eCommerce payment gateways: What are they and how do they work?

In the dynamic world of eCommerce, seamless and secure transactions are paramount to building customer trust and driving sales. Behind every successful online purchase lies a sophisticated system known as an eCommerce payment gateway. Let's explore what these gateways are and how they function to facilitate smooth and secure transactions.

What is an eCommerce payment gateway?

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. This technology enables a seamless and secure checkout experience.

According to IBM’s Cost of a Data Breach Report 2023, the global average cost of a data breach is an astounding US$4.45 million. Implementing payment gateways can mitigate data breaches, as they employ robust security features, such as encryption 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 68% of shoppers abandoning their carts.

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 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 is a key part of the payments process. Payment gateways differ from payment processors. While a payment gateway collects and verifies payment information, payment processors orchestrate the transaction between your eCommerce platform, 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 platform encrypts the payment data

When the customer submits their payment information, the eCommerce platform encrypts this sensitive data to send it securely over the internet. 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 bridges the merchant's website and the payment processor, such as a bank. The 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's 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.

How global businesses are using eCommerce payment gateways

Here are three examples of top businesses that use payment gateways effectively on a global scale:

Amazon

Amazon uses payment gateways to facilitate seamless and secure online transactions for millions of customers worldwide.

Requirement: Given its vast customer base and global reach, Amazon needs efficient payment gateways to handle high volumes of transactions securely and reliably. Efficient payment gateways are crucial for maintaining customer trust and managing complex transactions across different currencies and regions.

Implementation: Amazon integrates multiple payment gateways, such as PayPal, credit/debit card processors, and Amazon Pay, to offer a variety of payment options to customers. These payment gateways ensure a convenient and secure checkout process for buyers on their platform.

Benefit: Diverse payment gateways allow Amazon to provide a smooth and reliable purchasing experience. These gateways also help Amazon mitigate fraud risks and streamline transaction processes, which are vital for its large-scale operations.

Apple

Apple uses payment gateways to enable smooth in-app purchases, online sales, and transactions across its ecosystem of products and services.

Requirement: Apple's diverse range of products and services, including the App Store, iTunes, and Apple Music, need a robust and secure payment gateway to handle millions of transactions daily. It's essential for managing subscriptions, one-time purchases, and in-app payments while providing a seamless user experience.

Implementation: Apple Pay, the company's proprietary digital wallet service, acts as a payment gateway, allowing users to make purchases securely using their Apple devices. By integrating Apple Pay into its platforms, Apple enhances user convenience and security during transactions.

Benefit: The seamless integration of Apple Pay boosts user trust and engagement, leading to increased sales and a stronger brand ecosystem. It also leverages technologies like tokenisation and biometric authentication to enhance security, reducing the risk of fraud and increasing user confidence in Apple's payment infrastructure.

Uber

Uber leverages payment gateways to process payments for rides and other services  globally.

Requirement: Operating globally with different regulatory environments and payment preferences, Uber needs versatile and reliable payment gateways to manage diverse payment methods. These gateways need to ensure quick, secure, and transparent transactions to maintain operational efficiency and user satisfaction.

Implementation: Uber integrates payment gateways like Stripe to handle transactions securely within its app. These integrations enable passengers to make cashless payments, provide transparency in fare calculations, and ensure a convenient payment experience for both riders and drivers.

Benefit: Using reliable payment gateways enhances Uber's operational efficiency and user satisfaction, promoting higher usage and loyalty among both passengers and drivers. These gateways also support Uber's expansion into new markets by offering localised payment solutions and ensuring compliance with regional financial regulations.

What are the different types of eCommerce payment gateways?

There are many types of payment gateways, and understanding the various types can help you choose the right match for your business needs. Here are some common types of payment gateways.

Merchant account gateways

Merchant account gateways are traditional gateways that require businesses to have a merchant account with a bank or payment processor. They handle credit card transactions and debit card transactions. 

How merchant accounts work: Customers enter their payment information on the merchant's website. The gateway securely transmits the data to the merchant account processor to verify the transaction. The customer's bank then transfers the funds to the merchant's account, minus any processing fees.

Payment aggregators

Payment aggregators act as an intermediary between the merchant and various payment methods, eliminating the need for a separate merchant account. They often offer a wider range of payment options.

How payment aggregators work: Similar to merchant account gateways, customer payment information is sent to the aggregator for processing. The aggregator then handles settlements with the merchant, typically deducting their fees and depositing the remaining funds into the merchant's account.

API payment gateways

API (Application Programming Interface) payment gateways are software tools that let businesses integrate secure payment processing directly into their websites, applications, or platforms. Unlike traditional gateways with pre-built interfaces, APIs offer more flexibility and customisation for the checkout experience.

How API payment gateways work: Developers integrate payment functionality into the business's platform using the payment gateway's API documentation and tools. APIs allow them to easily create buttons and forms while handling data securely. During checkout, the customer enters their payment information, which is securely transmitted as encrypted data to the payment gateway's servers. The gateway then verifies the information with the issuing bank or financial institution and processes the transaction. Finally, the customer's account transfers the funds to the merchant's account, minus any processing fees, with the transaction status communicated to the business platform.

Mobile wallets and digital payment gateways

Mobile wallets and digital payment gateways cater specifically to mobile payments, allowing customers to pay using digital wallets like Apple Pay, Google Pay, or Samsung Pay.

How mobile wallets and digital payment gateways work: The customer initiates the payment through their mobile wallet app, which securely transmits the payment information to the gateway. The gateway verifies the transaction with the issuing bank and completes the payment.

International payment gateways

International payment gateways cater to businesses selling internationally by supporting multi-currency transactions and offering currency conversion and international fraud prevention features.

How international payment gateways work: The gateway lets customers see product prices and pay in their preferred currency. The gateway handles the currency conversion and settles the transaction with the merchant in their chosen settlement currency.

Cryptocurrency payment gateways

Cryptocurrency payment gateways specialise in processing transactions using cryptocurrencies like Bitcoin or Ethereum.

How cryptocurrency payment gateways work: The customer chooses cryptocurrency as their payment option and sends the digital currency to the merchant's wallet address. The gateway verifies the transaction on the blockchain network and confirms the payment.

The top three benefits of using an eCommerce payment gateway

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

1. Payment gateways offer enhanced security

eCommerce payment gateways provide a secure environment for processing online payments, 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.

2. Payment gateways increase conversion rates

eCommerce payment gateways offer seamless checkout experiences, which can significantly boost conversion rates and reduce cart abandonment. Offering a variety of payment methods and features such as saved credit card details and one-click sales can significantly boost conversions and sales, as they allow customers to pay with their preferred payment method quickly and efficiently.

3. Payment gateways offer efficient payment processing

eCommerce payment gateways automate the payment processing workflow, so businesses can accept payments quickly and efficiently. These gateways handle authorisation, settlement, and transaction management, reducing manual intervention and streamlining financial operations. 

Payment gateways also provide real-time transaction monitoring to enable businesses to track payments, reconcile accounts, and gain insights into their revenue streams. Moreover, integration with inventory management and accounting systems simplifies order fulfilment and ensures accurate financial records.

What are the main 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. 

Payment gateways typically charge transaction fees

Transaction fees for processing payments can vary based on transaction volume, payment methods, 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.

Payment gateways can experience 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 issues can lead to failed transactions, payment delays, and inconvenience for customers trying to make purchases, potentially affecting business revenue and reputation.

Certain payment gateways offer limited payment options 

While payment gateways offer a variety of payment methods, they may not support all payment options desired by customers in different regions or demographics. Some gateways restrict certain currencies, card types, or alternative payment methods, limiting the flexibility and convenience of payment choices for customers. 

This inconvenience can result in missed sales opportunities and dissatisfied customers who prefer alternative payment methods that are not supported by the gateway.

Choosing the right payment solutions provider is crucial for mitigating potential drawbacks. A reputable provider can offer more competitive transaction fees, robust technical support to minimise downtime, and a suite of payment options to cater to diverse customer preferences across markets. 

Top three features to consider when choosing an eCommerce payment gateway

When considering an eCommerce payment gateway, focus on the functionalities and capabilities that directly impact your online transaction process. Here are the top three features to consider when choosing an eCommerce payment gateway:

Whether the payment gateway offers tokenisation as a security feature

Tokenisation is a security feature that substitutes sensitive payment information (like credit card numbers) with tokens. These tokens are used for processing transactions without exposing actual card details, enhancing data security and reducing the risk of fraud. With tokenisation, eCommerce payment gateways ensure that customer payment data remains secure during online transactions.

Whether the payment gateway offers support for multiple payment methods

Comprehensive support for various payment methods is essential for an eCommerce payment gateway. This feature allows businesses to accept payments through different channels, including credit and debit cards, digital wallets (e.g. PayPal, Apple Pay), bank transfers, and alternative payment methods specific to certain regions. By offering a wide range of payment options, eCommerce payment gateways cater to diverse customer preferences and increase checkout flexibility.

Whether the payment gateway is PCI DSS compliant

Payment Card Industry Data Security Standard (PCI DSS) compliance is a crucial feature of eCommerce payment gateways. Compliance with PCI DSS ensures that the gateway meets industry standards for securely handling payment card data. This includes implementing encryption, secure network protocols, regular security assessments, and maintaining a secure environment for processing online payments. eCommerce payment gateways that are PCI DSS compliant provide businesses and customers with confidence in the security of their transactions.

Securely accept global payments with Airwallex

Airwallex is a payment services provider, which means it offers not only payment gateway solutions but also payment processing for eCommerce platforms. Airwallex can integrate with your eCommerce platform several ways. For example, you can process payments with no-code plug-ins on your Shopify, WooCommerce, Magento platforms, or use our payment gateway and processing with a pre-built hosted page on your web store.

Grow and safeguard your business globally:

• Accept payments with all major card schemes and 160+ local payment methods

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

• Reduce chargebacks with built-in fraud prevention

• Minimise FX risk with multi-currency pricing

FAQs

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. The diversity in offerings reflects the varied requirements and priorities of businesses operating in the digital commerce space. 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 Stripe, PayPal, and Airwallex. Airwallex is particularly well-suited for global businesses, as it supports payments in over 130 currencies and offers competitive foreign exchange rates. Stripe is another popular choice, known for its ease of integration and robust fraud prevention measures. PayPal, a household name in online payments, provides a seamless checkout experience and is trusted by millions of customers worldwide.

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, such as eBay, Amazon, Lazada, Shopify, and WooCommerce. They also offer enhanced security and provide a seamless checkout experience.

Disclaimer: *UK Disclaimer: This information does not take into account your objectives, financial situation, or needs. Services in the UK are offered by Airwallex (UK) Limited (Company No. 10103420), which has its registered office at Labs House, 15-19 Bloomsbury Way, London, England, WC1A 2TH, United Kingdom. Airwallex is authorised by the United Kingdom Financial Conduct Authority under the Electronic Money Regulations 2011 (firm reference number 900876).