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Ecommerce Payment Gateways Explained

Last editedApr 20222 min read

Payment gateways are required to accept and process customer credit card payments. If you want to be able to take card payments via your online store, you need an ecommerce payment gateway.

In this post, we’ll explain how payment gateways work in ecommerce and why they’re necessary for accepting online card payments.

What is a payment gateway?

A payment gateway is a merchant service which processes credit card payments, both online and in-store. It authorises payments, while making them convenient and secure. Popular examples of payment gateways include PayPal, Stripe and Square.

An online ecommerce payment gateway is exactly the same, except that it is used exclusively by ecommerce stores, and not in brick-and-mortar stores.

How payment gateways work in ecommerce

A gateway is a lot like a virtual cash register used to carry out electronic transactions. As such, it must be both convenient for customers and provide a high level of security. It does this in the following ways:

  • Encryption - A payment gateway will encrypt data so that it can be used exclusively by merchants and customers.

  • Authorisation - The payment will be authorised when a payment processor receives approval from the credit card company. This may entail extra security measures such as 2-step verification.

  • Fulfilment - Once the gateway receives authorisation, it will proceed with the payment.

Payment gateway vs. payment Processor

The terms payment gateway and payment processor are often used interchangeably, but they have a significant distinction.

A payment processor analyses transaction data and transmits it to the relevant issuing bank. This transaction data includes the credit card number linked to the bank account. A gateway, meanwhile, does the same but additionally authorises the transfer of funds as well.

Types of Payment Gateways

There are three main types of payment gateway:

1.  Redirect

A redirecting payment gateway involves redirecting customers away from the ecommerce site to a different page to complete their transaction. A popular example of a redirecting gateway is PayPal.

The disadvantage of redirecting gateways is that it can be confusing for the customers to suddenly find themselves on a foreign site before making their payment, potentially leading to checkout abandonment. However, when it’s a gateway like PayPal, customers are usually reassured given that it’s a household name.

2. Checkout on site (but pay off-site)

With this kind of payment gateway, customers will complete checkout on the familiar ecommerce site, but the actual payment processing happens on the off-site gateway. Stripe is an example of a gateway that works this way.

The advantage is that customers aren’t caught off guard by being immediately redirected to a different page to type in their card details. However, it does mean that merchants don’t have complete control over the payment experience for users. For your sake, it’s therefore advisable that you opt for a reliable payment gateway which you can trust to provide a great service.

3. On-site payments

Some businesses orchestrate the whole payment process themselves, meaning both checkout and payment occur on the ecommerce site itself. This can be reassuring for customers who are able to complete their purchase on-site, while also allowing businesses to be in complete control of the checkout experience for their users.

However, more control in this respect comes with more responsibility with regards to security, efficiency and convenience.

Some businesses choose to offer several ecommerce payment gateway options. For example, they might offer payment on-site and have the option to checkout with PayPal.

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