystem that prioritizes flexibility. For instance, our Accounts Receivable Automation software supports a wide range of ERP applications and payment gateways that are out of the box while offering API access to easily connect with your current systems.
Global coverage
In e-commerce, customers can come from anywhere. So, if you frequently make sales across borders, ensure your payment gateway offers multi-currency support. It is also essential to verify that the platform complies with relevant foreign trade regulations, such as protecting consumer data.
Relevant features
Beyond baseline transaction processing, consider what additional features might benefit your business. If you offer subscription services, look for a platform that supports autopay and recurring billing. If you have physical locations or cater to a younger audience, you might prioritize a gateway that handles mobile or virtual card payments.
Since not every transaction succeeds, evaluate how effectively the gateway manages chargebacks or refunds and whether there are extra costs involved. These supplementary capabilities — or lack thereof — can significantly affect your payment gateway’s overall return on investment.
Common challenges with payment gateway integration
- Technical complexity: Many businesses need help with the technical aspects of integrating a new payment gateway. Without in-house resources to design or code solutions, this investment can quickly become costly and inefficient.
- Security concerns: Criminals constantly evolve, and staying compliant with PCI DSS standards — or ensuring your third-party provider is — can consume significant time and resources.
- Low bandwidth: The quality of your internet services will directly impact the speed and efficiency of your payment processing efforts, especially during high-traffic periods like sales surges.
- Management difficulties: Supporting multiple payment gateways offers customers flexibility, but it can complicate operations for IT and accounting teams, leading to inefficiencies in managing various systems.
Invoiced: Keep your payments moving
Choosing the right gateway can significantly impact your bottom line. Ensuring fast, accurate payments requires more than just the right gateway — it requires certain technology. If your invoicing processes are inefficient, your customer may not know when or how to initiate a transaction.
Invoiced’s Accounts Receivable Automation software simplifies payment management with an intuitive interface that lets you easily manage multiple gateways, add new ones, or switch them without hassle. Our platform integrates seamlessly with your existing systems, offers robust security features to prevent fraud, and automates payment workflows so you can focus on growth instead of technical hurdles.
Schedule a demo today and see how Invoiced can streamline your payment process and get you paid faster.
