Payment gateways: What are they and how do they work?

For ambitious businesses, eCommerce isn't just a trend; it's a strategic gateway to accelerated growth. By going online, you break free from geographical limitations, reaching local and international customers without significant investment in physical infrastructure. 

Building your business' eCommerce presence is now easier than ever, with support from the Singapore government and tools that set up your digital storefront in weeks. Yet venturing into eCommerce involves a lot of decision-making, such as choosing the right payment gateway. 

Payment gateways serve worldwide markets, enabling businesses to accept a diverse range of payment methods from customers across the globe. As simple as it might seem, there’s a lot to think about when choosing a payment solution, such as security, integration with your existing website, and ease of maintenance. 

This article will explore everything that a merchant needs to know about payment gateways. This includes the way they work, the different types of payment gateway available, the advantages and disadvantages of payment gateways, and provide examples of payment gateway providers. We’ll round things out by looking at the payment gateway services provided by Airwallex, which specialises in cost-effective and customer-friendly global transactions.

A key takeaway from this article is that not all online payment gateways are equal. Whether you’re new to eCommerce or looking to optimise your existing operations, it’s worth exploring payment gateway providers in Singapore and learning how to choose one that meets your business' needs.

What is a payment gateway?

A payment gateway is a technological platform that allows businesses to accept money from customers. It allows in-person and online businesses to accept, process, and manage various payments from their customers. While Point of Sale (PoS) terminals used in-store are a form of payment gateway, the phrase is usually used to refer to online payment gateways. Payment gateways allow merchants to accept payments via credit or debit card (they can also be referred to as a credit card payment gateway) but they typically also accept other forms of electronic payment such as a mobile wallet like Apple Pay.

Digital payment services are going through a surge in growth, with mobile wallets, payment apps and the increasing convenience and speed of digital payments accelerating adoption, particularly among younger generations. The total transaction value of digital payments is expected to grow by almost 10% annually between 2024 and 2028, with a projected total amount of US$16.62tn by 2028. For this reason, it has never been more important for merchants to choose carefully when it comes to the design and functionality of the payment gateways they use.

How do payment gateways work?

Let’s say a customer is purchasing a product or service from your website. The payment gateway is the secure tool on the checkout page that takes the card number and checks if it’s valid. 

It then forwards the transaction details to a payment processor (also known as a Payment Service Provider or PSP). This behind-the-scenes system facilitates the transaction by bridging communications between the payment gateway, card network, and cardholder’s bank. 

What additional services do payment gateways provide?

There are a few other vital functions that a payment gateway performs:

Encryption: The payment gateway encrypts data submitted by customers during the online checkout process before it is transmitted to other entities. This prevents anyone intercepting the information while it is being sent from one place to another and ensures that standards such as Payment Card Industry (PCI) compliance are upheld.

Tokenisation: Tokenisation is another important method of securing payment transactions. When the customer details are entered, they are replaced by a string of meaningless symbols, known as a token. This token can then be stored for future transactions, while the details are held in a secure vault, to be unlocked by financial institutions to complete the transaction when needed.

Fraud prevention: Fraud-detection algorithms, address verification systems (AVS) and card verification value (CVV) checks are measures that can be put in place by your payment gateway to help assess whether transactions are fraudulent before they are processed.

Data collection: Payment gateways can also collect data on transactions that can help businesses tweak and improve their payment systems. For example, they can provide insights on the number of chargebacks and declined transactions.

What are the different types of payment gateway?

There are four types of payment gateways, and the difference between each lies in their integration and upkeep. 

Hosted payment gateway

A hosted payment gateway is where the customer completes the transaction on the payment service provider’s (PSP) page instead of your website. 

When your customer is ready to check out and pay, the hosted payment gateway takes the consumer to the PSP’s page. The customer enters their card details here and hits the “Pay Now” button. They are redirected back to your website once the transaction is successful. 

Airwallex and Paypal are some payment platforms that offer hosted payment gateways. 

Self-hosted payment gateway

With a self-hosted payment gateway, payment details are collected directly on your website or app, using a form that you’ve fully customised. However, the payment processing is still handled by a PSP.

Once the self-hosted payment gateway collects the payment details, they are forwarded to the PSP to process the transaction. The payment gateway receives a response from the PSP and forwards it to your website, which then displays a “thank you” page to the customer.  During this entire process, the customer stays on your website and isn’t redirected anywhere else. 

Airwallex, Shopify and Stripe offer self-hosted payment gateways.  

API-hosted payment gateway

An Application Programming Interface (API) allows two or more applications to talk to each other so they can access specific features or data. Therefore, an API-hosted payment gateway uses APIs to integrate your payment form with a PSP, so that payment processing happens directly on your website. This means customers can complete the payment journey without being redirected to a different site. 

Local bank integration

A local bank integration is where the customer is redirected to a bank’s online platform to complete a transaction. This service leverages the bank's technology and security measures, while facilitating transactions from customers who prefer paying through their bank.

DBS Paylah is an example of a local bank integration.

Is a payment gateway the same as a payment processor or payment provider?

This can be a little confusing, because companies can bundle these services together. However, a payment gateway, processor and provider are all distinct entities within the ecosystem of electronic payment transactions.

Payment gateway providers offer the software that integrates with your site, collecting, encrypting and transmitting customer information. Payment processors receive this information and send it on to financial institutions and card networks. ‘Payment provider’ is an umbrella term for someone who offers payment services.

Increasingly, payment providers are bundling together multiple services, which can mean cost savings for merchants. For example, Airwallex can act as a gateway, processor and acquirer. It also offers these services separately. On top of this functionality, there are other services that can be provided to merchants by payment gateway providers, including customer support, invoicing, payment integration with accounting software and detailed analytics that can be used to optimise business practices.

What type of businesses use payment gateways?

The types of business that use payment gateways to process their transactions can vary wildly. Here are a few examples of different types of business and the way that they use gateways:

Retail stores

Independent retail stores may use a payment gateway to securely process transactions for purchases made on their website. Many merchants use eCommerce platforms like WooCommerce and Shopify to sell their goods rather than building their own websites. These marketplaces provide merchants with a ready-made online store and payment gateways can then be integrated into the backend of this store.

A real-life example of an eCommerce store using a payment gateway is Wine Kin, a Singaporean retailer of fine wine that was founded in 2023. Wine Kin uses Airwallex’s payment gateway, integrated with the backend of their WooCommerce website. This allows them to accept payments from all types of customers in different regions, and in different customers, using different payment methods.

As well as credit cards, Wine Kin can accept payments through WeChat and AliPay using their Airwallex gateway. They are also able to send Payment Links for customers who prefer to pay in this manner. Airwallex also provided acquirer services, so payments and supplier payouts could be managed through a single platform to create an efficient workflow. Airwallex’s integration with Xero also simplified Wine Kin’s bookkeeping process.

Online marketplace

An online marketplace could also use a payment gateway to facilitate transactions. It’s possible to embed a payment gateway into the platform that automatically splits funds so that any fees and bills are taken from customer payments before the remaining amount reaches the merchant’s account.

Payment gateway providers that are also acquirers may also allow merchants to hold money in multiple currencies, which can help them avoid paying transaction fees when receiving and sending money in foreign currencies. This eCommerce platform may use a white-labelled payments system, which allows the process to remain branded and integrated with the rest of the site, without the business having to design a solution from scratch.

Subscription-based business

A subscription-based businesses may also use a payment gateway to manage recurring billing and subscription payments from their customer until they cancel or end the subscription. Payment gateways may help handle the aspects of trial management, invoice, up to the point of automated recurring billing. They may also help you manage plan upgrades, downgrades and cancellations via an API.

Payment gateways can use tokenisation to securely hold customer payment information on file for repeat payments without any danger of breaches or interception by cybercriminals. Rather than holding the information itself and being responsible for keeping it safe, tokenisation involves replacing that information with a ‘token’ (string of meaningless characters) that can be swapped back safely when the transaction occurs.

Top 4 pain points when using a payment gateway

Accepting online payments comes with unique challenges. These issues can have a huge impact on SMEs operating with few technical resources or small margins. 

• Hidden fees: Payment gateways often charge fees for their services. While many of these costs are transparent and upfront, such as one-time setup costs or fixed transaction fees, some can be less obvious.  Hidden fees can include transaction fees for international payments or additional fees for alternate payment methods. Many payment solutions also charge a fee for converting and settling foreign currency in Singapore dollars. 

• Technical integration issues: Sometimes, the payment gateway may be incompatible with your chosen eCommerce platform (e.g. Shopify/WooCommerce) or with your mobile application. This will require custom coding or additional plugins, which can drive up costs and integration time. Another common issue is inaccurate syncing with existing business systems, which can lead to delays in order fulfillment or accounting errors.

• Chargebacks: Online payments are susceptible to chargebacks, a form of consumer protection against fraudulent card transactions.  A chargeback can occur for a variety of reasons, such as failure to deliver goods, cancelled subscriptions, or when the delivered goods are damaged. They are also initiated by the cardholder when they want to dispute an unauthorised charge on their credit or debit card. Fighting chargebacks can be resource-intensive, as you need to show evidence of a legitimate and successful transaction. If a chargeback gets approved, you lose the full value of the sale and pay a chargeback fee. In extreme cases, and if this happens in high frequency, a business can lose the ability to accept card payments.

• Keeping up to date with ever-changing security and compliance requirements: Payment gateways are required to meet industry standards and regulations such as the Payment Card Industry Data Security Standard (PCI DSS) to protect sensitive financial information and prevent fraud. It is important that every aspect of a business’s payment process meets these standards, so ensure that you work with a payment provider that is up-to-date with evolving standards no matter where in the world you or your customers are based.

Top 5 benefits of using a payment gateway

Despite these challenges, digital payments offer benefits that can outweigh its drawbacks. Here are reasons why it’s worth integrating a payment gateway to your business:

Support online transactions and online payments

Offering multiple payment options appeals to a wider range of customers, which can drive up your sales. Besides credit or debit card transactions, payment gateways also support payments from FAST transfers (i.e. PayNow), digital wallets (i.e. Apple Pay or Google Pay), and more. 

Some payment gateways also accept region-specific payment methods like Alipay in China or GrabPay in South East Asia, making it easier to access overseas customers. 

Accept payments globally

Payment gateways are a must for SMEs venturing beyond Singapore. They allow international transactions without the complications of handling foreign cash, and even support regional payment methods. However, you’ll want to use a multi-currency specialist like Airwallex to maximise this benefit, as they’re designed to help you save on exchange rates and transfer fees. 

Improved security

At the core of payment gateway security is data encryption. When a customer enters their payment details, the gateway encrypts this information so that it’s securely transmitted to the payment processor, protecting both the customer and the merchant.

Fraud prevention and better customer experience

Online transactions can sometimes be riskier due to the increased likelihood of fraud. However, some payment gateways minimise chargebacks with built-in fraud-prevention tools. These tools analyse each transaction in real-time for suspicious patterns, and block transactions that seem particularly risky.  

Faster processing and improved operational efficiency

Payment gateways enhance operational efficiency once they are integrated with your existing systems. They can automate processes like invoicing, bookkeeping, and inventory management. For businesses that offer subscription-based services, some payment gateways accept automated recurring payments, which simplifies the billing process.

How to install a payment gateway: a step-by-step guide

Adding a payment gateway to your website is a straightforward process. The specifics can vary according to the solution you’ve chosen or the platform you’re using, but they generally fall under these steps: 

Step 1: Create and set up a merchant account

Some online payment services will ask you to create and configure a merchant account within their platform. This is an account that holds funds from customer card payments before they’re transferred to your primary bank account.   

Step 2: Install the gateway plugin or obtain API keys 

If you’re using an eCommerce platform like Woocommerce, adding a payment gateway is as easy as installing a plugin. Go to your platform’s app store, search for your chosen gateway, and click “install”. 

Custom-built sites and self-hosted gateways may require you to download API keys, a unique identifier made up of alphanumeric codes. API keys establish a secure connection between your eCommerce store and the payment gateway, so that transaction data is safely communicated between the two. 

Step 3: Test the payment gateway

Conduct several test transactions to ensure everything is working as it should. Most gateways offer a sandbox or test environment for this purpose. Check if the funds are getting credited to the merchant account and if the customers receive appropriate confirmation messages.

Step 4: Go live

Once all bugs and errors have been ironed out, it's time to go live. Switch the gateway settings from 'test' or 'sandbox' mode to ‘live' or 'production' mode. And just like that, you're ready to accept digital payments.

Top 5 features of payment gateway providers

Here's how to choose the right payment gateway in Singapore for your business. As you evaluate different payment solutions, look out for the following details:

Transaction fees vs fixed fees

Payment gateways generally have two types of fees: transaction fees, and fixed fees. Transaction fees are the variable costs associated with every transaction handled by the gateway. They are typically a combination of a fixed fee and a percentage of the transaction’s value. Fixed fees, on the other hand, are costs that do not change with the volume or value of your transactions. These are your monthly account fees, setup fees, or minimum fees. 

You should evaluate these fees in the context of your estimated sales volume and average transaction value to determine the most cost-effective solution.

Multi-currency support

If your goal is to accept overseas payments, multi-currency support is a must. This lets your customers see the final price in their own local currency, which can positively influence their purchase. On your end, you can accept and hold a wide variety of currencies, and convert them to Singapore dollars at market-leading rates. For cross-border eCommerce, seek a solution that offers like-for-like settlement. This allows you to receive and hold funds in a foreign currency instead of being forced to convert to Singapore dollars. For example, if you charge USD to a customer in the US, you can receive and hold those funds in USD. You avoid unnecessary conversion fees, and you get full control over when you want to convert funds to a different currency.

Types of payment methods available

Offering diverse payment methods caters to a wider audience and potentially leads to higher conversion rates. Apart from card payments, e-wallets, and bank transfers, payment methods can include payment links, QR codes and recurring payments.

When selecting a payment gateway, check that they support the relevant payment methods for your business. While credit and debit cards might be universally accepted, the popularity of other payment methods can vary based on the region or industry.

Supported platforms and integrations

As you compare payment gateways, ensure that your top choice supports platforms you currently use or plan to use in the future. This will help with ease of setup and streamlining operations. 

For example, if you run an eCommerce business on WooCommerce, you’ll need a payment gateway with WooCommerce plugins. If you use accounting software like QuickBooks or Xero, syncing these with the payment gateway automates accounting with every transaction. Finally, connecting the payment gateway with inventory management systems ensures real-time updates on stock levels and order statuses.

Security 

Look at the systems put in place to ensure the safe transmission and handling of customer payments. At the bare minimum, the payment gateway should strictly adhere to PCI-DSS requirements, a set of security standards for accepting, processing, or storing credit card information. There should also be an SSL protocol to safeguard the transmission of sensitive data. On top of data security, a good payment gateway offers fraud protection and authentication processes like Card Verification Value (CVV) checks and 3D secure protocols.

How much does a payment gateway cost?

Price shouldn’t be the only consideration when choosing a payment gateway provider but it is an important concern. Look into different fee structures, and think about the type of transactions and the volume that you are likely to process.

Costs can be broken down into various categories, such as:

• Setup fees

• Flat monthly or annual fees

• Transaction fees: a small percentage, flat amount or combination of the two for each transaction processed.

• There may also be additional fees for administrative operations. For example, chargebacks may incur an extra cost to resolve.

If your volume of transactions is relatively low, you might want to look for a fee structure that involves lower monthly fees and lower set-up costs. That’s because transaction fees will add up to a smaller amount than a high-volume company would be paying.

4 examples of payment gateway providers in Singapore and globally

Businesses in Singapore have plenty of online payment services to choose from. Here are some payment gateways that serve worldwide markets.

Airwallex

Airwallex's payment gateway is designed for businesses with global ambitions. Its standout feature is like-for-like settlement in 11 foreign currencies. This means you’re not forced to convert currencies to the Singapore dollar, which protects you from fluctuating exchange rates and unnecessary conversion fees. 

With competitive fees and ease of integration, Airwallex’s secure payment solution is a great choice for both new and established eCommerce businesses. 

PayPal

A familiar name in online payments, PayPal offers a secure way for businesses to handle online transactions. Its eCommerce payment gateway allows customers to pay using their Paypal accounts, which saves them the trouble of entering their card details. 

Paypal’s merchant fees are among the highest in the market, which is currently 3.90% + S$0.50 fixed fee for receiving payments from Singapore buyers. 

Stripe

Stripe’s payment gateway is a popular choice because of its ease of integration and ability to accept various payment methods, including credit cards and digital wallets. 

Fees start at 3.4% + S$0.50 per successful card charge, though custom pricing and volume discounts can be arranged.

Shopify

For entrepreneurs who already use Shopify as their online storefront, Shopify is a simple option as only one account is required for all their transaction and eCommerce needs. The interface is user-friendly for both merchants and customers and security measures are advanced. Scalable pricing plans cater to businesses of all sizes, from startups to enterprise-level organisations, allowing merchants to grow their online presence and sales over time. Like PayPal, the convenience and perks of Shopify as a payment gateway do come with relatively high fees; there is limited customisation and some merchants have reported challenges in accessing responsive customer support for technical issues.

Why choose Airwallex as a payment gateway provider?

If you’re ready to reach overseas customers and operate globally, Airwallex’s robust payment gateway can support your ambitions. Here’s how:

Offer 160+ global and local payment methods  

Although credit cards are globally recognised and accepted, they might not be the preferred option in every market. Shoppers are more likely to abandon their transaction if they see an unfamiliar payment option at checkout. 

With Airwallex, you can offer 160+ payment methods and build trust throughout the checkout process. This is particularly useful when you’re entering a new market. A transparent fee structure helps you make informed decisions about how best to structure your pricing and payment options.  By accommodating local payment methods, you’re showing the customer that you understand and cater to the local market's needs, which can drive differentiation and sales.

Multi-currency support with like-for-like settlement

On top of supporting multiple currencies and 160+ local payment methods, Airwallex lets you accept and hold transactions in leading currencies like US dollars, the euro, or yuan, and benefit from like-for-like settlement. 

This means you receive payouts in the same currency that your customer used, without converting it back to Singapore dollars and paying conversion fees unnecessarily. You can hold the funds in your secure multi-currency wallet for future payments to global suppliers, which protects you from foreign exchange risk.  

Flexible integrations   

Airwallex offers all four payment gateway types. Whether you want full customisation or out-of-the-box solutions, Airwallex has the right solution for your business’s needs. 

SMEs with limited IT resources can use Airwallex’s no-code plugins for eCommerce platforms like Shopify and WooCommerce. There is also the option to set up a simple Airwallex-hosted payment page on your website. 

If you want full control over the customer experience, your developers can build an end-to-end solution through the Airwallex API or mobile SDKs.

No website? No problem - you can use Airwallex to generate a Payment Link that seamlessly connects with your accounting software. Simply share your link over email, SMS, or social media, and track payments as they arrive in real-time.

Security and fraud protection

No matter what kind of integration you choose, you’ll benefit from Airwallex’s security infrastructure. On top of PCI-DSS compliance and SSL protocols, we also use network-issued tokens to replace sensitive payment data with unique symbols. Even if a security breach happens, the actual card details remain inaccessible to hackers.

Airwallex can also minimise chargebacks with built-in fraud prevention tools. You can set a risk appetite that triggers additional security layers like 3DS. Airwallex’s risk engine analyses transactions in real-time, and scores them according to the likelihood of fraud. From here, you can decide whether to accept or reject the transaction. 

Frequently asked questions

1. Which is the best payment gateway?

Different payment gateways will appeal to different businesses. Cost is an obvious factor, as well as ease of use, security, customisation, scalability, global reach and customer support. For global transactions, Airwallex stands out due to its transparent pricing, low FX rates and wide range of local payment methods. In terms of popularity, PayPal remains widely used worldwide and provides a reliable, user-friendly interface, although its fees can be higher than alternatives.

2. Do I need a payment gateway?

Yes, eCommerce merchants typically need a payment gateway to facilitate online transactions and securely process payments from their customers. A payment gateway serves as the intermediary between the merchant's online store and the financial institutions that process the transaction.If you have an account with a platform like Shopify, a payment gateway may be provided as part of the overall eCommerce package. However, it may be possible to upgrade to a payment gateway that is more compatible with your specific business by integrating a separate payment gateway with your store.