Types of Payment Gateways and How They Work

Since business around the world is increasingly cashless, and done in an online environment, there is a growing emphasis on speed and security. Whenever customers enter their card details or swipe their card, technology is called upon to provide a tamper-free environment where those details can be transferred from one point to another, and money can change hands safely and effortlessly. One of the primary tools used to achieve this is the payment gateway. Payment gateways process credit card payments for both e-commerce sites and traditional brick-and-mortar stores. They are as essential for today’s retailers as cash registers once were. 

The most popular gateways include PayPal, Square, Stripe, Apple Pay, Amazon Pay, Authorize.net and Adyen. None of these will be specifically endorsed here, but they are currently the biggest names in the business and they all have excellent reputations. You may choose to work with only one of them or stack them. It depends upon your business’s needs – and those of your customers, of course.

When selecting a payment gateway for your business, it is always best to have at least some knowledge of how they work, what to look for, and how to navigate the many available options. As a POS solution provider, Access2Pay works with multiple payment gateways. Let us share with you what we have learned, and what you need to keep in mind as you research and select payment gateways.

There are several components involved in payment processing: the processor itself, the retailer’s POS solution, the customer’s and retailer’s banks, and of course, the payment gateway. The payment gateway is the doorkeeper, the central, front-facing component that kicks the whole process off by collecting, transferring and authorizing customer information in real time to the retailer’s bank, where the transaction is authorized.

Payment gateways generally come in three types: on-site, off-site and redirects.

This is the option most often chosen by large-scale businesses that handle high sales volumes. These businesses tend to handle payments on their own servers, and operate the checkout and payment processes through their own systems.

With this type of gateway, the checkout occurs on the retailer’s site, but the payment processing is moved to the gateway’s backend. This is a simpler process that ensures increased security on the back end. The only thing you need to consider as a merchant is that choosing this option means sacrificing control over at least part of the process, since your customers will usually be redirected from your site to complete the authorization. There is nothing wrong with that provided you trust the gateway.

With redirects, the customer is often taken to a separate payment page offsite, where they can use a payment processor like PayPal to complete the transaction. Small businesses often use redirects so they can piggyback off a larger, trusted platform. This is a much simpler option for retailers, but the downside is that they add an extra step for the customer, and the merchant has no control at all over the process.

Like all tools, payment gateways have their limitations – there is only so much they can do. As you research and select your gateway, be sure to understand and accept these limitations, which include:

Gateway providers do their best to make their tools as universal as possible, but the reality is that there are very often payment types they can’t accept, or card issuers and payment processors they do not work with. Before choosing a gateway, research its limitations in this regard, and make sure it can accept the payment types your customers are most likely to use.

If you are looking to target an international market, you need to make sure that your gateway can accept payment options from your customers’ countries. Remember that international shoppers may also face higher fees. Many payment gateway providers charge fixed transaction fees for both domestic and international commerce, and some charge more for cross-border transactions.

With a payment gateway, security should be your biggest concern. The leading payment gateways stake their reputation on their ability to provide security, so you can generally trust them, but you should also consider the risks and vulnerabilities that may arise from time to time. These include data breaches. Most gateways are protected with TLS encryption to handle confidential data, but once the data is moved to a server, that server remains at risk. You also have no way of controlling the transaction from your customers’ side. You can ensure security over most of the process, but you can’t control who has access to your customers’ devices. Finally, certain malware could be used to access confidential information, which can then be used to make purchases on your site. When such a transaction is put through the gateway, the latter has no way of detecting the fraud.

Security will probably be your first consideration when it comes to payment gateways, but there are others to bear in mind as well, such as payment methods, integration, and of course, the reputation of your provider.

As mentioned before, one of the most frequent limitations of payment gateways is that they don’t accept all payment methods and may not recognize cards from certain issuers. The question you need to ask yourself is: what payment methods are my customers most likely to use, and will my payment gateway accept them?

Your gateway must be able to integrate with your overall payment solution, including your POS system and your payment processor. Its APIs must be able to work with all the current technology you already operate. The best solution is to focus on gateways that are customizable and that can be integrated with your platform.

How much does the gateway charge, and is it worth the expense? More importantly, what are the related security costs? If a payment gateway charges you lower fees than its competitors but doesn’t provide as much security, you are going to have to pay to address your security concerns anyway. It might be worth paying a little more for a gateway that has stronger security and comes from a more reputable vendor.

Once again, security is everything when it comes to payment gateways. Look for gateway providers that are PCI-compliant, which is to say, they operate their systems in line with the Payment Card Industry Data Security Standard (PCI DSS), a set of standards crafted to uphold security provisions, especially for digital payments. Don’t choose a provider that doesn’t maintain its PCI compliance.

That brings us to the providers themselves. Research each one carefully and see how they are regarded in the industry. There are some big names, such as Amazon Pay, PayPal or Apple Pay, whom you know you can trust purely on the strength of their brand and reputation. Rather steer clear of lesser-known names, unless they can present a good account of themselves. If you use a well-known gateway, you also have the benefit of brand recognition; your customers will more readily use your site and services because they will know, based purely on the name of your gateway provider, that the transaction is likely to be safe.

A flexible merchant account is another important factor. You will want to accept all kinds of payment options, from Visa or American Express to Apple Pay. Choose a payment gateway and merchant account that is flexible enough to accommodate them all.

What is the best way to overcome the limitations of certain gateways, while making the most of their strengths? The answer is stacking – or in other words, simply use more than one. You can employ multiple gateways on your e-commerce platform to offer your customers more options. There are multiple benefits to gateway stacking, including:

By stacking gateways, you give your customers more choice and flexibility. You may use one gateway that can only process MasterCard and Visa, which would be a problem when an American Express customer wants to make a purchase. You can fix that by simply using another gateway that is open to AMEX, and giving your client that option. When customers are given an experience of choice and convenience, they will be more likely to come back and recommend you to others.

Along with greater choice comes the freedom to choose plan B when necessary. If a customer does not have a credit card, for example, there is no reason why you should lose that sale. You can simply offer them the option of using PayPal, Venmo, or Apple Pay.

Access2Pay is a cloud-based POS solution suited to a wide variety of businesses. We provide payment software for service-based franchises, small retailers, online and brick-and-mortar stores, auto shops, government offices and more. Our software integrates with all payment gateways and processors, as well as accounting software and other tools you may need to run your business. Our solution empowers you with streamlined sales management, and also helps you manage the other key aspects of your business, such as inventory, customer data and staff performance.