When someone makes a payment on a website or in a store, the transaction involves more than just clicking a button or tapping a card. Behind the scenes, a series of steps happens in seconds to move money from one account to another.
These steps require a secure way to collect and send payment details to the right financial institutions. That’s where payment gateways come in.
For anyone running a business or working with digital payments, knowing how payment gateways work is part of understanding how money moves in today’s commerce environment.
Let’s dive in.
- What is a payment gateway?
- How does a payment gateway work?
- Payment gateway vs payment processor
- Security measures and compliance
- Payment gateway process and transaction flow
- Choosing a payment gateway for online and in-store sales
- Costs and fees of a payment gateway
- Integration options for POS and ecommerce
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What is a payment gateway?
A payment gateway is the technology that lets businesses accept credit cards and digital payments from customers. Think of it as the online version of the card reader you see in stores. When you enter your card details on a website, the payment gateway is what securely captures that information and sends it where it needs to go.
The term covers both the physical machines that read cards in stores and the digital systems that process online payments. In both cases, the gateway acts as a bridge between the customer, the business and their banks.
Most modern payment gateways can handle:
- Credit and debit cards
- Digital wallets like Apple Pay and Google Pay
- Bank transfers
- Buy-now-pay-later options
The main job of a payment gateway is to make sure your payment information gets where it needs to go safely and quickly. It encrypts (scrambles) your card details so they can’t be stolen during the transaction.
How does a payment gateway work
When you buy something online or in a store, the payment gateway kicks into action the moment you enter your card details or tap your phone to pay. Here’s what happens in those few seconds:
- You enter your payment information or tap your card.
- The payment gateway encrypts your data to keep it safe.
- This encrypted information travels to a payment processor.
- The processor checks with your bank to see if you have enough money.
- Your bank either approves or declines the transaction.
- The response travels back through the system.
- You get a confirmation message that your payment went through (or was declined).
This whole process typically takes just 2-3 seconds for the approval part. The actual movement of money from your account to the business happens later, usually within 1-3 business days.
What makes this process work is the payment gateway’s ability to talk to different financial systems securely. It translates your payment information into a format that banks can understand and process.
Payment gateway vs payment processor
People often mix up payment gateways and payment processors, but they do different jobs in the payment chain:
| Feature | Payment Gateway | Payment Processor |
| Main job | Collects and encrypts payment data | Moves money between banks |
| When it works | During checkout, when card info is entered | After the gateway sends the encrypted data |
| Example | The checkout page on a website | The service that contacts your bank |
| Customer interaction | Direct (customers enter info into it) | Indirect (works behind the scenes) |
Think of the gateway as the front door where payment information enters, and the processor as the messenger that takes that information to the banks. Both are needed to complete a transaction, but they handle different parts of the process.
The gateway payment processing system is the combination of these two elements working together to make sure money moves correctly and securely.
Security measures and compliance for a payment gateway
Payment gateways handle sensitive financial information, so security is a top priority. Here are the main ways they keep your data safe:
1. Encryption
What it is: A process that scrambles your card data into a secret code that only the right systems can unlock.
Why it matters: Without encryption, your card details could be stolen as they travel between systems. Modern payment gateways use strong encryption (usually 128-bit or 256-bit SSL) to protect this information.
Think of encryption like putting your payment in a locked box that only the bank has the key to open.
2. Tokenization
What it is: A system that replaces your actual card number with a random string of characters called a “token.”
Why it matters: If someone hacks into a store’s system, they only find the meaningless tokens, not actual card numbers. The real card data is stored separately in a highly secure environment.
Tokenization is like using a claim ticket at a coat check instead of wearing your actual coat around the store.
3. PCI requirements
What it is: PCI DSS (Payment Card Industry Data Security Standard) is a set of security rules that any business handling card payments must follow.
Why it matters: These standards help prevent data breaches by requiring businesses to maintain secure networks, protect cardholder data and regularly test their security systems.
Payment gateways help businesses meet these requirements by handling much of the sensitive data processing, but merchants still have responsibilities for their own systems’ security.
Learn more: What is PCI Compliance? How to Become PCI Compliant
Payment gateway process and transaction flow
The electronic payment gateway handles three main stages when processing a transaction:
1. Authorization
When you click “Pay Now,” the gateway asks your bank if you have enough money available. The bank checks your balance and either approves or declines the transaction. No money actually moves at this point; the bank just puts a hold on those funds.
2. Authentication
The system verifies you’re the rightful owner of the card through methods like:
- Checking the CVV code (the 3 digits on the back of your card)
- Verifying your billing address matches what’s on file
- Sometimes, using 3D Secure (like Verified by Visa), which requires an extra password
These steps help prevent fraud by making sure the person using the card is actually authorized to use it.
3. Settlement
This is when the money actually moves from your account to the business’s account. The gateway payment online system batches approved transactions together (usually at the end of the day) and sends them to the banks for processing.
Settlement typically takes 1-3 business days, which is why you might see a “pending” charge on your account before it becomes final.
Choosing a payment gateway for online and in-store sales
When picking a payment gateway for your business, consider these key factors:
1. Evaluating gateway payment processing
Fees: Payment gateways typically charge some combination of:
- Setup fees ($0-$250)
- Monthly fees ($10-$50)
- Per-transaction fees (usually 2-3% plus a fixed amount like $0.30)
Payment methods: Make sure the gateway supports all the ways your customers want to pay.
Integration: Check if the gateway works with your existing website, POS system and accounting software.
Security: Look for gateways that offer strong encryption, tokenization and fraud prevention tools.
Support: Consider what happens if something goes wrong. Is help available when you need it?
2. Payment gateway for online payment
For online businesses, also consider:
Mobile experience: How does the checkout look on phones and tablets?
Checkout flow: Some gateways redirect customers to another site to pay, while others keep them on your site. The smoother the process, the fewer sales you’ll lose.
International capabilities: If you sell globally, you’ll need a gateway that handles multiple currencies and payment methods popular in different countries.
3. Credit card gateway compatibility
Most credit card gateways support major cards like Visa, Mastercard and American Express, but there can be differences in:
Fee structure: Some gateways charge more for processing certain card types (like American Express).
International cards: Not all gateways handle foreign cards equally well.
Digital wallets: Support for options like Apple Pay, Google Pay and PayPal varies between gateways.
Costs and fees of a payment gateway
Understanding the fee structure of payment gateway services helps you budget accurately:
Setup fees: One-time charges to create your account and integrate the gateway with your systems. Many modern gateways have eliminated these fees.
Monthly fees: Regular charges for using the gateway service, typically ranging from $0-$50, depending on features included.
Per-transaction fees: Charges applied each time a customer makes a payment. These usually follow one of two models:
- Flat rate: A simple percentage plus fixed fee (like 2.9% + $0.30) for every transaction
- Interchange-plus: The actual cost charged by the card network plus a markup (more transparent but more complex)
Additional charges: Some gateways also charge for:
- Refunds or chargebacks
- Currency conversion
- Advanced fraud protection
- PCI compliance assistance
When comparing gateway payment services, look at the total cost based on your typical transaction volume and average sale amount, not just the advertised rates.
Integration options for POS and ecommerce
Connecting your payment gateway to your business systems can happen in different ways:
1. API integrations
An API (Application Programming Interface) is like a bridge that lets different software systems talk to each other. For payment gateways, APIs allow your website or POS system to communicate directly with the gateway.
Benefits of API integration:
- Customizable checkout experience
- Real-time payment information
- Automatic synchronization with inventory and accounting
This approach works well for businesses that want more control over their payment process and have technical resources to implement it.
2. Gateway payment online
For online stores, there are two main ways to set up your checkout:
Hosted payment pages: The customer gets redirected to the gateway’s website to enter their payment information. This is easier to set up but creates a less seamless experience.
Embedded checkout: The payment form lives directly on your website, creating a smoother experience for customers. This usually requires more technical setup but keeps customers on your site throughout the process.
Lightspeed Payments works with many popular payment gateways, making it easy to accept payments both online and in your physical store through a single integrated system.
Final insights and next steps
A payment gateway is the technology that makes digital payments possible by securely connecting customers, businesses and banks. It handles the critical tasks of encrypting sensitive data, routing it through financial networks and confirming transactions.
When choosing a gateway, consider not just the costs but also security features, supported payment methods and how well it integrates with your existing systems. The right gateway should make payments easier for both you and your customers.
As payment technology evolves, we’re seeing more options for real-time payments, stronger security through biometrics and expanded support for global payment methods. Staying current with these developments helps businesses offer the payment options customers expect.
Talk to an expert to learn how Lightspeed can help grow your business with integrated payment solutions.
Frequently asked questions about payment gateways
What is the difference between a payment gateway and a merchant account?
A payment gateway processes transactions, while a merchant account is where funds are deposited after processing. Think of the gateway as the technology that enables transactions, and the merchant account as the bank account that receives the funds.
Can I use multiple payment gateways for my business?
Yes, many businesses use multiple gateways to provide payment flexibility, ensure backup if one system fails or optimize costs for different transaction types.
How long does it take for funds to reach my bank account after a transaction?
Most payment gateways deposit funds within 1-3 business days, though some offer faster settlement options for additional fees.
What payment methods can I accept through a payment gateway?
Modern payment gateways typically support credit cards, debit cards, digital wallets like Apple Pay and Google Pay, ACH transfers and sometimes alternative payment methods like buy-now-pay-later services.
How do payment gateways handle international transactions?
Payment gateways can process international payments by supporting multiple currencies, though they may charge additional fees for currency conversion and cross-border transactions.
Editor’s note: Nothing in this blog post should be construed as advice of any kind. Any legal, financial or tax-related content is provided for informational purposes only and is not a substitute for obtaining advice from a qualified legal or accounting professional. Where available, we’ve included primary sources. While we work hard to publish accurate content, we cannot be held responsible for any actions or omissions based on that content. Lightspeed does not undertake to complete further verifications or keep this blog post updated over time.
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