What Is a Payment Gateway?

Woman processing an online order from an office in her home
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DEFINITION
A payment gateway securely transmits customer data, including bank information or credit card details, to the payment processor. It is the online equivalent of a point of sale (POS) terminal.

A payment gateway securely relays credit card or bank information to and from a payment processor. It is the virtual equivalent of a point of sale (POS) reader and is used in online transactions. 

Businesses that sell products or services will likely need a payment gateway to secure transactions between them and their customers, though all-in-one solutions for payment services that don’t require a separate payment gateway are common. Here’s more about how a payment gateway works and why it’s an important part of the online shopping experience. 

Definition and Examples of a Payment Gateway

A payment gateway securely transmits customer data, including bank information or credit card details, to the payment processor. It is the online equivalent of a point of sale (POS) terminal. A payment gateway is the first step in finalizing an online purchase. 

Payment gateway providers, which most businesses use in order to process online purchases, ​​are common and easily recognizable. Some examples include PayPal, Square, Stripe, Authorize.net, Braintree, WePay, and 2Checkout. 

How a Payment Gateway Works

When you make a purchase from a merchant’s website with a debit or credit card, you enter the card information into a hosted checkout form (the payment gateway) on the website or mobile app. Once you click a button to place your order, the payment gateway springs into action. It transmits the card information securely to the payment processor. 

At this point, the payment processor takes over and relays your information to the issuing bank, which then approves or denies the request. If approved, the payment processor connects your bank to the business’s merchant account and transfers the funds.

The payment gateway comes back into play at this point. Once the transaction is approved and funds are transferred, the payment gateway returns the information from the processor to the merchant’s website. The merchant will see whether or not the charge has been authorized and completed.

The payment gateway helps legitimize online transactions by encrypting transactions, verifying addresses or other identifying information, and analyzing and flagging any potentially fraudulent transaction patterns.

Do I Need a Payment Gateway?

Merchants who accept payments online need a payment gateway in order to verify a customer’s credit card information, process payments, and settle transactions.

Theoretically, businesses that only have physical locations could opt out of a payment gateway. However, most businesses offer some type of online experience, and a payment gateway is necessary for e-commerce transactions.

All-in-one options for payment gateway solutions are common.  Some merchant account vendors (like Shopify) offer turnkey products that don’t require a separate payment gateway. Square is another provider with an end-to-end payment processing system where a separate payment gateway is not required. 

How Much Does a Payment Gateway Cost?

Depending on a business’s needs and requirements, average costs for a payment gateway range between $0 and $25 per month in fees. Gateway fees are around 10 cents per credit card payment.

If you’re a business owner, be aware of hidden payment gateway fees, which may not always be clearly outlined. These could go beyond the monthly service and processing fees to include a percentage of the sale as well as a flat charge per transaction. There may also be fees for cancellation, compliance, batch transactions, and currency conversions, as well as processing minimums.

Payment Gateway vs. Payment Processor

A payment gateway has different functions than a payment processor. A payment gateway serves to securely move the transaction to the payment processor. A payment processor sends a customer’s credit card information to the bank, processes approval or denial, connects the customer’s bank to a business’s merchant account, and transfers the funds. 

Payment Gateway Payment Processor
Captures and sends data from the credit card to the payment processor Receives credit card data from the payment gateway
Does not approve or deny the transaction, but rather, relays information about approval or denial of the payment Sends credit card information to all those involved, including banks, credit issuers, customers, and merchants, and settles the transaction
The virtual equivalent of a point-of-sale (POS) terminal in a brick-and-mortar store May provide merchants with the equipment needed to process transactions
Used in online transactions Used in both online and in-person transactions

Key Takeaways

  • Most businesses that conduct online sales will need to use a payment gateway for processing since card-not-present transactions require a streamlined way to ensure payment. 
  • Payment gateways can quickly transmit secure details to a payment processor, which connects customer account information to a merchant during a transaction.
  • Merchants pay for payment gateway services, typically a monthly charge and a per-transaction fee.

Article Sources

  1. Fiserv Merchant Solutions. “What Is a Payment Gateway?” Accessed Dec. 10, 2021.

  2. PayPal. “Payment Gateways: What They Are, What They’re Not, and What They Cost.” Accessed Dec. 10, 2021.