What is a Payment Gateway?

A payment gateway serves several functions during the transaction process. From the customer’s point of view, it’s simply added security. For the merchant, it’s the vehicle that carries a transaction along its processing journey.

As a customer, you probably don’t think too much about what happens when you swipe your card. If you think about it at all, you’re probably just worried about the chances of your information getting stolen. Luckily—if you’re shopping with a reputable merchant—they’ll be one step ahead of you thanks to their payment gateway.

A payment gateway serves several functions during the transaction process. From the customer’s point of view, it’s simply added security. For the merchant, it’s the vehicle that carries a transaction along its processing journey.

Before we can fully explain the function of a payment gateway, we need to give a quick rundown of what actually happens when a customer swipes their card:

The Payments Process

There are five key components of the payments process:

  1. A point-of-sale (POS) system
  2. Your merchant bank account
  3. The customer’s bank account
  4. A payment processor
  5. A payment gateway

The transaction process begins when your customer provides their card information. First, your processor will contact the customer’s bank to ensure that the customer's funds are sufficient. Once confirmed, the customer's bank sends the funds to your merchant account by way of your processor. This process is instantaneous; it all happens between the customer swipes their card and the POS terminal flashes “Card Approved.”

So wait, where does the processing gateway come into play in that seemingly simple process?

Unfortunately, these five components aren’t always interconnected. If a direct API integration is unavailable, merchants will have to find a solution to link their POS system to their processor. That’s where the payments gateway comes in. In addition to that role as a connector, the payment gateway protects your customer’s sensitive information—names, addresses, credit card numbers—from prying eyes and protects you from astronomical fines that come with data breaches.

Payment Gateway to the Rescue

The easiest way to understand the role of a payment gateway is to envision it as the delivery person at your favorite pizza joint. Gateways are responsible for delivering sensitive card information between parties during the transaction process. The delivery person is responsible for safely transporting mouth-watering pizza to your home.

Just as a pizza delivery person packages your pizza in a box and stores it in one of those heat-keeping bags, payment gateways take precautions to protect customer data from potential harm. This is done through processes like encryption and tokenization.

Of course, once that pizza arrives safely to your home, you'll be expected to tip the delivery person. Similarly, your payment gateway will take a small portion of each transaction to compensate for its services.

Virtual Terminal

If you’re running a strictly online business, then a gateway is an absolutely essential part of your payments process. Since you never see your customer’s actual card, the gateway can act as your virtual terminal that collects all the information and sends it to your processor. This ecommerce gateway is then responsible for letting you know when the transaction is authorized (i.e. when you’re closer to getting your money). Online businesses simply would not be able to function without payment gateways.

https://www.youtube.com/watch?v=Hu2aT7WbloQ

Choosing Your Gateway

By now, it should be obvious that payment gateways are an important part of payment processing. So, when you’re choosing the gateway that works best for your unique business, there are a few things that you should keep in mind:

1. Integration

It’s important to look at this first because it is possible that your processor already has direct integration with your POS or accounting software. If that’s the case, then you don’t actually need a gateway. However, if you don’t have direct integration, or if you simply want added security, then you want to look for a gateway with PCI compliance that will integrate with the POS system and processor you have in place.  

2. Price

Sadly, you will have to pay extra for the security and authorization your gateway provides, but with countless payment gateway options out there it should be easy to find one that fits into your budget. Make sure to look at any monthly/annual fees as well as per-transaction fees when you’re calculating the price. It may also be the case that certain features of the gateway are add-on, meaning you’ll have to pay a little more for them.

3. Payment options

The ultimate goal of your business should be to make it as simple as possible for customers to buy your product. That means, you should offer as many payment options as possible so that you can reach a larger audience of potential customers. Some payment gateways have restrictions on the type of cards or payment options they accept, so make sure yours accepts everything you need it to.

There are also a few different types of gateways: redirects, check out on-site, payment off-site, and on-site payments. The first two require some sort of third-party software that handles the purchase either by redirecting your customer to a different site or sending their information to a different site to complete their purchase. These options take some of the responsibility off of you making the process a little lighter on your end, but they also remove some of your control over the transaction. On-site payments, on the other hand, keep everything in your hands throughout the payment process (which does mean a little more work for you).

4. Reputation

No one wants to put their credit card information into a site that looks shady. Take the time to find a gateway from a reputable source with good reviews—it doesn’t hurt if it looks good aesthetically either.

5. Security

This is the main job of the gateway, so make sure that the one you choose has the best security and encryption software possible in your budget. Make sure that the company you choose maintains PCI compliance because then you know they’re up to the current standards in security.

6. Support

Any software is only as good as the support it offers you when things go wrong. A gateway is an integral part of your payments process, so you want to make sure that if something were to happen you have a direct line of communication with your gateway’s support staff—otherwise you could be left on hold as your money slips away.

Major Gateway Comparison

To help you get started on your hunt, here are a few of our preferred gateways, along with a pricing breakdown of each:

Authorize.net

This is the first gateway that comes to mind for most merchants. It’s fairly popular among small-to-midsize businesses because of its flexible payment options.  It doesn’t hurt that the company has a great reputation either. If you choose to process directly through Authorize.net, it will cost you 2.9% + $0.30 per transaction in addition to a $20 monthly fee. If you choose their gateway only option (and process elsewhere), Authorize.net charges a $25 monthly fee and $0.10 to protect your transactions.

NMI

NMI offers the greatest variety of services beyond what you’d expect from a gateway. Whether you’re running a mobile, ecommerce, or brick-and-mortar business  (or any combination of the three), NMI’s options ensure you can do so with ease. Unfortunately, because of the various features available to NMI customers, there is no set pricing for their gateway services. If you’re considering NMI, you’ll have to contact them to get pricing for your specific needs.

Payline Data

Payline Data was created with online businesses in mind. While their services are available to all business types, ecommerce is definitely their bread and butter. Similar to Authorize.net, PaylineData offers processing services in addition to their gateway functionality. If you’re just utilizing their gateway services, you can expect to pay $10 per month at $0.20 per transaction, making it a little more expensive than Authorize.net. However, their rates are more competitive when you elect to use them as your payment processor.

If you are unsure whether you need a gateway or don’t know which to choose, feel free to consult the free payments experts at SwipeSum! We specialize in finding every unique business the best payments solution at the lowest rate, totally free of charge. Click here to get started.

Stephen Seaman

Stephen is the co-founder and COO of Swipesum. A resident of St. Louis since 2014, Stephen loves local microbreweries and ping pong.

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