What is a payment gateway?

A payment gateway is an online software service that securely bridges the gap between a customer’s debit/credit card and a business bank account, allowing merchants to accept digital payments safely.

Payment gateways also protect card details by encrypting sensitive payment information, such as the main card number. This keeps the information passed between the customer, merchant, and acquirer (the bank that approves the payment) secure.

Below, we’ll share everything you need to know about payment gateways, including how they work, the different types, how much they cost, and how to choose the right solution for your business.

What is a payment gateway and how does it work?

A payment gateway is a digital technology that allows businesses to safely accept payments online. Some of the most popular payment gateways in both the UK and globally include Stripe, PayPal and Worldpay.

The typical process for a payment gateway is as follows:

1. The customer places an order on your business website or in-store.
2.  The web browser encrypts the information (ie: card and account details) via SSL (Secure Sockets Layer) encryption.
3. The customer’s encrypted card details are forwarded to the payment gateway via the merchant account.
4. The payment gateway then passes on the transaction details to the payment processor used by the acquirer.
5. This payment processor then forwards the transaction information to the card association (e.g. Visa, Mastercard).
6. The customer’s bank receives the authorisation request and sends a response code back to the payment processor, detailing whether the payment has been approved or declined.
7. The merchant account then submits all approved authorisations to the acquirer. The acquiring bank then signs these off and transfers the funds into the merchant’s business bank account (a process that takes approximately two days).

Payment gateways vs merchant accounts: what’s the difference?

While it can be easy to confuse the two, there is a key difference between a merchant account vs payment gateway.

Specifically, the payment gateway captures and encrypts customer card data at checkout, while a merchant account is a specialised business bank account that holds customer funds while payments are verified.

Additionally, a payment gateway is customer-facing as it’s the digital checkout form or payment window the customer sees when making a purchase, whereas a merchant account is managed by the business and does not interact with customers.

What are the types of payment gateways?

The four main types of payment gateways are hosted, self-hosted, API/direct, and local/on-site gateways, differing primarily in checkout location and technical integration. Each serves the same purpose of taking payments, but the main difference is how they are integrated into a website and where the checkout process takes place.

Hosted payment gateways

The customer is redirected away from your website to the payment provider’s secure page (for example, PayPal Standard or Square). After the payment is completed, they are redirected back to your store.

Hosted payment gateways are easy to set up and have the best Payment Card Industry Data Security Standard (PCI-DSS) compliance, which is handled entirely by the provider. However, it also interrupts the customer’s buying journey, and there’s also less brand control during checkout.

Self-hosted gateways

Payment details are collected directly on your website, but the transaction data is sent to the gateway’s API in the background for processing (such as Stripe and Braintree).

While this gives customers a seamless checkout experience and your business full control over branding and user interface (UI), it requires a higher technical setup and stricter PCI-DSS compliance responsibility on your server.

API/direct payment gateways

Customers enter their credit card or banking information directly into your checkout form without leaving your site. Meanwhile, secure API integrations handle the entire payment process in the background.

This type of payment gateway gives you complete end-to-end control over customer data flow and user experience, but it also requires full PCI compliance (PCI-DSS Level 1 or 2) and robust on-site security measures.

Local/on-site payment gateways

The checkout form is integrated into your website using secure components like iFrames or JavaScript software development kits (SDKs). Customers enter their card details directly on your site, while sensitive payment information is securely tokenised and processed by the payment provider.

This approach provides a customisable checkout experience while reducing your PCI compliance and security responsibilities. However, your checkout experience primarily depends on the payment provider’s scripts, SDKs, and performance.

How much do payment gateways cost?

The cost of a payment gateway depends on whether you use an all-in-one payment aggregator (like Stripe, Square and PayPal) or a dedicated merchant account with a gateway (such as Authorize.net and Worldpay).

In general, there are four separate charges that apply. These are as follows:

1. One-time setup fee: £0-£250
2. Monthly fees: £0 for pay-as-you-go providers or £15-£25 per month for standalone gateways
3. Transaction fee: Typically 20p to 30p per transaction.
4. Transaction rate: 0%-5% (this may be charged by your merchant account)

The above costs will come into play when comparing gateways. Therefore, you should consider how you’re likely to use your account.

For example, if you’re a small business and have a low transaction volume, choosing a pay-as-you-go provider is the best option, as there are no contracts or monthly costs; you only pay transaction fees for each sale. Here’s the kind of fees you can expect, depending on card type:

• UK consumer debit/credit cards: 1.4%-1.5% + 20p-25p
• UK commercial/business cards: 1.9%-2.5% + 20p
• European (EEA) cards: 2.5% + 20p
• International non-EEA cards: 3.25% + 20p

On the other hand, interchange-plus pricing is recommended for businesses with high transaction volumes (£20,000-£50,000 per month), as the merchant only pays for the exact wholesale cost of a card transaction plus a fixed markup for the processor, which is usually agreed upon beforehand.

• UK Visa/Mastercard wholesale interchange: 0.2% (debit), 0.3% (credit)
• Processor markup: 0.15%-0.40% + 5p-10p

Are there any additional charges?

Aside from setup, monthly and transaction costs, there are other charges you should look out for as well. These include:

• Dispute/chargeback fees: £12-£20 per instance if a customer files a payment dispute with their bank.
• Foreign currency settlement: Approximately a 2.0% currency conversion fee if converting sales from USD/EUR to GBP.
• PCI-DSS compliance fees: £0 on modern aggregators and around £2.50-£10 a month on traditional merchant accounts.

To find out more about specific payment gateway provider costs, check out our review of the best payment gateways for small UK businesses.

What are the UK’s leading payment gateways?

Some of the most popular payment gateways in the UK are takepayments, Stripe, Worldpay, Shopify and Revolut. You can find out more about each provider in the table below or through our in-depth review of the best payment gateways available for small UK businesses.

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		Best for:	Transaction fees from	Monthly costs	Payout time	Contract length
BEST OVERALL
takepayments	Stripe	Worldpay	Shopify	Revolut
A flexible payment structure	A simple payment gateway solution	Selling high-value goods	An all-in-one solution	Affordability
Quote-based	1.5% + 20p for standard UK cards	1.3% + 20p	1.5% + 25p (Advanced plan)	1% + 20p
Quote-based	None	None for pay-as-you-go plans	From £19	None
Next business day	Up to seven business days	Same day or next day	Two to five business days	Next day
12 months	None	18 months	None	None

Tips for choosing the right payment gateway for you

Choosing the right payment gateway is an important decision, as it can have a direct impact on the customer experience, transaction security, and the reliability of your payments infrastructure.

Rather than simply comparing transaction fees, it’s worth considering how well each provider meets your technical, security, and business requirements.

When deciding on your payment gateway, consider the following:

• Safety first: always check the PCI compliance level of your payment gateway provider, and only consider merchants that offer PCI DSS Level 1.
• Integration: the payment gateway needs to be able to integrate with the software and programs that you already use to run the technical side of your business (such as your website).
• Reliability: check that your provider offers an uptime guarantee, which is a formal promise by the provider stating that their system, website, or infrastructure will remain open for a certain period of time.
• Fraudsters beware: top payment gateway providers cooperate with their merchants to set the right level of fraud detection, so they can sell to all their customers without throwing money down the drain.
• Accepted payment methods: at the very minimum, you need to be able to handle both debit and credit card transactions, while more advanced gateways allow you to take a variety of payment options.

Multi-currency support and cross-border capabilities

If you plan to sell internationally or expand into overseas markets, your payment gateway must support multi-currency processing and local payment methods to avoid high cart abandonment rates and hidden fees.

For this, you should consider the following:

• Cross-border and FX conversion fees: gateways charge cross-border transaction fees plus foreign exchange (FX) conversion markup if converting foreign sales back into GBP.
• Multi-currency processing and settlement: look for gateways that allow you to charge customers in their local currency (such as USD, EUR, AUD) and settle funds directly into matching currency accounts without forcing an immediate currency conversion.
• Local payment methods: ensure your gateway supports regional payment options, such as iDEAL, Giropay/SEPA, Apple Pay, Google Pay, Klarna/Afterpay, Alipay and WeChat Pay.
• Dynamic currency conversion: choose a gateway that offers DCC at checkout so that international customers can see prices and pay in their home currency.

Final thoughts

Payment gateways are an essential part of selling online, as they connect a customer’s payment details from the online checkout to the financial networks that settle and authorise the transactions.

They also don’t come as a one-size-fits-all solution, as there are different types of payment gateways – from easy-setup solutions to on-site payment gateways that offer a fully customisable checkout experience for your customers.

When deciding on a payment gateway, remember that you shouldn’t only opt for the one with the cheapest transaction fees. You should also consider its safety, reliability, accepted payments and how well it integrates with your digital channels. When you compare these factors with several payment gateway solutions, you can find one that best matches your business and gives your customers to best checkout experience possible.