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

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 payments 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.

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. While different types of business will have different requirements, you should be looking for a gateway that boosts conversions while remaining secure and minimising chargebacks.

How do payment gateways work?

A payment gateway is at the front end of the payment processing system and is the interface where customers’ payment information is collected. Typically, the payment method used is a card but other payment methods such as mobile wallets can also be used.

Once a customer’s details have been entered into the payment gateway, they are transferred to the payment processor. They are then forwarded on to financial institutions – banks and card networks, for example – who carry out the transfer of funds from the customer’s account to the merchant’s account.

After the information travels through the card network and issuing bank, a message will be sent back through the payment gateway. The message informs both the customer and merchant on whether or not the transaction was successful. If the transaction is approved, the business is notified and proceeds to fulfil the order. If declined, the customer may be prompted to try a different method of payment.

Because of their role, credit card payment gateways have also been described as the “rails” that pass information between the merchant and issuing bank, and then back to the merchant. 

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 gateways?

Different types of payment gateway offer different drawbacks and benefits, and each business must assess their own transaction patterns and operational model to decide which works best for them. Merchants can then decide the amount of control and responsibility they want for their payment gateway. Payment gateways can be broadly divided into three main categories:

Self-hosted payment gateway

Also known as ‘on-site,’ this type of payment gateway is hosted on the business’s own servers. The customer enters their payment details onto a page on the business’s website, which are transmitted from there to the payment service provider (PSP) to authorise the payment.

The benefits of self-hosted payment gateways include a seamless customer journey, because customers don’t have to click through to a separate checkout page that may look and feel different to the rest of the business’s website. By removing friction from the journey, this could contribute to a higher conversion rate and lower the chances of cart abandonment. There is also greater control over the design and flow of the checkout experience.

The drawback to self-hosted gateways is greater responsibility for PCI compliance, as customers’ payment information is stored on the business’s own servers. More technical expertise and a larger amount of resources may be required to implement the gateway initially.

Redirect payment gateway

Also known as ‘hosted,’ a redirect payment gateway takes customers away from the merchant’s website to a page hosted on the payment service provider’s server in order to fill out their payment details.

This is simpler for the merchant, as the merchant will not need to worry about processing the payment, preventing fraud, keeping card details secure and maintaining compliance with PCI and other standards. However, it adds an extra step for the customer, introducing friction to the user journey, and there is less control over the design of the hosted page.

Payment gateway API

Payment gateways can be integrated into a business’s website using APIs (application programming interfaces). This way, control of the design and user flow can be maintained by the merchant while data is securely and easily sent to the relevant financial institutions to complete the transaction.

Airwallex allows merchants to take full control of their checkout experience without having to build a payment gateway solution from scratch by implementing an API in the back end of accepting payments in an iOS or Android app using mobile SDKs (software development kits).

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:

Independent store

Independent stores may use a payment gate to securely process transactions for purchases made on their website. Independent stores are typically small businesses without a tech resourcing, so they may use a redirect gateway to keep things simple while ensuring they remain compliant. 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 benefits of using a payment gateway

• Convenience for your customers: With payment gateways, merchants can offer customers local payment options. This removes obstacles to conversion and contributes to customer loyalty, which can have a positive impact on the business’s bottom line. 

• Enhanced security: Payment gateways offer robust security measures to ensure that customer information is always protected and the risk of fraudulent transactions stays as low as possible. These include encryption, which scrambles information to make it unreadable to anyone who intercepts it in transit, and fraud-detection algorithms, which look out for patterns that indicate suspicious activity and prevent those transactions from being completed without additional authorisation methods.

• Supports efficiency and growth: Payment gateways automate authorisation and settlement of transactions, speeding up the process without compromising on security. They can help businesses scale as transaction volumes increase and allow merchants to cater to an international customer base, with a wide range of currencies and local payment methods accepted.

• Gain insights from data: Many payment gateways provide reporting and analytics tools that allow you to gain valuable insights into customer behaviour and transaction patterns. These insights can empower businesses to make data-informed decisions to optimise their strategies and maximise revenue.

Top 4 pain points when using a payment gateway

• High fees that eat into your margin: Transaction fees for processing payments can vary depending on factors such as payment method, transaction volume and geographical location. Additional fees may be incurred when customers dispute a transaction with their bank or credit card issuer and a chargeback occurs, triggering a refund to the customer. These fees can eat into profit margins, particularly for businesses with high transaction volumes or low-value transactions. That’s why it’s important to find a payment gateway provider with a fee structure that works for your business.

• Difficult and lengthy integrations that consume team resources: It can be time-consuming and costly to set up a secure payment gateway to integrate with an eCommerce platform or website. In some cases this can require some technical expertise and coordination between different departments of the business. Ongoing maintenance and updates may be necessary to ensure that operations remain smooth and that evolving industry standards and regulations are always upheld. Talk to the customer service team at your potential payment gateway provider to find out the best and easiest option for your team.

• 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.

• Lack of control of your checkout: A business’s checkout is absolutely crucial to its functioning. By integrating a payment gateway into your eCommerce site, you are vulnerable to any disruptions or service interruptions that the gateway provider might experience. For this reason, it is imperative to choose a reliable provider with a strong reputation. Consider contacting other leaders in your industry for unbiased recommendations and testimonials.

Top 3 features of a reliable payment gateway

Multi-currency support

Online commerce now regularly takes place across borders, and it’s important to create a frictionless experience for overseas customers as well as domestic ones. One way of doing this is by using a payment gateway that automatically converts transactions into the customer’s preferred currency.

Combined providers, processors and acquirers who specialise in international transactions like Airwallex can also allow merchants to hold money in multiple currencies, which can help avoid FX fees when accepting funds and paying suppliers in the same foreign currency.

Wide range of payment methods

A good and secure payment gateway should offer a wide range of payment methods. In addition to credit and debit cards from multiple networks, this could include mobile wallets like Apple Pay and Google Pay, which enable quick and seamless payments when via mobile devices. Alternative payment options like Klarna, which allows customers to buy now and pay in instalments later on (BNPL), opens up your customer base to include those who may be unable to pay for an item in a single transaction upfront.

It’s also important to remember that there are popular payment methods in some regions that may be unfamiliar to you due to your own geographic location. For example, WeChat Pay and Alipay are widespread in China, and iDEAL is a preferred payment method in the Netherlands.

A recurring billing and subscription management capability

A payment gateway provider that facilitates automated billing for subscription-based services, allows businesses to set up and manage recurring payments efficiently. This means that there is flexibility in the billing plans you can create for customers, with different options for pricing structures, billing frequencies and types of subscription. 

Subscription businesses also have specific security needs as they need to hold customer details on file. Make sure your payment gateway provider uses a robust security measure such as tokenisation to protect this sensitive financial information. 

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. 

3 examples of payment gateway providers

While some companies just offer payment gateways alone, many payment service providers offer a merchant account as well as a gateway. This can simplify operations, rather than having to set up a merchant account separately. Here are some reliable options:

Airwallex

Airwallex is a top choice for growing or global companies looking for competitive FX rates and multi-currency business accounts. It has good compatibility with software platforms like Xero and Shopify and is a cost-effective way of processing cross-border payments and currency conversions. The software integrates effortlessly with a wide array of other eCommerce and accounting platforms, and in-built expense management is offered for no additional fee.

PayPal

PayPal’s fees and currency conversion rates do tend to be higher than competitors’ and there is a limited amount of customisation available for checkout pages. However, it is a widely known solution with a simple payment process and extensive integration with almost all eCommerce platforms. It is well optimised for mobile and there are flexible payment options, including PayPal Credit.

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.

Read our comprehensive guide to the Top 8 Payment Gateway Providers & Services.

Why choose Airwallex as a payment gateway provider?

As a payment gateway provider, Airwallex stands out for its competitive pricing, seamless integration with tools like Shopify and WooCommerce, detailed reporting analytics and global reach. 

In addition to that, the services Airwallex offers go well beyond gateways. Airwallex helps thousands of businesses simplify their financial operations and grow internationally, by offering an end-to-end platform on which merchants can collect, hold, manage and spend their funds.

Some of the benefits of partnering with Airwallex for your payment solution needs include:

Scalability

Businesses of all shapes and sizes use Airwallex to reach new global customers, eliminate unnecessary currency fees, and protect against fraud. This includes eCommerce stores, subscription businesses and online marketplaces.

Local payment methods

Conversions can be maximised by pricing in local currencies and letting customers pay with their preferred payment methods. Airwallex accepts payments via 160+ payment methods  in 180+ currencies and 180+ countries. As well as the major card networks – such as Visa, Mastercard and American Express – there are a range of regional payment methods available such as GoPay, GrabPay, E.SUN, WeChat Pay and Ali Pay.

Like-for-like settlement

Businesses can collect and settle funds in the same currency without the hassle of setting up multiple entities or paying hidden conversion fees. Airwallex allows merchants to collect and store funds into a multi-currency wallet, which eliminates unnecessary conversion fees.

Reduce chargebacks

With Airwallex as your payment gateway provider, it’s possible to automatically identify suspicious transactions with built-in fraud detection and dispute management. This means that fraudulent transaction attempts can be declined and chargeback frequency reduced.

Improved acceptance rates

Airwallex’s machine learning powered 3D Secure (3DS) optimisation engine includes smart merchant category codes (MCC) assignment, automatic retries, ISO message optimisations, and more to improve the rates of transaction acceptance. At the same time, compliance with regulations is maximised: the best strategy is automatically chosen based on transaction risk, applicable regulatory exemptions, and policies. Each merchant’s risk appetite can be customised based on their own business model.

Saved payment details

Customers can save their details in order to drive repeat sales. Security remains high thanks to network tokenisation which ensures customer details remain secure and private. The use of tokenisation can also improve card acceptance rates and reduce processing costs.

Flexible integration options

You can integrate an Airwallex payment gateway into your online store no matter the size of your team or level of technical expertise. Simple plug-and-play integrations are available to plug in to popular platforms like Shopify and WooCommerce. It’s also possible to get an Airwallex-hosted page, which allows Airwallex to take care of the whole payments journey. If you want more control over the checkout experience, you can build directly via Airwallex’s API or accept payments in your iOS or Android app using Airwallex’s mobile SDKs.

Frequently asked questions:

• 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.

• 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.