Payment Gateways: How Do They Work?

What are payment gateways?

A payment gateway technology allows merchants to accept credit or debit card payments. It bridges the gap between the customer, the e-shop and the relevant financial institutions.

Security and reliability are important aspects of payment gateways. They should also be easy to use so customers have no unnecessary problems paying for goods or services.

High-quality payment gateways allow easy integration into the web environment and do not lack a professional customer service line. In case of any complications, you can contact the experienced staff, who will be happy to help you.

Payment gateways are provided by specialised companies or by the banks themselves. The first option has the advantage that it is universal and can be used by anyone, regardless of where they have an account. However, the opposite is true for banks’ payment gateways. They are only for their customers. Other customers are severely restricted.

Payment gateways have dozens of features, such as support for multiple currencies or payment methods. Before choosing one, it’s important to understand these details and consider which ones are necessary for your business. This will help you decide which payment gateway to choose.

Did you know…?

The term payment gateway was first used in 1996. It referred to a payment processing technology developed by engineer Jeff Knowles. However, the first real payment gateway is considered to be the Adyen system, created in 2006 by two young Dutch entrepreneurs, Pieter van der Does and Arnout Schuijff.

How do payment gateways work?

A payment gateway is a key component of an electronic payment processing system. It is the lead technology responsible for sending customer information to the bank where the merchant has an account.

The whole process of how a payment gateway works differs depending on which one you choose. But it usually goes something like this:

• After you have filled your shopping basket and entered your basic information and address, you proceed to checkout. If you choose to pay by card, a payment gateway will open.
• You enter basic information on the payment gateway form, including the cardholder’s name, card number, expiry date, and three-digit CVV code.
• The payment gateway first verifies this information to prevent fraud. Verification usually takes the form of a payment confirmation via a mobile authorisation app or by entering a multi-digit code that the bank sends to your phone number.
• Once the payment gateway has verified your identity, it sends the encrypted card details to the bank, reducing the risk of misuse by third parties.
• The bank performs a few checks and approves the transaction if everything is OK. If so, it sends this information to the payment gateway, automatically redirecting you to the merchant’s site.
• If the bank has approved the payment, you will see a payment confirmation on the site. If there are any problems during the payment process and the payment does not go through, you will be asked to try again or use a different payment method.
• Once the payment has been approved, the so-called settlement process begins in two phases. In the first, the acquirer, i.e. the seller, “freezes” the payment amount in the customer’s account. The second phase is the settlement itself, when the funds are transferred to the customer’s account. When this happens depends on the terms and conditions and the agreement between the merchant and the payment service provider.

Functions of payment gateways

Payment gateways have several functions. The basic ones include

Encryption

This is one of the most important features that any payment gateway must have. It protects the customer’s payment details from being misused by third parties. Verified payment gateway intermediaries constantly update their security measures and monitor their systems to minimise minor and major risks.

Authorisation

Authorisation is another key payment gateway feature that prevents fraud. It works by the payment gateway sending encrypted transaction details to the bank or other relevant payment processor.

The financial institution checks and verifies the payment, for example, by sending an SMS or alert to a mobile app. When the customer confirms the transaction, the bank returns the information to the payment gateway, which can continue its work.

Data collection and reporting

Payment gateways provide businesses with valuable data that can be analysed to identify their strengths and weaknesses.

Typical data generated by payment gateways includes

• Transaction history
• Refund reports
• Failed payment information
• The number of payments made over a selected period

Fraud detection and prevention

In addition to preventing the misuse of customer data by third parties, payment gateways also reduce the risk of fraud. They do this through advanced measures such as fraud detection algorithms, card verification systems, etc.

If the payment gateway detects fraud, it automatically blocks other potential transactions.

Currency conversion

Many payment gateways also offer currency conversion services, which is particularly useful if you sell your products abroad. The important thing is to check that the gateway you choose actually supports the currency you need.

Integrate

Remember that payment gateways support interfacing with different payment methods or e-commerce platforms. So you can easily integrate them into your online business and allow your customers to make payments quickly and easily.

Additional features

Payment gateways can also include the following features:

• Payment expiry – allows you to set a period during which the customer can complete the payment. Typically, this can last from a few minutes to a few days. The choice of time period is entirely up to you. However, you should set a shorter time for products with limited availability. This is because the product is booked before payment is made. It is in this state until the customer buys it or the system returns it to the offer after the payment has cleared. So if the expiry date is too long, no one else can buy the product.
• Recurring payments – this feature is particularly useful if you offer subscriptions or services that the customer pays for regularly.
• Refunds – useful if a customer returns a product within the statutory period. A payment gateway allows you to issue a partial or full refund quickly and easily.
• Restart payment – if the customer fails to complete the payment, they can start again using either the same or a different payment method
• Cancel payments – this feature allows you to cancel some payments, such as duplicate payments.
• Customise the look and feel of the gateway – most providers will allow you to customise the payment gateway to suit your needs. For example, they will add your logo or use your distinctive colour.s
• Link to accounting systems – a very handy feature that makes administration easier and prevents errors due to inattention. Individual data is automatically transferred from the payment gateways to the accounting system, where the accountant can work with it immediately.

Payment gateways versus payment terminals

At first glance, payment gateways may seem similar to payment terminals. However, there are several differences between the two solutions.

Payment gateways are primarily designed for online transactions. They can be found on websites, mobile applications or other digital platforms.

A payment terminal is a physical device used by operators of brick-and-mortar stores, restaurants or other retail outlets. It allows customers to pay using credit and debit cards and, in recent years, contactless payment methods such as smartphones or watches with NFC technology.

Expert advice

Payment gateways and payment terminals also share some characteristics. These include how payments are processed. Both solutions act as intermediaries between the customer, the business and the relevant financial institutions. They also encrypt sensitive data throughout the process and streamline payments.

What are the main benefits of payment gateways?

Payment gateways will delight you with dozens of benefits, including:

Increased security

As mentioned above, several checks are performed during the payment process to ensure that the person making the purchase is indeed the cardholder. Identity verification is done in various ways. The most popular method is sending a text message with a one-time code valid for a few minutes, but banks are now also using authorisation apps.

Sophisticated technology also provides security by detecting suspicious activity and fraudulent transactions. These primarily monitor customer behaviour, purchase history, and purchasing habits.

Did you know…?

The payment gateway intermediaries must adhere to strict security and regulatory standards. These include the Payment Card Industry Data Security Standard (PCI DSS), designed to prevent the loss of sensitive cardholder data.

Improved payment experience

Payment gateways enable customers to make purchases anytime, anywhere, without worrying about their sensitive data. At the same time, the process is quick and easy for them, as most gateways allow payment information to be stored securely. In practice, this means they don’t have to re-enter it the next time they make a purchase.

By creating a seamless and secure payment environment, you’ll build credibility and brand loyalty with your customers. This will keep them returning and recommending you to their friends and family.

Customisable payment options

You can integrate payment gateways directly into your existing website or other platform. This makes it easy to combine them with other payment methods, such as cash on delivery.

Payment gateways supporting various payment methods are also a big plus. Credit cards, Apple Pay, Google Pay, and many others are often used.

Ability to expand into foreign markets

By supporting multiple currencies and enabling their conversion, payment gateways are key in expanding into foreign markets. In such cases, it is ideal to choose an intermediary known not only in your home country but also in the countries to which you are expanding. This builds trust and prevents people from abandoning a purchase due to unfamiliar payment options.

Basic Types of Payment Gateways

Payment gateways are divided into four basic groups, as follows

Hosted gateways

Hosted gateways are characterised by the fact that when customers make a payment, they are automatically redirected to the payment intermediary’s platform. Here, they enter their payment details and complete the transaction.

The advantage of this type of payment gateway is that it is easy to integrate and has a high level of security, as the data is processed on the provider’s servers. They also like it because it is generally PCI DSS compliant, and people are used to it. They encounter it regularly in other e-commerce shops. The downside is that businesses don’t have much control over the payment gateway.

Hosted gateways are great for smaller businesses and those who don’t want to take on extra responsibilities. Everything is taken care of by the middleman.

Self-service gateways

Self-service gateways, also known as self-hosted gateways, allow companies to collect customer data on their own websites. This gives them full control over the entire checkout process and user experience.

If you choose self-hosted gateways, you must ensure you are hosting them. You need to be prepared to handle payment data correctly and securely and comply with data protection standards.

Self-hosted gateways are suitable for larger organisations. This is mainly because they are more time and cost-intensive than hosted gateways.

API-hosted gateways

API-hosted gateways allow companies to offer simple payment processes directly on their websites or applications. They collect payment data through an application programming interface (API).

This alternative has the advantage of providing secure and seamless payments. On the other hand, it requires a high level of security and oversight from businesses, as well as compliance with the necessary standards.

Local bank integration

This is a payment gateway from a specific bank. This solution is particularly suitable if you target customers from a specific region or country where the bank is a trusted and well-known entity.

Most bank payment gateways are secure and easy to use. The method or speed of integration depends on the institution itself.

The disadvantage of a bank payment gateway is that it is very restrictive. Only customers of the financial institution can use it, not others.

Types of payment gateway by payment location

In addition to the basic types of payment gateway, there are others. For example, we classify them according to the location of the payment:

On-site payments

On-site payments are mainly used by large companies with sufficient resources and staff to manage them on their own servers. This alternative offers more control but also comes with a lot of responsibility. It is all on your shoulders.

If you choose to process payments directly on the web, remember that you need to keep track of various statistics and find out where your weaknesses are. Analyse them and try to minimise or eliminate them. It’s true that every single improvement, even the smallest, can have a positive impact on the customer experience and increase sales.

Off-site payments

Off-site payments are particularly common among smaller businesses or those just starting out. They are characterised by the fact that a third party handles payment processing and other responsibilities.

The two largest payment processors today are PayPal and Amazon Payments. In Europe, you’re more likely to find PayPal, whose services are used by many European customers.

The advantage of off-site payments is that you can trust them completely if you choose a verified processor. Not to mention that such a company will also offer you additional features to improve the customer experience.

However, there are some disadvantages to off-site payments. For example, customers have to leave your site to make a payment. So you cannot guarantee they will return and wonder what else they can buy from you.

Expert advice

Another disadvantage of off-site payments is that you have no control over them. So if customers are unhappy with something, there’s nothing you can do about it.

How do I choose the right payment gateway?

When choosing a payment gateway for your e-shop, there are a few basic parameters you should keep in mind:

Learn about the types of payment methods supported

Payment gateways support several payment methods:

• Card payments are the most popular and convenient method you will come across today. Payment is quick and easy. All you need to do is enter your personal and card details and confirm the transaction via the app or a one-time SMS code. Today’s payment gateways also allow some information (such as card numbers) to be stored securely. This makes the whole payment process even faster. Before choosing a payment gateway, make sure you know what types of cards it accepts. Visa, Visa Electron, Mastercard and Maestro are the basic cards.
• Apple Pay – this method has become increasingly popular in recent years. This comes as no surprise because it is characterised by high security and speed. You can pay for goods in a fraction of a second.
• Google Pay – works in a similar way to Apple Pay. However, it is designed for devices that run on operating systems other than Apple’s. For example, Android.
• Bank transfers – not all customers prefer to pay by card, Apple Pay or Google Pay. Don’t miss out on the ability to transfer funds from one bank account to another.

Find out which currencies are supported

Do you sell products and services in countries that don’t pay in euros? Your payment gateway should support the currency they use. Otherwise, you will have to use another intermediary’s gateway for foreign payments, which is inconvenient and costly.

Make sure it offers the features you need

Payment gateways come with different features. The basic ones, such as encryption or identity verification, will give you everything you need. More advanced ones, such as customisation of the look and feel or integration with accounting systems, to name but a few. So make sure you understand what you are getting with your chosen solution and whether it will meet your needs.

Find out about the price

There are several fees associated with the payment gateway, which are:

• Activation, administration and monitoring fees
• Transaction fee
• Invoicing fee, etc.

The fee amount depends on factors such as the intermediary, number of transactions, type of cards or turnover. For more information, go directly to the payment gateway’s website. There are usually several packages or solutions. You can choose from these depending on the size of your business.

A tip

If you sell high-risk goods, such as tobacco or alcohol, expect the range of payment gateways to be very limited. Not all of them support transactions for these products.

The most popular payment gateways

There are dozens of payment gateways on the market today. Each has its pros and cons. Here are the ones that were the most popular in May 2024 due to their high security and great user experience.

Comgate

A major payment gateway provider in Europe. Accepts payments in a variety of currencies and supports fourteen additional languages.

Comgate allows you to customise the design of your payment gateway by adding a logo or a background. Integration is no more complicated than with GoPay or TrustPay, and the same goes for using the gateway.

Other features of the Comgate payment gateway include:

• Supports recurring payments
• Activation is free
• Payments can be made in nine currencies
• It has a responsive design, so it can be used on mobile phones and tablets

GoPay

Along with TrustPay, GoPay is another favourite of the most popular payment gateway intermediaries. It offers dozens of currencies, and any customer can process through its gateway.

Large businesses enjoy GoPay for its variety and dozens of features. If you’re still not sure, try the free demo.

The GoPay payment gateway is also known for other features:

• It offers over 50 payment methods
• It has an inline gateway, so the customer stays on your website while paying
• It supports recurring payments.

Did you know…?

GoPay supports Bitcoin payments. It is one of the few gateways that have this feature.

24-Pay

24-Pay is a secure payment gateway with a range of features, including fast cashless payments. Customers can use debit and credit cards, as well as bank transfers.

The 24-Pay gateway supports Google Pay, Apple Pay, SMS payments and QR payments. Payment cards include Visa, Visa Electron, Mastercard and Maestro.

Other strengths of the 24-Pay payment gateway include:

• It has a responsive design
• Easy to use
• Supports recurring payments
• Supports pre-authorised payments
• Additional plugins are available, such as WooCommerce or PrestaShop.

TrustPay

TrustPay is a Slovakian payment gateway known for supporting card payments (Visa, Visa Electron, Mastercard, Maestro), Apple Pay, Google Pay and bank transfers. Processing is quick and easy. You can manage everything online from the comfort of your own home.

Integration with your website or other platform is also relatively simple. Professional customer support is available if you don’t know how to use it. They will be happy to help.

Other features of TrustPay include:

• Offers over 25 payment methods
• Google and Apple Pay work automatically, so you don’t need any special integration
• Allows you to accept payments from almost anywhere in the world
• Offers the ability to pay in 14 currencies.

Besteron

The Besteron payment gateway is widely used in various European countries. It is characterised by a pop-up window that appears when the customer decides to pay for the order. The customer fills in their details and confirms the transaction, and they do not have to leave your e-shop.

Besteron accepts Visa, Visa Electron, MasterCard, and Maestro. It also supports Apple Pay, Google Pay, and bank transfers. Of course, ease of use and fast integration are also features.

Among other features, the Besteron payment gateway is worth mentioning:

• Customers can store their card details on it
• You can use it to return a payment to the customer’s account
• Payments can be managed in real-time
• It supports all major platforms, including WooCommerce, PrestaShop, Magento, etc.

Other providers

Many other intermediaries also provide payment gateways, so you can be confident that you are making the right choice. For example, you can choose GP WebPay, Twisto, Fondy, FastSpring, Braintree, Stripe, or Borgun.