What is a Payment Gateway?

Are you asking yourself, “What in the world is a payment gateway?”

Many merchants aren’t able to answer this question. It’s important to know what a payment gateway is and why it is essential for your online business.

What is a Payment Gateway & Why is it Required?

A payment gateway authorizes online credit card sales by telling you whether a transaction is approved or declined. The payment gateway is the virtual equivalent of a physical POS terminal in a store or restaurant. Without it, your online business has no way of successfully processing and accepting online transactions.

How it works:

Gather Information – When making a purchase, the customer enters their credit card information, which is transferred to the merchant via the payment gateway.

Transfer Data – From there, the information is transmitted from the acquiring bank (the bank maintaining the merchant’s bank account), through the payment gateway, to the issuing bank (the customer’s credit card company).

Send a Response – The payment gateway receives a response from the issuing bank, and tells you whether the sale is approved or declined. Once a sale is approved, the funds are deposited into the merchant bank account.

Selecting and Integrating Your Payment Gateway

If your merchant account provider suggests a specific payment gateway, it is not required to choose this way. However, we recommend you take your merchant account provider’s suggestion into consideration because the suggested payment gateway will most likely integrate easily into your current merchant account.

The payment gateway integrates with your website’s shopping cart and collects financial information from the customer at checkout. Depending on the eCommerce platform you are using, there will be a variety of plugins or extensions to help your website integrate with the payment gateway.

Payment Gateway Fees

Independent of a merchant account, a payment gateway has its own set of fees. These can include: monthly fees, transaction fees, annual fees, and set up fees.

Set Up Fee – This is charged for the setup of a payment gateway, although you can find many providers who waive this fee.

Monthly Fee – This is charged monthly for using the payment gateway services.

Transaction Fee – This is the cost for each sale processed by the payment gateway.

Annual Fee – This is an annual charge for the payment gateway’s features, services, and technology. This is typically waived by many providers.

There are many websites that compare payment gateways and the different rates they offer. A comparison website will help you choose the right payment gateway for your online business.

Payment Gateway vs Merchant Account

If you are accepting online payments, both a payment gateway and a merchant account are required. The merchant account is a unique bank account where funds are held before being transferred into your bank account. The payment gateway simply approves or declines a sale before the money is transferred out of the customer’s bank account and into the merchant bank account.

While some payment providers exclusively offer payment gateways, others offer both payment gateways and merchant accounts. These full service payment providers typically have an easier application process and lower monthly fees.