What Is A Payment Gateway (And Why Do I Need One)

Whether you’re accepting payments online, in-store, or both, all merchants need a payment gateway.  It’s a secure way for customers to enter their payment information, including credit and debit card details, on a website or at a point of sale (POS). 

What is a payment gateway?
A payment gateway is a software program that sits between the merchant and customer, often supplied and hosted by a third-party provider. It offers a secure pathway that requests and manages payment in order to take money from the customer and pass it into the merchant’s bank account.  It’s often described as ‘an electronic cash register for the virtual world’.

What does it do?
It has three essential roles – encryption, authorization and settlement.  First, it encrypts payment data, so it can move safely between the seller and the buyer. It then sends payment requests to the payment processor for authorization via the credit card or financial institution allowing the website/POS to move to the next action in the sales journey (confirmation, receipt, etc)…  Finally, it assists in settling the payment, completing the transaction and allowing for the transfer of funds between the buyer and seller. Some payment gateways also provide dashboards, analysis and reports on transaction status and payment performance.

How does it help?
A well performing gateway is good for customers. It helps ensure a seamless customer experience by enabling secure acceptance to happen in a matter of seconds. It’s good for merchants too. The payment gateway ensures smooth and accurate authorization.  If the payment is valid, the value will be exchanged.  If not, payment will be declined, which helps merchants avoid unnecessary chargeback fees.

What about PCI compliance?
Using a third-party, PCI compliant, payment gateway means that merchants never have to deal with sensitive credit card data. The gateway provider assumes responsibility for data traveling through the payment chain, thereby relieving merchants of PCI obligations and transactional security risks. (Learn more about payment data security here)

What else does it do?
As well as facilitating e-payment acceptance, the payment gateway can perform many other important functions. For example, order screening and tax calculation. It can also be used for geolocation services, providing a pathway to manage location-specific actions. Some advanced gateways can facilitate more than payments and can be used to manage and deploy value-added services directly to the POS.  Enriching point of sale with extra capabilities such as personalized customer and loyalty services and alternative payment options.

Aren’t gateways the same as processors?
There are many similarities but also some important differences. The gateway represents a system, whereas the processor is a ‘step’ in the payment chain. Processors analyze and transmit transaction data to the relevant issuing parties, a gateway does this too, but it also assists in the settlement process to facilitate the transfer of funds between buyer and seller.

Payment gateways and online payments

In order to accept online payments, organizers need access to a payment gateway and to hold a merchant account (or aggregator). The payment gateway has to be compatible with the shopping cart and needs to be integrated with the merchant account. Sometimes this means it can only be set-up after these are in place. Aggregators often offer a gateway in tandem with their merchant account e.g. PayPal.  Sometimes the same payment gateway can be used for in-store POS as well as for online and mobile transactions.

A powerful commerce investment

Payment gateways can help merchants to streamline processes and transactions, connect multiple channels and capture more than just payment data. It can seamlessly enable many additional commerce capabilities and offer in-depth analysis and at-a-glance reporting via useful transaction dashboards. Experienced payment partners, like FreedomPay, can help you discover new ways that payment gateways can empower your sales operation.