As a business that sells goods or services, it’s a given that you’ll need to be able to take payments from your customers. This often requires a variation of hardware and software, from a till system and card reader to a business bank account, where your hard-earned profits can be safely stored.

If you’re not just selling from a brick-and-mortar location, you may also have an e-commerce presence on a website or app, but regardless of where or how you’re taking payments, you’ll likely need a payment gateway.

If you’re not sure what a payment gateway is or how to get started with one, don’t worry, we’ve got everything you need to know covered in this easy guide. Read on to learn more.

What is a payment gateway?

A payment gateway is a piece of software that takes customers’ debit or credit card details and validates them. It will then authorise and process the payment to ensure the business receives the funds owed for the goods or services purchased.

Although the term is sometimes used differently depending on the organisation, the phrase typically refers to a tool that takes and validates payment.

Technically an ePOS or mPOS system is also a kind of payment gateway. This is because they both accept card information through chip and pin, contactless or mobile payment forms, validate it and encrypt it for processing.

What is an example of a payment gateway?

High-profile examples of payment gateways include; PayPal, Shopify, Worldpay, Stripe and even Amazon, all of which offer solutions for businesses to start taking payments, particularly those looking to set up e-commerce websites.

Some of these examples are classed as payment service providers, or PSPs, because they also offer merchant accounts as part of the arrangement. Merchant accounts, a type of business bank account, enable businesses to accept and process payments from card transactions.

At Dojo, we provide a merchant account for you, for free, when you sign up for any card machine. You can find out more here.

Types of payment gateways

Payment gateways tend to fall into one of three main categories:

  • On-site - the business website’s own servers process the payments, meaning the user stays on site, which can be ideal for dealing with large volumes of payments.
  • On-site and off-site - this combination features a checkout that appears on the business’s website but the payment is processed on the back-end.
  • Redirect - if you’ve ever paid on a website through PayPal you will recognise the journey of being redirected to authorise the payment on PayPal’s own website before being taken back to the original site to complete the transaction. This could be potentially off-putting for customers if they aren’t familiar with this process.

The difference between a payment gateway and a merchant account

It’s important to note that payment gateways are different to merchant accounts. If you want to take electronic payments online you’ll need both a payment gateway and a merchant account.

Payment gateways are also different to payment processors, which are a service that connects the customer’s bank account to the businesses’ merchant account to move the money. To make that distinction clear, let’s dig into how payment gateways actually work.

How Do Payment Gateways Work?

To better explain how a payment gateway works, let’s work through an example of a customer purchasing an item from a business who have an e-commerce website and payment gateway set up:

  • The customer finds the item they want to buy, places it in their cart and checks out, submitting their order.
    This order and the payment details are encrypted by the customer’s web browser, whether they are using a computer or a mobile device, and the information is sent to the merchant’s web server, or in some cases directly to the payment gateway.
  • The payment gateway then converts the message to ISO8583 and forwards it to the payment processor. ISO8583 is the typical format for payment transaction information and commonly contains details on the value of the transaction, where it originated, the bank sort code and the card account number.
  • The payment processor forwards the transaction to whichever card association the customer’s card is with (for example, Visa or Mastercard), which in turn sends it on to the customer’s bank.
  • The bank then uses that transaction information to check whether the customer has the available debit or credit and sends a message back to the processor to say whether the transaction has been authorised or declined. If it has been declined by the payment gateway, the response code will give one of a number of reasons why, like ‘insufficient funds’. If it has been authorised, the issuing bank will place a hold on the funds to ensure that the customer doesn’t spend them on something else until the transaction is completed.
  • This response will be forwarded to the payment gateway, which sends it to the website, where it will be revealed to both the business and the customer. All of this process so far will have taken less than three seconds.
  • If authorisation has been received, the customer will receive a notification that their order has been successful, along with an order number. The business will then send a ‘clear’ response after the transaction has been fulfilled (for example the item has been shipped), after which the issuing bank will change the hold on the funds to a debit.
  • Typically, all of a business’s authorisations will be cleared in a batch at the end of the day via the payment processor to their acquiring bank, which requests the funds from the card issuing bank. This will then make a settlement payment.
    The acquiring bank then deposits this money into the businesses’ bank account (these can often be with the same banking company). It can often take around three days from authorisation for the funds to appear in the bank, however, with Dojo, we endeavour to get your funds into your business account the very next day with our next-day transfers.

That’s the extensive explanation of how the process works with a payment gateway but it can also be summed up in three stages:

  • Collection - The payment gateway receives the payment information from your website.
  • Transfer - It will transfer these securely to the payment processor.
  • Authorisation - The customer’s issuing bank will authorise or decline the transaction and the payment gateway will send this information on to you and the customer.

So, now you know how payment gateways work, but what are the benefits of using one?

The benefits of using a payment gateway

The main benefit of using a payment gateway is convenience for your customers. Having a payment gateway on your website means that your customers can buy from you at any time, from anywhere, within a matter of minutes - even more quickly if they are repeat customers who have saved their payment details.

This can be useful for smaller businesses, especially those expanding from brick-and-mortar to e-commerce for the first time as they can have a version of their store that’s open 24/7.

Importantly, online payments through payment gateways offer a level of security that both customers and businesses rely on and expect. Not only can customers be confident that their card details are being encrypted and transmitted securely, but businesses can be sure that their transactions are compliant with security standards.

So, if you want to set up an online store to run alongside your existing store, or if you’re just planning on setting up an online-only small business, you need to know how to get set up to take payments using a payment gateway.

How to set up an online payment gateway

Before you get started looking for a payment gateway, you need to have several things in place. This includes a business bank account, a website and a variety of business and financial documents in order to get a merchant account set up for you.

An easier and quicker option is to go with a payment service provider where you can get the merchant account provided as part of the service, and often you’ll just need a bank account and an email address to get going.

When choosing your payment gateway, there are several things you need to consider to make sure you’re selecting the right one:

Cost is certainly a factor. This can include set-up costs, admin costs and a cost per transaction, so you need to investigate and work out the short and long-term implications of each payment gateway on your shortlist.

Speed is another factor, as different payment gateways can take different amounts of time to get set up, with payment service providers often available almost instantly, while others can take up to a month before you can start taking payments.

The speed with which you’ll get your money is something else to investigate. Will it be the next day or could you potentially be waiting up to 30 days? Do they have a set day of the week or month when payments are made? Particularly for new businesses that need reliable access to funds, knowing when you’ll get the money from transactions can be essential to avoid difficult situations.

Security is clearly another important aspect, both for your liability and to give customers the confidence to make payments with you, especially if you sell high-value items. Payment gateways in general are known for offering quality security and fraud protection tools, but at the very least you need a provider with level 1 PCI DSS compliance.

Type of payments accepted
The type of payments accepted is also worth investigating. Do they take international payments? Even if you are initially just targeting UK customers, having the option to change this in the future would save you from needing to change payment gateways at a later date. Other questions to ask are: Do they take all major cards? Do they accept bank payments? Do they offer recurring payments if you are selling subscription items?

Website integrations
You also need to check the technical aspects to see how it will integrate with your e-commerce website. Will the gateway be hosted on the website or need a redirect? Finding one that integrates with your existing software and banking will make this transition much more straightforward and streamlined.

Customer support
You will also need to think about what kind of customer support you have in place. As payment gateways are available to use 24/7 you need to consider what you’ll do if a customer contacts you with a payment issue outside of store opening hours. Think about if your customers will be able to speak to a human or are you going to set up a web chat or chat bot function.

It’s also worth thinking about the payment gateway provider customer service - will they be able to fix your issue remotely and quickly to keep your business moving?

There are plenty of things to consider when selecting the right payment gateway for your small business, but if you want to take payments smoothly and securely, payment gateways are a tried and tested option.