What Is a Payment Gateway?

Close up of credit card on keyboard
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Question: What Is a Payment Gateway?

Answer: A payment gateway is a service that authenticates and automates electronic payments made by shoppers to e-commerce merchants. It allows e-commerce merchants to accept credit cards on their websites.

A payment gateway is an interface between the banks (or financial institutions) of the shopper and the merchant. It facilitates the transfer of money from the shopper's account to the merchant's account.

The payment gateway is a software application. To draw an analogy, think of the credit card swipe machine at the checkout counter. Akin to the swipe machine, the payment gateway:

  • processes a transaction securely
  • verifies details such as identification and limits
  • accepts or rejects the transaction.

Some payment gateways are programmed to compute tax and shipping costs too. All gateways have algorithms to detect fraud. Though payment gateways were designed primarily for e-commerce websites, many physical retailers find it convenient to use a payment gateway instead of a swipe machine.

Types of Payment Gateways

There are two primary types of payment gateways based on the location of the transaction processing code:

  1. Merchant Side API
    In this type, the transaction processing code resides on the e-commerce merchant's server and accesses the payment gateway by using an API (Application Programming Interface).
  1. A Secure Order Form
    This is a more common implementation. It redirects customers to the website of the payment gateway provider. After the payment is processed, the customer is returned to the e-commerce merchant's website.

How to Choose a Payment Gateway

The primary issues to keep in mind when selecting a payment gateway are:

  • Compatibility
    You need to ensure that the technology platform required for the payment gateway is compatible with your shopping cart's technology.
  • Security
    Detecting fraud is a moving target. Make sure to read up the latest about who is winning this perpetual battle.
  • Price
    There is some merit to the notion that payment gateways have become a commodity service. As a result, your decision should certainly be influenced by the pricing.
  • Simplicity vs. Customizability
    Some payment gateway providers such as PayPal and Google Checkout are simple to implement but do not permit a high degree of customization. Others are more complex, but can be customized to your needs.

Often, you do not get to choose a payment gateway, as it comes bundled with your e-commerce hosting account.