What is an eCommerce payment gateway and how does it work?

Key takeaways: 

• eCommerce payment gateways offer a secure way to accept payments from your customers. 

• When choosing an eCommerce payment gateway, businesses should consider factors like fees, security, and platform integration.

• Airwallex’s payment gateway can simplify international transactions with its multi-currency Business Accounts.

An eCommerce payment gateway is a technology that merchants use to accept debit or credit card transactions from customers, bridging the website and the bank that processes the payment.

According to IBM’s Cost of a Data Breach Report 2024, the global average cost of a data breach is an astounding US$4.88 million.¹ Implementing a payment gateways with robust payment security can mitigate data breaches, since they employ security features, such as encryption, tokenization, and fraud detection tools to safeguard sensitive customer data and reduce the risk of financial losses. 

Payment gateways also simplify the checkout process, significantly reducing cart abandonment rates. This is crucial, as findings from the Baymard Institute show that a complicated checkout process leads to a staggering 70% of shoppers abandoning their carts.² By simplifying this process, payment gateways not only boost sales but also improve customer satisfaction.

Read on to find out more about the different types of payment gateways, how they work, and what features you should consider when choosing one. We’ll also show you how Airwallex can meet your global payment gateway needs.

How do eCommerce payment gateways work?

eCommerce payment gateways enable secure and efficient online transactions and are a key part of the payment process. When a customer makes a purchase, the payment gateway securely captures the customer’s payment information and encrypts it to transmit it safely.

The payment gateway then routes the information to the payment processor that enables the authorisation and release of funds. This technology enables a seamless and secure checkout experience.

Payment gateways differ from payment processing tools. While a payment gateway collects and verifies payment information, payment processors orchestrate the transaction between your eCommerce store, your bank, and customer’s bank. Here’s how they work together to process payments:

1. A customer initiates a payment on an eCommerce platform

The payment process starts when a customer selects their preferred payment method on the checkout page of a website, online store, or mobile app. Payment methods could include credit cards, debit cards, and digital wallets.

2. The eCommerce payment gateway encrypts the payment data

When the customer submits their payment information, the eCommerce platform encrypts this sensitive data to send it securely to the payment processor encryption technologies like SSL (Secure Sockets Layer) protect the data from unauthorised access during transfer.

3. The payment gateway sends the encrypted data to the payment processor

 The eCommerce payment gateway securely routes the transaction information to the relevant payment processor for authorisation.

4. The payment processor sends an authorisation request to the customer’s bank

The payment processor, often a bank or financial institution, receives the transaction details from the payment gateway and sends an authorisation request to the customer's issuing bank. This is to verify the transaction and the availability of funds.

5. The customer’s bank approves or declines the transaction

The customer's bank reviews the authorisation request and approves or declines the transaction based on factors like available funds, fraud risk, and account status. It then sends an authorisation response to the payment processor via the payment gateway.

6. The payment processor communicates the authorisation response to the payment gateway 

If the transaction is approved, the payment gateway notifies the merchant's website, allowing the merchant to process and fulfil the order. If the transaction is declined, alternative payment methods may be requested.

7. The payment gateway initiates the settlement process

Once the transaction is completed, the payment gateway initiates the settlement process, where the customer's bank transfers the funds to the merchant account. Depending on the banking institutions involved, settlement typically takes a few business days.

eCommerce payment gateways ensure that online transactions are secure, efficient, and compliant with industry standards and regulations.

What are the different types of eCommerce payment gateways?

Payment gateways are critical components of eCommerce, enabling secure and efficient online transactions. Understanding the different types of payment gateways can help businesses choose the right solution for their needs. Here, we explore the various types of payment gateways and their unique features.

Hosted payment gateways

Hosted payment gateways redirect customers to a payment processor's platform to complete the transaction. These gateways are easy to set up and maintain, as the payment processor handles security and compliance. However, they offer less control over the checkout experience and can lead to a higher cart abandonment rate due to redirection.

Self-hosted payment gateways

Self-hosted payment gateways allow merchants to collect payment information directly on their website, providing a seamless checkout experience. These gateways offer more control and customisation but require greater responsibility for security and PCI compliance. Merchants must ensure their websites are secure and compliant with industry standards to protect customer data.

API payment gateways

API payment gateways provide merchants with APIs to integrate payment processing directly into their website or application. API gateways offer the most control and flexibility, allowing businesses to tailor the payment experience to their specific needs. However, they require advanced technical knowledge to implement and maintain. Merchants must have a dedicated development team to manage the integration and ensure ongoing security.

Local bank integration

Local bank integration allows customers to pay directly from their bank accounts using online banking. This type of gateway can reduce fees and increase conversion rates in specific regions but may not be suitable for international businesses. Local bank integration is particularly popular in Europe, where many customers prefer to pay directly from their bank accounts.

eCommerce payment gateway benefits 

Using an eCommerce payment gateway offers businesses peace of mind by enabling secure and efficient online transactions.

1. Offers enhanced security

eCommerce payment gateways provide a secure environment for processing online payments and encrypting sensitive customer information to prevent data breaches and fraud.

Tokenisation and encryption technologies ensure that payment details are transmitted securely, reducing the risk of unauthorised access to sensitive data.

This heightened security instils trust in customers and helps businesses comply with industry regulations such as PCI DSS (Payment Card Industry Data Security Standard), SOC 1, and SOC 2.

On top of encryption and tokenization, we employ fraud detection systems. For example, our machine learning and artificial intelligence technologies analyse transaction patterns to identify unusual behaviour and prevent fraud. This not only protects the business from legal issues but also reassures customers that their transactions are secure.

2. Increases conversion rates

eCommerce payment gateways offer seamless checkout experiences, and can display dynamic pricing in the shopper’s currency and offer local payment methods, which can significantly boost conversion rates and reduce cart abandonment.

Businesses without an online storefront can also simplify how their customers pay through payment links. Payment links can be easily generated and sent to customers via email, SMS or messaging apps. This link then directs the customer to a secure payment page where they can choose to check out with their preferred payment method quickly and easily.

3. Boosts efficiency 

Payment gateways automate many aspects of the eCommerce payment processing workflow, so businesses can accept payments quickly and efficiently. These gateways can save time and reduce manual intervention.

Payment gateways can also support many currencies and languages. This lets businesses expand into other countries quickly and easily without having to work with local payment processors or understand the differences in each market's local payment infrastructure. This simplifies operations, and can accelerate expansion efforts.

Limitations of eCommerce payment gateways

While payment gateways offer many benefits for online businesses, they also come with certain limitations that can impact your business. 

Transaction fees

Transaction fees for processing payments can vary based on transaction volume, payment method, and regions. These fees can snowball, especially for businesses with high sales volumes, impacting profit margins.

On top of that, some gateways have additional charges for currency conversion, chargebacks, and refunds, further increasing transaction costs for merchants. Your business can benefit from bundled pricing designed to help businesses who accept a high volume of payments manage costs.

Potential technical issues and downtime

Payment gateways rely on complex technical infrastructure to process transactions securely. As a result, they may experience occasional downtime, system glitches, or maintenance issues that can disrupt payment processing capabilities.

Technical problems can cause failed transactions, payment delays, and can make it troublesome for customers. This can affect profits and reputation. Good eCommerce payment gateway providers will have good customer support, which can go a long way when your business faces technical issues.

Limited payment options 

Some payment gateways may not support all the payment options that customers want. Some gateways limit certain currencies, card types, and may not offer local payment methods. This limits the options for customers to choose from and makes it harder and less convenient to pay.

This problem can lead to missed sales opportunities and unhappy customers who want payment methods that the gateway doesn't support. When selecting an eCommerce payment gateway, consider providers that can support the currencies in the countries your business currently operates in.

How to choose an eCommerce payment gateway for your business 

Choosing the right payment solutions provider is crucial for mitigating potential drawbacks. Here are some tips for choosing the right eCommerce payment gateway for your business:

• Compare fees and costs: Look for a provider with transparent pricing and low transaction fees as this helps better forecast costs over the period of your contract. Consider any additional costs like settlement fees which businesses will have to pay for if the received currency is different from the account’s currency. Opt for blended pricing for more certainty over costs.

• Prioritise payment method variety: Make sure your eCommerce payment gateway supports multiple payments so your customers can pay with their method of choice. This flexibility can help increase customer satisfaction and improve conversions.

• Understand the level of security provided: Your payment gateway must meet PCI compliance standards. The top payment gateways will include security features like encryption and tokenisation to protect your customers’ sensitive data.

• Make sure integrations are available: The gateway should integrate seamlessly with your eCommerce platform and be able to scale as your business grows. Airwallex integrates with platforms like Shopify, WooCommerce, and Magento, making accepting payments seamless.

Securely accept global payments with Airwallex

Selecting the right eCommerce payment gateway is crucial for businesses aiming to provide secure, efficient, and seamless online transactions.

Airwallex is a payment services provider, which means it offers not only payment gateway solutions but also payment processing.. Airwallex can integrate with your eCommerce site in several ways. For seamless integration with eCommerce platforms, you can use no-code plug-ins for Shopify, WooCommerce, or Magento. These tools allow you to start accepting payments quickly and without technical expertise.

If you're integrating directly with your eCommerce site, we offer a payment gateway and processing solution with a pre-built hosted page. This allows you to provide a secure and customisable checkout experience on your web store.

With Airwallex, you can grow your business globally:

• Accept payments from 160+ payment methods including major card schemes.

• Eliminate costly FX conversion fees with like-for-like settlement.

• Reduce chargebacks with built-in fraud prevention.

We're regulated in all markets we operate in, with 60+ licences and permits globally. Join the 100,000 businesses that trust us to process over US$100 billion in global payments volume.

Disclaimer text: We wrote this article on 16 October, 2024. We based the information on our own online research and were not able to manually test each tool or provider. The information is provided for educational purposes only, and a reader should consider the specific requirements of their business when evaluating providers. This research is reviewed every six months. If you would like to request an update, feel free to contact us at [email protected].

Frequently asked questions 

Which is the best eCommerce payment gateway?

When determining the best eCommerce payment gateway, it's important to recognise that each provider offers unique features and benefits that cater to different business needs. When choosing a suitable payment gateway provider for your business, be sure to compare the payment options, security and compliance standards, and integration and customisation options for each provider.

What are the top eCommerce payment gateways?

Some of the top eCommerce payment gateways include Airwallex. Airwallex is particularly well-suited for global businesses, as it eliminates costly FX conversion fees with like-for-like settlement, among other payment capabilities.

Do I need an eCommerce payment gateway?

Yes. If you’re running an online business that accepts payments, you’ll need to use a payment gateway. Payment gateways are essential for accepting and processing credit card payments on your eCommerce website. They also offer enhanced security and provide a seamless checkout experience.

Sources:

• https://www.ibm.com/reports/data-breach 

• https://baymard.com/lists/cart-abandonment-rate