If your business wants to accept card payments online, you’ll need to get to grips with what payment gateways are and how they work. We guide you through the different types of payment gateways and how to choose the right one for your business.
A payment gateway is a software application that enables merchants to accept debit or credit card payments from customers either in-store or online. It acts as an intermediary between a merchant and the financial institution processing the payment.
Payment gateways can include a physical card reading service or point-of-sale (POS) terminal in a shop, as well as a payment processing terminal integrated into online stores. Once a customer has entered their card details, this information is verified, and the payment gateway will inform you whether the cardholder’s bank has approved the payment.
Types of payment gateways
There are 4 main types of payment gateway. The key difference among them is how they are integrated into your website, with some requiring more maintenance than others.
The 4 types of payment gateway are as follows:
Hosted payment gateway
A hosted payment gateway will direct customers away from your checkout page and transfer them to a third-party website or portal to submit their payment details. Because they are hosted by a third-party provider, such as PayPal, this option requires the least effort. You won’t need to worry about integrating and maintaining your website’s payment gateway, and you’ll also have a high level of security and fraud protection. The downside is that costs can be higher.
Once a customer has filled out their payment details on the host page, they will be redirected to your website to complete the sale.
Self-hosted payment gateway
With a self-hosted payment gateway, payment information is collected directly on the merchant’s website. This information is then encrypted and submitted to the third-party payment gateway for authorisation. An example of this type of payment gateway is Shopify.
The main benefit is the customers stay on your web page and are not redirected elsewhere. Businesses can also keep an eye on important metrics such as abandoned basket rates. However, you won’t have access to a full technical support team as you would with a hosted payment gateway.
API-hosted payment gateway
If you want to have complete control of your website design, an application programming interface (API) hosted payment gateway could be the best solution. Payment details and processing are completed on your website with an interface that can be customised to suit your website and checkout experience. It can also be integrated with setups, including mobile devices.
However, while this option has its positives, you will be responsible for all security requirements.
Local bank integration gateway
Here, customers are automatically redirected to a local bank’s website to submit their payment details. After this, they are redirected back to the merchant’s website. It’s a basic and simple option but doesn’t usually allow repeat payments. For this reason, it won’t be suitable for businesses looking to grow quickly.
How do payment gateways work?
When a customer enters their card details, the payment gateway passes this information on to the merchant’s acquirer (the provider of your merchant account). The transaction is then transferred to the card issuer through schemes like Visa and Mastercard. The transaction is either approved or refused by the issuer, and this information is passed back to you and the customer through the payment gateway.
How do online payment gateways work?
A customer enters their credit or card details onto the payment page at checkout.
The payment gateway encrypts the card details, carries out fraud checks and transfers the cardholder’s information and transaction details to the merchant’s acquirer.
This information is passed on to the card scheme, such as Visa or Mastercard, and to the issuing bank. The transaction is either authorised or declined.
This decision is passed back to the payment gateway to inform the customer and merchant, and if the transaction has been authorised, it will be processed. The funds will be transferred to your merchant account.
Note that a merchant account is a separate bank account businesses use for their receivables. When a transaction is carried out, the funds are temporarily transferred to your merchant account, where they stay until you move them to your business bank account.
Who are payment gateways best for?
If you’re a business that wants to accept debit or credit card payments from customers through your website or mobile application, you’ll need to use a payment gateway. As well as ensuring the payment goes through correctly, it will also keep your customers’ payment data secure and private.
Costs and fees
When comparing payment gateways, you’ll need to factor in the costs. Some payment gateways charge a one-off setup fee of up to £250, and many charge a monthly subscription fee on top. This could be between £10 and £50.
Then, there are transaction fees to consider. Some payment gateways might not charge a monthly fee but will charge higher transaction fees instead. But typically, you’ll be looking at around 2% plus 20p per transaction. Fees will likely be higher if you accept international card payments.
Pros and cons of payment gateways
Pros
Can be easy to set up and integrate into your website.
Using one reduces the risk of card fraud and data breaches.
Offers a swift checkout process and enhanced customer experience.
Many payment gateways support multiple currencies, enabling you to cater to overseas customers.
Cons
Various fees apply.
Payment gateways might require merchants to organise their own Payment Card Industry (PCI) compliance.
Customer support might be limited, depending on the type of payment gateway you choose.
What is the best small business payment gateway in the UK?
There’s no one best payment gateway, as ultimately, the best payment gateway for one business might not be the best for another. But as a small business, you’ll want to keep costs as low as possible. So, if you have lower sales volumes, you’ll want to look for a payment gateway that only charges transaction fees, not monthly fees. But if you have higher sales volumes, you could be better off paying a monthly fee in return for a lower transaction fee rate.
If you’re just starting out, it can make sense to opt for a hosted payment gateway, as this can be easier, and you’ll have access to technical support should you need it. But if you want to keep a close eye on payment metrics and keep customers on your website, a self-hosted payment gateway could be a better way to go.
Finally, keep in mind that if you want to take payments from overseas, you’ll need to look for a payment gateway that can process international payments.
Bottom line
Payment gateways are essential for any business wanting to process customer card payments online. As well as simplifying the online payment process for you, they also ensure you receive your payments quickly and securely. But as there are several different payment gateways to choose from, you’ll need to compare fees and features carefully to be sure you’re picking the right one for your business.
Frequently asked questions
A self-hosted payment gateway integrates the checkout process into your website. Once a customer has entered their payment details, this information is encrypted and submitted to the third-party payment gateway for authorisation.
Payment gateways can be expensive due to the variety of fees they charge. You might have to pay a setup fee, a monthly subscription fee, as well as transaction fees. Some might even charge for customer support, and if you need to accept payments from overseas, an international transaction fee might apply, too.
Payment gateways are designed to collect and verify customers’ card information and are required if you want to accept online payments. But a payment processor is the service that communicates between the merchant, the card company and banks. It ensures funds are transferred from the customer’s account to the merchant account.
Yes, PayPal is a payment gateway that lets users send and receive payments online.
No, Apple Pay is a digital wallet platform that lets customers pay with their mobile device. Payments on Apple Pay are processed through a compatible payment gateway.
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Rachel Wait is a freelance journalist and has been writing about personal finance for more than a decade, covering everything from insurance to mortgages. She has written for a range of personal finance websites and national newspapers, including The Observer, The Mail on Sunday, The Sun and the Evening Standard. Rachel is a keen baker in her spare time. See full bio
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