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What is a Payment Gateway and how does it work?

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Last editedApr 20238 min read

Understanding an online payment gateway is a vital part of making sure your online business flourishes. Few things are more important than making it as easy as possible for customers to pay you in a flexible, secure and user friendly manner. An online payment gateway facilitates card payments from around the world as simply as taking payments at a physical point of sale.

What is a payment gateway?

A payment gateway is a tool that securely validates your customer's credit card details, ensuring funds are available for you to get paid.

Payment gateways are the services that authorise credit card payments for online and offline businesses. It is the equivalent of a physical point-of-sale (POS) terminal in a shop or restaurant. It lets your customer submit their credit card details and then securely passes this information from the customer to the merchant and then between the merchant and the bank.

Your payment gateway tells you whether the charge has been approved by the cardholder’s bank and submits your charges for settlement.

It's worth noting that "payment gateway" and many related terms in the area of credit and debit card payments may not be defined in any legal, regulatory, or "official" documentation, depending on where you are located. As such, different people and organisations commonly use these terms with differing definitions.

What is a merchant account?

A merchant account is a special type of bank account businesses use to accept credit or debit card payment from their customers. Funds received from customers are temporarily held here before being deposited into your bank account.

Payment gateways are often confused with merchant accounts. To take payments online you need both a payment gateway and a merchant account, but they are not the same.

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What is a payment service provider?

Payment service providers (or PSPs) are companies that provide a variety of services to a business to help them get paid. They commonly provide both a merchant account and a payment gateway to a business, helping the business collect and manage its payments. Payments go to the PSP and are then transferred on to you.

How does a payment gateway work?

Within the process of online payments via credit or debit card, a payment gateway does the following:

  1. Collection - When your customer navigates to the checkout on your website to enter their credit card details, the payment page will either be provided by your payment gateway or will securely transfer the details to it.

  2. Transfer - The payment gateway securely transfers your customer's credit card details and details about the transaction to your payment processor (A.K.A. acquirer, acquiring bank, or merchant bank).

  3. Authorisation - After this information makes its way through the card network and to your customer's issuing bank, authorisation of the transaction will make its way back to your payment gateway, where you and your customer are informed whether the transaction is successful or not.

Different Types of payment gateways 

In simple terms there are three types of payment gateways:

  • On site – payments are processed through the sites own servers. This approach enables you to deal smoothly with large volumes of payments.

  • On-site and off-site combined – with the method the checkout will appear on your site, while the payment is actually processed on the back end. While this offers increased security, it lessens the control you have over the customer journey.  

  • Redirect – a redirect payment gateway will often offer the option of payment methods such as PayPal. Because a redirect gateway takes customers to a second site it is simpler for the merchant but adds another step for the customer. This may discourage some customers from shopping with you.

What payment gateway options are there?

There are a lot of different options for you to choose from when looking at a payment gateway. Some of the main options include:

Payment gateways:

Payment service providers (payment gateway + merchant account):

Payment service providers are typically easier and quicker to get started with as you don't need to set up your own merchant account (and if you do the provider will offer that too).

The business benefits of payment gateways

The benefits of an online payment gateways for your business include the following:

  • Convenience for customers – a payment gateway offers maximum convenience for your customers. The gateway means that payments can be made around the clock and from any location.

  • Speed – by removing the barriers between choosing goods and making a payment the payment gateway makes it more likely that customers will complete purchases. 

  • Wider markets – by making it easier to create an online version of a bricks and mortar store, payment gateways enable business to access truly global markets. 

  • User friendly – online payment gateways have been designed and put together by experts. This means that as well as providing a secure payment solution they guarantee a user friendly experience for online customers.  

  • Speed – the fact that online payment gateways can store the payment details provided by customers means they don’t have to manually enter every time and the shopping experience becomes a faster, simpler process.  

  • Security – online payment gateways come with security built in, meaning merchants can be certain all payments are secure and their site meets the relevant security standards in their region.

Getting started with payment gateways

Before you can start taking payments with a payment gateway, you will typically need:

  • A UK business bank account

  • A business plan and one page summary of what your business will be doing

  • A website (if you plan to trade online) with terms and conditions

  • Management accounts and a profit & loss projection for the next 6 months minimum

Setting up a merchant account requires a good relationship with a bank, and a minimum value of transactions a month (around £10,000). Banks will also typically require a bond of at least £10,000 (more if you’re in a high-risk industry).

Getting started with payment service providers

It is generally quite simple to get set up with a payment service provider but requirements do still vary from provider to provider.

If you choose to use a newer full service provider like Stripe then you'll just need a bank account, email address, your account details and to answer some questions about your business.

Which payment gateway should I choose?

Choosing a payment gateway (or payment service provider) can be difficult, considering the sheer variety of choice in the market. We have come up with a list of 10 quick questions to help you ensure you get the right payment gateway for you.

1. How soon do you need to start accepting payments?

Setting up a merchant account and payment gateway will usually take around 3 – 4 weeks. However, some payment gateway providers like PayPal and Stripe let you sign up without a merchant account and get started straight away.

While most payment gateways offer help setting up a merchant account, obtaining one can still be a long and complex process - particularly if you’re a new or small business going through the process for the first time. With GoCardless, our award-winning customer support team are there to help you.

2. How much do you want to spend on a payment gateway?

Cost is a concern for every business. Before committing to any payment gateway provider, make sure you are aware of their fee structure. Some of it may not be immediately obvious. The most important thing to think about is total operating cost, which includes:

  • Set-up costs

  • Transaction costs

  • Admin costs

A payment gateway and merchant account will typically cost around:

  • £600 – 900 in set-up costs

  • 15p + 2% per transaction, and

  • £50-100 monthly fee

You will usually also be charged extra fees for any chargebacks.

If you only take a relatively low volume of online payments, then you should try to avoid monthly fees and a high setup cost. You might also want to consider Direct Debit which is typically cheaper than card payments.

3. How soon do you need to receive funds from your sales?

While you will usually know that a payment has been approved straight away it typically takes a few days for a payment to be settled. Payment timings vary significantly from provider to provider.

Some gateway providers hold onto your funds (or a certain % of your funds) for up to 30 days while others can settle your funds as quickly as the next day. Some providers may also only pay out funds on set days. Ideally you should look for a provider that pays out every day.

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4. Does the payment gateway offer international payments?

If you need to take international payments – or may want to in the future – you should check whether the payment gateway offers international and multi-currency payments or an interface with multiple languages.

You should also check whether there are any additional fees for accepting multi-currency payments or payments from other countries and whether you will need to have a merchant account in a specific country.

5. How secure is the payment gateway?

Security is obviously a key concern when taking payments. You should make sure you only use a provider which is level 1 compliant with the Payment Card Industry Data Security Standard (PCI DSS) and that offers built in security capabilities (such as tokenization).

You should also consider the fraud protection and screening tools offered. Most payment gateways offer a number of tools to help you guard against fraud, such as filters to define who or where you receive payments from. These tools are particularly important if you will be accepting payments from people who you don't have an existing relationship with.

6. What level of support does the payment gateway offer?

Customer experience is one of those under-valued areas which can really hurt your business down the line and as such is worth taking seriously from the off.

You should look for a payment gateway which offers support when you need it and in a way you can get it. Questions you might want to ask are:

  • Does the provider only offer email support or do they offer a range of support?

  • How responsive is the support?

  • Where is the customer support based? Do they work the same hours as you?

  • Do you need to pay extra for customer support?

A good place to start is contacting them to see how the initial experience goes as well as doing a research online into other customers’ experiences.

7. What types of cards are accepted by the Payment Gateway?

Payment gateways typically accept Visa and Mastercard, and many also accept American Express. If you’re collecting international payments you may want to check that the gateway supports local credit card types.

Or opt for a bank payments solution like GoCardless, enabling you to collect payments direct from your customer's bank account, over 30+ countries.

8. Does the payment gateway offer automatic recurring payments?

If you want to take recurring payments you may want to look for a system that will store your clients’ credit card numbers and let you automatically charge them on a recurring basis. Many gateways now have this feature, but in almost all cases they also require your business to have an online merchant account.

9. Does the payment gateway offer hosted or non-hosted payments?

Hosted payment gateways

A hosted payment gateway redirects a customer away from your checkout page to a securely ‘hosted’ payment page. Once a payment has been made then your customer will be returned to your website and the order will be confirmed.

Redirecting to another site reduces the risk around storing and transacting credit cards and helps you to meet PCI requirements. Hosted solutions can also be more suitable for small-to-medium sized businesses that require a quick and cost-effective way to securely accept card payments online. However, it also means sending a prospective customer to another site at a critical point in the payment process. If this extra step makes your payment process longer or slower, or if the payment page looks significantly different to your site, customers may fail to complete their payment.

22% of customers blame failure to complete a payment on a long or slow payment process, while 58% blame security concerns. is an important consideration for any business.

Non-hosted payment gateway

Using a non-hosted payment gateway, your customers will be able to enter their details without leaving your site. To take payments onsite you typically need an SSL certificate and to comply with certain legal and technical PCI requirements.

However, some payment service providers allow you to send card details directly from your customer’s browser to the provider, meaning that it never hits your server. This makes the payment process much simpler for your customers without imposing any more requirements on you.

10. Can the payment gateway be used with your existing/planned integrations?

Consider whether the payment gateway integrates with your current billing, shopping cart, and accounting solutions you are using. Ideally the payment gateway you choose will be integrated with software you already have.

If not, you should still look for a service that is integrated with software providers, because it increases convenience and saves you time, as well as signals that the provider has an API that is easy to integrate against, saving you development time down the road. Find out more about the GoCardless API.

If after asking all of these questions you still haven't found a payment gateway which meets your requirements, there are some other options you can consider. Our guide to recurring payments compares each of the main online payment options on costs, ease of access, international reach, timings, support, and more.

If after asking all of these questions you still haven't found a payment gateway which meets your requirements, there are some other options you can consider. Our guide to online payments helps to clarify the main options available.

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