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When choosing a payment gateway, it’s important to consider both the front-end and back-end user experience, security features, and cost.
Payment gateways are not one-size-fits-all. The best payment gateway for your business will depend on the size of your company, the nature of your business, and your typical customer.
Payment gateways are essential for accepting card and digital wallet payments. The payment gateway securely transmits the customer’s data and payment information on for processing.
What is a payment gateway and how does it work?
A payment gateway is a technology that allows merchants to authenticate and facilitate customer payments. Payment gateways collect and encrypt sensitive customer payment information (e.g. credit card or digital wallet details), then securely transmit it to the payment processor.
Many of today’s payment gateways also serve as payment processors, responsible not just for transmitting customer data, but also for authenticating it and initiating the transfer of funds between parties.
Key parties involved:
- Merchant - The person or business that is doing the selling.
- Customer - The person or business that is doing the buying.
- Customer’s bank (issuing bank) - The financial institution that issued the customer's payment method, such as a credit card.
- Merchant’s bank (acquiring bank) - The financial institution where the merchant holds an account and receives payments.
- Payment gateway - The intermediary technology that securely transmits the customer’s payment data to the payment processor.
- Payment processor - The technology that authenticates the customer payment data and initiates the transfer of funds from the issuing to the acquiring bank.
Difference between a payment gateway and a payment processor
A payment gateway completes the first step of the payment process, securely collecting and sending the customer’s payment details to the payment processor. The payment processor communicates with the customer’s bank and the merchant’s bank to authenticate the transaction, verify funds, and manage the transfer of money.
In essence, the payment gateway acts as a bridge between the customer and the payment processor, ensuring that their sensitive data is encrypted and transmitted securely.
Many modern payment service providers offer combined services as both a payment gateway and a payment processor.
Payment processor
- Connects merchant bank with customer bank
- Can process a transaction and transfer funds from the cardholder’s account to the merchant account
- Relays transaction information between banks to process payment
- Needed for both in-person and online transactions
Payment gateway
- Encrypts and transmits information between merchants and customers
- Relays whether a transaction has been approved or denied
- Requires a payment processor to carry out the final transaction
- Used mostly for online transactions
