What is a payment gateway and how does it work?

Key takeaways

• Seven out of ten shoppers who add something to their cart never complete the purchase. In 2026, the global cart abandonment rate sits at 70.22%, and a big chunk of that is payment-related: slow checkouts, failed transactions, and forms which ask for too much.¹

• A payment gateway is the software that sits between your checkout page and the banking system. When a customer enters their card details, the gateway captures that data, encrypts it, and passes it along to the payment processor and the relevant bank networks so the transaction can be authorized and settled.

• The best payment gateway is the Airwallex Payment which lets you settle natively in multiple currencies and comes with a unified suite of other financial tools.

Every card transaction on your website runs through a payment gateway. It’s the security layer that protects customer data and the routing system that connects your checkout to the global banking network. Getting this right means fewer abandoned carts, lower processing costs, and a real path into international markets.

Understanding payment gateways

What is a payment gateway?

A payment gateway is a secure software application that acts as a digital courier between your online checkout and back-end payment networks.² It captures customer card credentials, encrypts the sensitive data using tokenization, and routes the transaction details to the processor for authorization. Modern gateways replace primary account numbers with cryptographically secure digital tokens, ensuring that raw financial data never sits on a business server.

Benefits of payment gateway

A properly configured payment gateway handles PCI DSS compliance for you, so sensitive card data never touches your servers. That shrinks your audit scope considerably. It also lets you offer payment methods  beyond standard cards, whether that's digital wallets or local bank debits, which matters if you're selling in markets where those are the default.

Challenges of payment gateway and how to overcome

Older fraud filters tend to be blunt instruments. They block too much, legitimate customers get declined, and you lose sales you should have kept. A machine-learning fraud engine looks at far more signals before making a call, so it catches more actual fraud without flagging real customers in the process.

Payment gateway downtime is another risk: a single outage halts all sales. Integrating a payment switch that automatically reroutes transactions if a primary path fails creates strategic redundancy. Building custom API integrations or looking into how to create a payment gateway connection from scratch can also demand heavy developer hours, but pre-built plugins and hosted checkout forms reduce this significantly.

Why businesses need a payment gateway

Every business accepting digital card-not-present payments must use a payment gateway to secure the transaction lifecycle.² Without one, there is no technical mechanism to safely capture card credentials, verify card validity, or transmit payment details to the banking network. The gateway also enables recurring subscription billing and supports international sales by handling multi-currency checkout.

Payment gateway vs. payment processor vs. payment terminal

These three components serve distinct roles. The payment gateway secures data at checkout and transmits it to the processor. The processor handles authorization, clearing, and settlement across card networks. At the point of sale, the terminal reads card data through a chip, magnetic stripe, or NFC tap.

Most modern platforms bundle all three functions together, but knowing how they differ is useful when something breaks or when you're comparing processing costs.

How a payment gateway works

The journey of an online payment moves through seven sequential steps, completing in a few seconds. Here is how each one works.

Step 1: Initiating checkout

The consumer enters card credentials into the payment form on your website and clicks the purchase button. This packages the order value and credentials for secure transmission.

Step 2: Encrypting the payment details

The payment gateway captures this sensitive data and immediately encrypts it using tokenization.² Raw card details never touch your merchant server, keeping your systems completely out of scope for raw card data handling.

Step 3: Routing data to the payment processor

The gateway sends the encrypted transaction data to your payment processor and acquiring bank. The acquirer is the licensed institution that actually holds funds on your behalf, and this handoff sets up the bank-to-bank verification step that follows.²

Step 4: Contacting the card networks

From there, the processor sends the transaction to the relevant card network, whether that's Visa, Mastercard, American Express, or another. The networks handle communication between financial institutions and set the rules everyone in the chain has to follow.

Step 5: Verifying funds at the issuing bank

The card network routes the transaction to the consumer’s issuing bank.² The issuer reviews security credentials, verifies available funds, and confirms card validity. This step prevents overdrafts and fraudulent authorizations.

Step 6: Delivering the bank decision

The issuing bank sends an approval or decline code back through the card network to the processor, which passes the result to the gateway.² The gateway then displays the order outcome to the buyer almost instantaneously.

Step 7: Finalizing order clearing and settlement

Once approved, funds move from the customer’s account to your business bank account, typically clearing in one to three business days depending on your provider. This completes the core transaction lifecycle.

The role of the payment switch

A payment switch is a routing engine that decides, in real time, which processor should handle each transaction. Rather than sending everything through one path, it weighs factors like network availability, transaction size, and cost before making a call. If a network goes down, the switch reroutes automatically. From the buyer's perspective, nothing changes.

Types of payment gateways

Your choice of gateway architecture determines how much control you have over the checkout experience and your security liabilities.

Hosted payment gateways

Hosted gateways redirect customers from your eCommerce site to a secure page hosted by your payment provider. The external page is highly secure, but the redirect disrupts the brand experience and can increase cart abandonment. This is a simple setup with minimal PCI compliance burden.

Integrated payment gateways

With an integrated gateway, the checkout lives entirely on your site. Your team controls the design, there are no redirects, and customers never leave your domain. The tradeoff is more development work upfront and a heavier PCI compliance burden. For brands where checkout experience directly affects conversion, that tradeoff is usually worth it.

How to choose the right type for your business

Hosted gateways are a reasonable starting point for early-stage businesses that aren't ready to invest in a custom checkout. As you scale, the limitations start to show: less control over the experience, fewer options for local currencies, and no ability to tailor the flow. That's when it makes sense to move to an integrated eCommerce payment gateway.

What fees do payment gateways charge?

Selecting a payment provider requires a complete audit of transaction fees and currency processing costs. Hidden fees compound quickly and erode international margins.

Standard transaction fees

Most payment gateway providers charge a percentage rate plus a flat per-transaction fee. These costs are split among the issuing bank, the card network, and the processor. Under a blended model, all costs are compressed into one rate, which can obscure the lower costs of processing debit cards.

The hidden cost of currency conversion

International payments come with extra costs that add up quickly. Cross-border fees typically run 1% to 2%, and currency conversion markups add another 2% to 3% on top of your standard processing rate. For businesses with significant UK or European sales, those markups apply to every GBP to USD and EUR to USD conversion. These costs compound when merchants must also pay overseas vendors, triggering a second conversion.

How multi-currency settlement protects your margins

Multi-currency settlement lets you hold foreign currencies natively rather than forcing immediate conversion. If a customer in Australia pays in AUD, the gateway settles that directly into your AUD wallet rather than converting it first. You then use those funds to pay Australian suppliers or ad networks, completely bypassing double conversion fees.

Airwallex Payments supports direct settlement in 20+ currencies, eliminating the international card surcharges and conversion markups that legacy processors stack on top of global transactions.

Why Airwallex is the best payment gateway for businesses

Airwallex Payments unites payment gateway, Global Accounts, and local payout rails into one platform. You can accept payments in 130+ currencies, hold those funds natively in 20+ currency wallets, and pay suppliers globally without routing through legacy banking intermediaries. This eliminates the double conversion that traditional setups impose on every international sale.

Airwallex processes global payments by routing payouts through local rails in 120+ countries, and 92% of transactions settle the same day. Shopify, WooCommerce, and Magento plugins connect directly to those Global Accounts, so collections and international payouts sit in one place. Multi-currency cards pull from held foreign balances directly, which means you're not converting currency every time someone pays for an overseas SaaS tool or runs an ad campaign abroad.

Xero and QuickBooks integrations keep the books current without manual reconciliation. For businesses operating across borders, Airwallex replaces a patchwork of accounts and workarounds with one platform.

Frequently asked questions about payment gateways

What is the difference between a payment gateway and a payment processor?

A payment gateway vs payment processor do different jobs. The gateway faces the customer: it captures card data at checkout and encrypts it before sending it anywhere. The processor handles what happens next, routing that data through card networks and banks until the transaction clears.

Do I need a separate merchant account with a payment gateway?

No, with Airwallex Payments your merchant account is bundled into the platform so collected funds flow directly into native multi-currency wallets without a separate banking relationship.

Does an online payment gateway store credit card numbers?

No, gateways use tokenization to substitute a randomized token for the actual card number, so the real data never sits on your servers and stays out of your PCI scope entirely.

What are standard transaction fees for online payment gateways?

Airwallex Payments charges 2.80% + $0.30 on domestic cards and doesn't force currency conversion on international transactions. Most standard competitors charge 2.9% + $0.30 on domestic cards, then add a 1.0% to 1.5% surcharge on international cards plus a 2.0% conversion fee on foreign currency payments.

What is the difference between a payment method and a payment gateway?

The difference between a payment method and payment gateway is that a payment method is the instrument the buyer uses, such as Visa, Apple Pay, or Klarna, while a payment gateway is the secure software pipeline that captures and transmits that payment data to the processor.

Are there free payment gateways for eCommerce?

Every gateway has costs. Interchange and scheme fees come with the territory and can't be avoided regardless of what any provider tells you. Airwallex Payments offers plans with no monthly maintenance fees, which is the closest to zero-cost setup for businesses maintaining a qualifying balance or processing volume.

What is Shopify's Bogus Gateway?

Shopify's Bogus Gateway is a sandbox tool built into the platform for testing your checkout before you go live. You use dummy inputs to simulate approvals, declines, and other outcomes without running any real transactions.

Sources

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

2. https://stripe.com/resources/more/payment-gateways-101

3. https://www.adyen.com/knowledge-hub/payment-gateway