Payment Gateway | B2B Finance Glossary

A payment gateway is an essential part of the process that allows your company to accept credit and debit payments from your customers. It is the gatekeeper of your customer’s specific payment data. It’s a technological mechanism that reads and transfers payment information from your customer’s bank account to your business’s bank account by capturing the necessary data and verifying that the funds for the desired transfer are readily available.

Payment gateways can be used both in-store and online. In-store payment gateways use software built into a point-of-sale (POS) system, payment terminal, or card reader that processes the payment when a customer physically swipes, taps, or inserts their debit or credit card. Online payment gateways use cloud-based software to link customers to merchants to authorize credit or debit card payment processing.

What are the different types of payment gateways?

There are three payment gateways: redirect payment gateways, hosted payment gateways (located off-site), and self-hosted payment gateways (hosted on-site).

Let’s take a closer look at each one of these:

• A redirect payment gateway might include different payment options by taking your customer to a payment processor like PayPal or Stripe to process the transaction.
• A hosted payment gateway allows customers to make purchases on your website or at your store, but the payment is processed through your payment provider’s servers instead of your own.
• Large companies that use on-site payments tend to use self-hosted payment gateways because these transactions happen on the individual company’s servers.

How do payment gateways work?

Payment gateways are critical to any company that wants to accept online and credit card payments from its customers – necessary forms of payment for most consumers today. Payment gateways use underlying technology to move financial data from one entity to another to fully authorize a payment and transfer funds from a payer to a payee.

Payment gateways involve several players, including merchants, customers, issuing banks, card schemes, and acquiring banks.

Let’s look at each of these players a bit more closely:

• A merchant sells the goods or services the customer purchases (sometimes called the cardholder).
• The issuing bank is the bank associated with either the customer’s credit card or the account that’s tied to the customer’s debit card (keep in mind that, in some cases, the customer will use the issuing bank for both).
• A card scheme is a credit card company that manages the credit card used in any transaction; typical card schemes include Visa and Mastercard.
• The acquiring bank or merchant acquirer is tied to the merchant’s bank account.
• Merchant acquiring refers to the acquiring bank's processes that enable transactions to go through and do so securely.

A payment gateway is initiated when a customer hits a “buy now” button on your company’s website. The gateway ensures that enough funds are available in the issuing bank before sending encrypted card information to the card scheme – which allows the transaction to be fully processed.

Once the card scheme approves the transaction, the payment gateway transfers information back to the merchant's website. Then, the payment gateway sends the information to the acquiring bank so that the money can be moved directly from the cardholder’s issuing bank account to the merchant’s bank account. Now, the transaction is done, and the payment process is completed.

Tips for choosing the best payment gateway for your business

When choosing a payment gateway, you’ll need to ensure that your partner is PCI-compliant, secure, and offers all the features your business will need to succeed. It’s also helpful if the vendor provides a payment gateway and a merchant processor in the same offering. Choosing the right payment gateway is essential to your business since this decision directly impacts your incoming revenue. Here are a few things to make sure of when it comes to choosing the right payment gateway for your business:

• The payment gateway should be available in your geographic region.
• The payment gateway should integrate easily into your ERP system, website, financial software, and point-of-sale (POS) software.
• The payment gateway should keep all financial data secure and be PCI-compliant.
• The payment gateway should accept the payment methods your customers want to use.