What is a payment gateway?

What is a payment gateway, and how exactly does it work? Here's all you need to know about payment gateways, including how much it'll cost.

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If you want to start taking payments online, there are all sorts of technical bits and bobs you'll need to make sure the process is safe, efficient, and legal – including a payment gateway.

A payment gateway bridges the gap between the customer’s card and your business bank account, and plays an essential role in accepting credit or debit card payments online.

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

Since payment gateways are fundamental to the inner workings of an ecommerce site, you’re probably wanting to know a little more about them. Here, we’ll go into further detail about what a payment gateway is, how it works, and how much it’s going to cost.

Read on as we explain the payment gateway essentials, and help you on your way to ecommerce success.

Compare Online Payment Gateway Costs Do you currently accept online payments? Request info - it only takes a minute

How do payment gateways work?

  1. The customer places an order on your website or in store.
  2.  The web browser encrypts the information (ie: card and account details) via SSL (Secure Socket 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, to be signed off and transferred into the merchant’s business bank account by the acquiring bank – a process that takes approximately two days.

Types of payment gateways

Redirects

Your customers are redirected to an external service, which handles and processes payments on your business’ behalf. While this option is convenient for startups looking to get their ecommerce set up quickly and with relative ease, this method involves taking the customer off your site, which could have a negative effect on custom. 

Checkout on-site, payment off-site

The checkout part of the purchase will occur on your website, but the payment processing happens via the payment gateway’s website.
Stripe is an example of a payment gateway that uses this method.

Payment onsite

If you have a large ecommerce site that anticipates multiple high volume sales, setting up your own payment processing system on site is a good option.This method allows you to create a smoother user journey that keeps your customers on your site. You also have complete autonomy over the design and overall checkout experience.

However, with great freedom comes great responsibility. This option can come at a high cost, and demands a certain degree of technical know-how. And as well as the gateway itself, you’ll need to handle your own merchant account, SSL certificate, and PCI compliance.

Payment gateways vs. payment processors

A payment gateway securely transmits online payments to the payment processor. The payment processor then handles the transactions made between credit/debit cards and acquiring banks.


How much do payment gateways cost?

The overall cost of your chosen payment gateway will depend on four separate charges. These are as follows:

  1. One-time setup fee: £0 – £250
  2. Monthly fee: £10 – £50
  3. Transaction fee: £0.00 – £0.25
  4. Transaction rate: 00-5.00% (this may be charged by your merchant account)

The above costs will come into play when comparing gateways. Consider precisely how you’re likely to use your account: for example, if you’re likely to be processing a large number of transactions, you’ll need to look for a low transaction rate and transaction charge as a priority over a low monthly fee.

In other words, a higher monthly fee can be offset by a lower transaction charge, as long as you have a high enough volume of transactions to process.

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


The UK's leading payment gateways

Here’s a quick-fire summary of the best payment gateways on the market today:

Payment gateway:Best for:
WorldpayBest for popularity and familiarity
Paypal Best for transfers
StripeBest for full service
Want to find out more about these providers?

If you want to find out all you need to know about these providers, including costs, features and benefits of using them, check out our in-depth review of the best payment gateways available for small UK businesses.

Tips for choosing the right payment gateway for you

  • Safety first – when selling online, the security of your customers’ data should be your top priority. Always check the PCI compliance level of your payment gateway provider, and only consider merchants that offer PCI DSS Level 1.
  • Integration – simply put, a payment gateway is a piece of software. This means it needs to be able to integrate with the software and programs that you already use to run the technical side of your business (i.e.: your website).
  • Reliability – uptime and reliability are key components of any well-run website. An inactive gateway means a stoppage in sales opportunities, which may be damaging to both your business’ reputation and your bank balance. To avoid this, be sure to check that your provider offers an uptime guarantee.
  • Fraudsters beware – before taking the plunge, look at your chosen gateway’s fraud protection policy. The 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. The more advanced and established gateways, meanwhile, will allow you to take a true variety of payment options. It’s worth looking into what your customers are most likely to pay with, and making an informed decision based upon that preference.

What about using multiple payment gateways?

As your business expands and you begin to sell abroad, varying levels of support will be available from each provider for domestic or international payments. This means that some gateways may only cover certain payment methods and currencies.

Adding multiple payment gateways to your ecommerce service will result in transactions being routed to the gateway that provides the best support for a particular region. The result? More successful transactions across multiple markets.


Next Steps: comparing payment gateway providers

We’ve been through what a payment gateway is, looked at how they work, and touched upon some of the different options out there today. Next, it’s time to get stuck into some quotes, tailored specifically to your business needs.

Simply complete our free, easy-to-use payment gateway price comparison tool and we will match you with the best providers available. There are zero obligations on your part.

Compare Online Payment Gateway Costs Do you currently accept online payments? Request info - it only takes a minute

Ross has been writing for Startups since 2021, specialising in telephone systems, digital marketing, payroll, and sustainable business. He also runs the successful entrepreneur section of the website.

Having graduated with a Masters in Journalism, Ross went on to write for Conde Nast Traveller and the NME, before moving in to the world of business journalism.

Ross has been involved in startups from a young age, and has a keen eye for exciting, innovative new businesses. Follow him on his Twitter - @startupsross for helpful business tips.

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