The ultimate guide to payment gateways

We love shopping and selling online today, but with new forms of trade comes the new form of payment.

Due to initial distrust in online shopping, and the perceived danger of providing merchants with personal banking information….. well, in: payment gateways.

A payment gateway is essentially an application that serves as a middle man between the buyer and the seller, and takes care of processing sensitive financial information. This facilitates the process for both buyers and sellers, and makes sure that the information is treated with all the care needed.

When it comes to payment gateways, merchant service providers can be independent financial services such as PayPal and 2Checkout, or banks.

Typically, payment gateways are used in e-commerce, although an increasing number of brick & mortar stores have started using them due to ease and transition from cash towards virtual currency and online wallets.

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How Do Payment Gateways Work?

As we’ve already discussed, payment gateways are the best way to shop and receive money as a seller online. When you think about the traditional exchange of money, that’s quite impossible today (at least, it’s very time-consuming), so payment gateways automate the process.

In order to automate the process of ordering and paying to a merchant, payment gateways process the transactions through a variety of steps:

1. A customer orders from your online shop and/or enters their payment information

2. If you have SSL encryption, the customer’s information is encrypted and transferred to the payment gateway. Additionally, the gateway can also offer to receive the information without your having to store them and transfer them through your website. This is beneficial both for the customer and you as the merchant, as you don’t have the responsibility of complying with data security rules and regulations.

3. Typically, the payment gateway next converts the message from XML format to a different message format, and forwards the information to your (seller’s) bank.

4. Next, the gateway gathers information from the customer’s card company (or a different payment processor) to see whether the payment will be approved or declined.

5. Once the bank gets the authorization request, they’ll send a response back to the processor, which will send a response to the payment gateway.

6. If the payment was approved, you and your payment gateway will receive a notification that the payment was authorized.

7. Merchants typically submit all authorizations at the end of the day, and the acquiring bank (your bank as the merchant) makes a batch settlement request from the buyer’s bank.

8. The customer’s bank makes a settlement payment, and the acquiring bank deposits the total amount into your account.

Even though the entire process seems very time-consuming, the initial order to payment through the gateway process lasts about 2-3 seconds, while the process of receiving funds can take up to 3 days at most.

In order to make sure that the payment information is stored securely, and that the payment is received, payment gateways also use a variety of other tools to detect fraud (such as geolocation, identity morphing detection, etc.).

The entire process is actually a lifesaver if you want to sell online, and setting it up as a merchant isn’t complicated.

Payment Gateway e-Commerce Integration:

There are a few key terms you’ll encounter as soon as you decide to integrate a payment gateway with your e-commerce site or your store.

Validation set

A validation set is code executed at different processing points. They’re executed by the program which builds payment, and they determine whether the payment entity passes applied rules.

In case all of the required rules aren’t satisfied, the Build Payments Program will mark the payment as failed.

Accept payments on e-commerce platform

If you want to accept payments on an e-commerce platform, you’ll need a payment gateway. Fortunately, there’s a plethora of options to pick from, and they all use the process described above to receive and forward the money to you as the merchant.

Some e-commerce platforms have their own payment processors, so it’s worth noting that you may not necessarily need a 3rd party payment gateway to safely transfer payment information and receive payment.

A great example of a payment gateway that allows you as the merchant to receive payment is It’s US-based and was acquired by Visa, so it holds itself up to the highest security standards when it comes to accepting credit card and electronic check payments.

Merchant account vs payment gateway

Both having a merchant account and a payment gateway is a way to receive payment from your customers as a merchant.

However, merchant accounts are typically used for brick and mortar stores, and allow you to accept different forms of payment. A merchant and a credit card processing company sign a contract, so you’re directly doing business with that company.

If you have an e-commerce store, a payment gateway is a much better solution. They work similarly to merchant accounts and credit card machines. However, they process payment information digitally, as opposed to physically.

Issuing bank and acquiring bank

Issuing and acquiring bank are common terms when it comes to payment gateways and processing payment digitally in general.

Issuing bank is your customer’s bank, and it’s the bank responsible for forwarding the funds for the purchase to you and your bank.

Acquiring bank is your (seller’s) bank, the bank which requests and receives funds on your behalf, and deposits them into your account.

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Types of Payment Gateways

Since different customers and merchants have different needs, it’s not surprising that there are multiple types of payment gateways. Depending on you and your customers’ needs, you may find that one type serves the purpose much better than the others.

However, when we talk about types of payment gateways, we commonly make a distinction between the following three:

1. Manual Payment System

Manual Payment System is the oldest system around the block. This is a great choice if you’re doing business with people from the countries where manual payment is a common form of payment, and where they may be reluctant to do business with credit cards and/or online payment in general.

Manual payment systems are typically:

  • Cash on Delivery (CoD)
  • Bank transfers/Direct deposits
  • Mail orders
  • Checks

You receive the information as an encrypted PDF, and you can process it at your premises.

Many systems today now support manual payment, even though it may seem counterintuitive in e-commerce.

2. Non-Seamless Payment Gateways

Non-seamless payment gateway is one form of payment gateway integrations where the payment gateway handles all the financial details. The gateway offers payment options, and the customers are then redirected to their bank’s secure page (if applicable).

This is a great option if you don’t want to comply with different regulations of storing financial information, as the payment gateway will handle everything in this case.

3. Seamless Payment Gateway Examples

Unlike the non-seamless payment gateway integration, seamless integration means that your customers will choose the payment option at your (merchant’s) site.

Good examples of seamless payment gateways include PayPal’s Payflow and SecurePay.

Both PayPal and SecurePay (as well as other less-known options) will process the payments on your website without redirecting the customer to a different website.

This means that the payment will be much faster than with non-seamless payment gateways. However, you should check whether you’re required to comply with any laws.

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Key Features of Payment Gateway Software

When choosing a payment gateway software for your store, these are the main features you should consider:

1. Seamless or non-seamless

Traditional gateways like redirect your customer to a different site, which can reduce conversions. Modern ones like PayPal’s Payflow keep the customer on your site, which can be more beneficial for your business.

2. Encryption standards

Pay special attention to encryption standards and integrations provided. You want to minimize all the possible risks, and make sure that your payment gateway is up to the current standards of data encryption.

3. Compatibility and speed

If you’re using an e-commerce platform, make sure that your payment gateway is compatible. Additionally, speed is a big factor because a slow payment gateway may result in customers’ confusion and reluctance to buy from you.

4. Review and report

Select a payment gateway that suits your reviewing and reporting needs. Each gateway charges a fee (which depends on a number of transactions, or can be a flat fee, or a commission per sale), and it’s good to keep an eye on that. Additionally, you may also want to review the number of failed payments.

A good payment gateway can help you understand the payment side of your business at a glance.

5. Fraud protection

Some fraud protection protocols are industry standard, but a payment gateway which offers even more tools to protect you and your customers is a good choice. Especially if you have a high volume of sales.

6. Card-not-present transactions

Card-not-present transactions are a big security risk, especially when it comes to processing payments online. During these transactions, the credit card is not physically present, nor is the person making the purchase, so it opens up the possibility of fraud.

The latest trends in payment gateway software primarily focus on the areas of safety and simplicity, especially with the rise of DDoS attacks and online payment.

Benefits of Payment Gateways

If you want to seamlessly receive payment online, payment gateways are the perfect tool for you. With security and speed in mind, many payment gateways mean less time spent on payment processing and more time increasing competitive advantage in an oversaturated market.

Payment gateways are beneficial both for customers and merchants, as they open up new possibilities of shopping online – safely.

So if you’re ready to start receiving payments online, here’s what you need to know to pick the perfect payment gateway for your business:

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How to Choose a Payment Gateway

1. Assess the cost of the payment gateway

One of the main things to keep an eye on is the cost of the payment gateway. As we’ve previously discussed, some payment gateways charge monthly fees, while others charge transaction fees.

Others charge both, but offer more.

For example, has a minimum monthly fee of $25, with 2.9%+30c transaction fee.

2. Check compatibility with platform for e-commerce site

If you’re using e-commerce sites like Shopify or WooCommerce, double-check whether the payment gateway is compatible with your site of choice.

Keep in mind that some sites offer their own in-house payment gateways, so it may not be necessary for you to get a third-party payment gateway.

3. How will customers send their payment methods?

Not only do you have to keep track of compatibility and fees, but it’s also good to pay attention to how the customers will send their payment methods.

For example, with seamless integrations, they’ll be sending them through your site, while non-seamless tend to redirect them to the payment gateway or a different site. This may result in a decreased conversion rate.

4. Mobile usability

The current trend in online shopping is mobile. People have started using their smartphones more and more, and as a merchant, you should make sure that you’re staying in the loop.

The best payment gateways (if you have customers which love mobile shopping) have mobile usability and allow mobile payments, so you’re not losing customers by making them switch to desktop.

5. Digital security and support

Financial information is the most sensitive information, so whichever payment gateway you choose, make sure that it’s up to standard and proactively protects both you and your customers’ data.

Additionally, you also want to get the best customer service so you can get in touch with the payment gateway in case of any issues or doubts.

Examples of Payment Gateways

When it comes to payment gateways, the most popular three are PayPal, Stripe and Authorize.Net.

PayPal has three separate plans, and the most basic starts at $0/monthly fee, transaction fee of 2.9% + 30¢. They accept payment from 203 countries, 25 currencies, and 9 card types.

Authorize.Net starts at $25/month, and transaction fee of 2.9% + 30¢. They accept payment from 5 countries, 11 currencies, and 6 card types.

Finally, Stripe is one of the most popular e-commerce payment gateways with no monthly fee, and 2.9% + 30c transaction fee. They accept payment from 25 countries, 100 currencies, and 6 card types.

There are a plethora of payment gateways, so make sure you cross-reference all the information and find the perfect solution for you and your customers.

Online shopping has transformed the face of the modern economy – and in a large part, we’ve got payment gateways to thank for that.

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