A payment gateway is a front-facing technology that sends a customer’s card details and payment info to a merchant’s bank account and ensures the customer has the funds required to make the payment.
You need a payment gateway to accept online and in-store digital transactions, including credit cards and digital wallets. As a business owner, you probably already use a payment processing system or gateway, and if you accept payments online, you can’t survive without one.
But do you know how this technology works? Understanding the payment gateway's inner workings can help you make informed decisions about which payment gateway is best for your business needs. It can also help you ensure the security of your customer's payment information and build trust with your customers.
How payment gateways streamline transactions
The cash register had its time in the sun for over a century. While great for accepting money and totaling the day’s sales, they weren’t cut out for the digital payments era.
In the 1990s, digital point-of-sale (POS) terminals entered the scene at scale, allowing consumers to pay by credit or debit card. And after that, the pace of change skyrocketed in the payments space, forcing the business world to embrace in-store and online payment gateways in less than a generation.
Today, these nifty digital transaction technologies have become the norm. They live up to consumers’ expectations for convenience and a streamlined payment experience.
People can pay using the magnetic stripes on their cards, chip technologies, or digital wallets, making the payments process lightning-fast and frictionless.
Payment gateways offer the same smooth experience for online payments, which rose by 62% globally from 2014 to 2021.
When customers navigate to a merchant’s payment page, they enter their payment information, click the ‘Buy’ button, and move on with their lives.
Payment gateways offer sellers a few perks, including a better customer experience and automatic transaction tracking. They start the payment process and make in-person and online digital payments fast, convenient, and secure for all parties.
Payment gateways vs. payment processors: What’s the difference?
A payment gateway and a payment processor are involved in the same process: These two components make electronic transactions happen, from swipe, tap, or click to cha-ching in the merchant’s bank account.
But one starts the process. The other finishes it.
A payment gateway is a software service that allows merchants to securely accept and authorize customer payments via various payment methods, such as credit or debit cards, e-wallets, and bank transfers. It’s the technology that moves payment information.
A payment processor processes the transaction and facilitates funds transfer between the customer’s and merchant’s accounts. It’s the technology that moves money.
Payment processors are responsible for ensuring the availability of funds, verifying the customer’s identity and creditworthiness, all transaction fees, and managing the settlement and reconciliation of transactions.
What does a payment gateway do?
The payment gateway facilitates the transfer of information between the merchant’s website or point of sale and the merchant account providers or payment processors. It ensures the security of the transaction by encrypting sensitive data and transmitting it to the payment processor for verification and settlement by that same payment processor.
It’s essential for both online and brick-and-mortar businesses. Not just because it facilitates payments, but because it’s what customers expect.
Whether you use a low a white-label payment gateway provider for online payments or a service connected to your merchant or business bank account, payment gateway services are a win-win for buyers and merchants. Here’s why.
Benefit #1: Improves the checkout experience
With a payment gateway, your business can accept various payment methods. Whether you have a B2C or B2B business, giving your customers payment flexibility is essential for creating a streamlined experience and preventing churn.
Customers who can’t pay using their preferred method might choose a different vendor. The same is true for payment gateways in stores. People are so used to electronic payments that they often don’t have cash or a checkbook. Some people don’t even carry a credit card and instead rely on the digital wallet on their smartphone.
You might lose customers without the right to a payment gateway because you’re not giving them an easy, convenient way to pay.
Benefit #2: Maximizes payment security
Payment gateways generally comply with security standards like PCI-DSS, giving you and your customers peace of mind that transactions and merchant accounts are secure and encrypted.
When comparing payment gateway providers, look for a service that encrypts data and follows all current international payments and industry compliance regulations.
You also want to verify that your provider uses network protection, including intrusion detection and network monitoring technology, and physical security for its data centers.
Benefit #3: Increases sales
Research shows that 18% of customers abandon their cart online if the checkout experience is too long or tedious. On the other hand, frictionless payments improve the customer experience, which can increase sales.
In addition to payment flexibility, features like recurring payments and the ability to accept multiple payment options make things even easier for customers, reducing friction and encouraging more sales.
A step-by-step look at how payment gateways work
Customer payments are effortless for your business and your customers. But a lot is going on behind the scenes.
The transaction involves four players: The merchant, the customer, the issuing bank, and the receiving bank. Here’s a look at how the process works:
- Customers choose a payment option and enter their card or bank account information.
- The payment information is securely transmitted to the payment gateway through an encrypted connection.
- The payment gateway receives the payment information, validates it, and sends it to the payment processor for authorization.
- The payment processor checks the availability of funds, and approves or declines the transaction based on various risk factors, such as fraud detection.
- The payment processor returns the authorization or decline message to the payment gateway, which then displays the appropriate message to the customer and the merchant.
- If the transaction is approved, the payment processor initiates the transfer of funds from the customer’s account to the merchant’s.
- The payment gateway sends a confirmation message to the business, displaying the order confirmation page to the customer.
- The merchant receives the payment.
The payment process involves many necessary steps to ensure everything goes smoothly and safely. These steps include ensuring payment information is transmitted securely, verifying that the customer is who they say they are, and checking that they have enough money to pay. Both businesses and customers must understand how this process works to feel good about doing transactions online and know their information is being kept safe.
Tips for choosing a payment gateway provider
You know you need a payment gateway, but your partner's payment service provider will impact your experience and customers. Here’s what you can do to ensure you’re getting the most out of your payment gateway services:
- Choose a provider with the features your business wants to offer customers, such as multiple currencies, the option to make recurrent payments, and automated payment reminders.
- Be ready to offer the payment options your customers prefer. As a B2B business, that means securing ACH and credit card payments. Online businesses should enable credit and debit card payments, app payments, e-wallets, and cryptocurrency.
- Prioritize security. Payment gateways have to be compliant with PCI data security standards.
- Use a mobile-friendly payment gateway. After all, mobile e-commerce sales are expected to reach $710 billion by 2025.
Take advantage of the BILL payment gateway and benefit from a built-in audit trail, customizable invoices, and low-cost ACH payments.
Give your business a competitive edge with the right payment gateway
Payments are at the heart of the customer experience, so everything you do to improve your payments experience gives your business an edge.
The good news is payment processing gateways are far more powerful than the humble cash register and easier to use. Accepting payments with a modern payment gateway is a breeze because the technology handles the data transfer and links with your payment processor to handle the transaction.
Your only job? Choose the best online payment gateway ever for your business. With a system that lets you sync with your accounting software, automate payment tracking, and customize the options you give your customers, you can boost your customer experience and improve your bottom line.