What is a payment gateway and how do they work?
Finance & Funding
Key learnings
- A payment gateway is a facility that allows businesses to receive payments from customers online.
- If you sell products and services online, you are a merchant and will need to use a payment gateway.
- Payment gateways protect merchants from expired cards, insufficient funds, closed accounts, or exceeding credit limits.
Any business that sells products and services online will be using payment gateways. A payment gateway is a facility that allows a business to receive payments from its customers. It involves the transfer of cash from one bank account to another through a series of steps, each of which are covered here. If you want to understand the mechanics of payment gateways, read our article below.
Every time you receive a payment for your products and services online, it must go through a payment gateway.
The main stakeholders involved in a payment gateway are:
- The Merchant – this is you – the business that sells a product or service online
- The Customer – this is sometimes known as the cardholder and is the customer purchasing your goods or services
- The Issuing Bank – this is the customer’s bank that issues the credit or debit card like Visa or Mastercard
- The Acquirer – this is the merchant’s bank account where payment will be sent to
1
How does a payment gateway work?
A payment gateway works by capturing and transferring payment data from a customer to the acquirer and then transferring payments if they are accepted to the merchant or declining it back to the customer.
You can think of the payment gateway as the middleman between your customer and you (the merchant) – the thing that ensures the transaction is carried out securely and promptly.
2
What does a payment gateway do?
There are a series of tasks that a payment gateway carries out when a customer orders a product or service from a merchant.
The process works in much the same way as a physical point of sale terminal in a shop or restaurant:
- A customer makes an order and enters their payment card details
- If the order is made online, these details are encrypted and sent to the merchant’s web server
- The merchant then forwards the transaction details to their payment gateway, which are then sent to the merchant’s bank, and onto the card issuer (VISA or MasterCard)
- The card issuing bank then receives the authorisation request and carries out checks before sending a response code to the payment gateway
- The gateway forwards the response onto the website where it is interpreted and relayed to the merchant and the cardholder
- The merchant can fulfil the order and the money from the sale is deposited into their account
- Although complicated, this whole process takes just a few seconds to complete.
3
Why do you need a payment gateway?
A gateway is the gatekeeper to your customer’s payment data.
For online merchants, a payment gateway relays the information from you (the merchant) to the acquirer and the issuing bank using data encryption to keep unwanted threats away from the sensitive card data.
Aside from fraud management, payment gateways also protect merchants from expired cards, insufficient funds, closed accounts, or exceeding credit limits
4
Merchant accounts
Merchant accounts and payment gateways are often thought to be the same. But to take customer payments online, you need a payment gateway and a merchant account.
This is because the merchant account is the place where funds are held before they are deposited into your bank account whereas the job of the payment gateway is simply to approve or decline the transaction.
5
Setting up and choosing a payment gateway
Setting up a payment gateway for your business is simple if you already use payment services for all your transactions. You just need to ask your provider for all the requirements and setup configuration details.
There are also tonnes of payment gateway providers to choose from such as Stripe, Worldpay and Opayo.
To make it easier to choose, take a look at this comparison of the top providers.
Next steps...
- Consider whether your business could benefit from setting up an online shop or making sales through your website
- Have a conversation with the organization you currently use for payment services to find out what you need to do to set up a payment gateway
- Choose a payment gateway provider using this comprehensive comparison tool.
- Sat Nav subscribers who sign up to a Tide business bank account (powered by Clearbank) through UMi can get £50 cashback and free bank transfers for a year.