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Your Guide to Payment Gateways

Payment gateways play an integral role in the payments process, but what are they and how do they fit into the payments stack? In this guide, you’ll find out.

What is a payment gateway?

In order for you to accept payments online, you need a way for customers to make purchases, as well as a means of securely transmitting and authenticating credit card information. 

That’s where the payment gateway comes in. 

The gateway is a piece of technology that gathers and transmits card and transaction data while ensuring PCI compliance requirements are met. It’s also what secures the transaction details via tokenization (encryption) and controls the delivery and communication between the merchant bank, payment processors, and the issuing bank. This protects the cardholders’ primary account numbers (PANs) during the payment process by keeping them concealed.

Try picturing it like this:

Imagine there are two islands: To get from one island to the other, you need a ferry, and the ferry needs a guarded route so it doesn’t get lost in the ocean or attacked by pirates along the way.

In this case, the ferry represents customer transactions and the payment gateway is the guarded route. The ocean is the Web and the pirates are bad actors or hackers. The guarded route (gateway) ensures that the ferries (transactions) are transported securely between each of the islands. Without the route, the ferries wouldn’t make it to or from the islands, and even if they did, they’d either get lost or would be seized by pirates.

> Learn more about the layers of the payment process

How does a payment gateway work?

After a customer initiates a payment from a checkout portal (such as websites or in-person payment devices), the payment gateway steps up to bat. First, the card data is tokenized and passed to the acquiring processor. Next, the payment details are passed through the card networks (Visa, Mastercard, etc.) and onto the issuing processor. Once the issuing processor receives approval (or denial) from the issuing bank, the authorization is routed back to the merchant to complete the transaction. 

While essentially a “middleman,” the payment gateway is a critical piece in the technology stack that allows companies to accept credit and debit card payments.

Though there is a lot of back and forth involved, this process happens in mere seconds.

> Learn more about the payment process

The different types of payment gateways

While they share the same purpose, there are multiple types of payment gateways and it’s important to know the difference.

  1. Card-present (CP) Payments This is a traditional type of payment gateway, which relies on a physical terminal or device that customers use to swipe, tap, or dip their credit or debit card. 

  2. Card-not-present (CNP) Payments A CNP gateway provides a checkout portal for websites, which lets merchants accept credit cards and alternative payments online, without seeing the physical card. This type of gateway is typically integrated into your website or platform.

  3. Payment Redirects A gateway redirect is when a customer is taken to a third-party site for payment (i.e. pay using PayPal). This option is simple for merchants, but offers the least amount of customization and control over the payments experience.

What’s the difference between a payment gateway and a payment facilitator?

A gateway’s main function is to securely communicate card details between the different technologies in the payment stack in a PCI-compliant manner. It’s also a core component of PayFacs and independent software vendors (ISVs). 

There are standalone gateways and embedded gateways. Standalone gateways are third-party companies that are connected to multiple processors. They provide more coverage, but the trade-off is often higher costs and additional integration requirements. An embedded gateway is typically less expensive and simpler as it’s part of a payment provider’s technology.

A payment facilitator, on the other hand, provides the technology and infrastructure to a payment processor that makes accepting payments possible. Almost all PayFacs also have their own gateway. Another key difference between a payment gateway and a payment facilitator is that a PayFac allows you to create an embedded merchant onboarding experience while payment gateways only allow for embedded checkout experiences.

> Learn more about Payment Facilitators

Do I need a standalone payment gateway or a payment facilitator?

Without a PayFac, you would have to go through the tedious process of registering with a processor to become a payment facilitator. Taking this route can be rewarding for SaaS companies but does come with time and investment commitments. 

While not always the case, businesses that use a standalone payment gateway are typically not using a payment facilitator. This method still lets you accept payments, but requires more set up and management on your side. Because the payments process has become such a large part of the customer experience, standalone gateways are used much less frequently—especially by SaaS platforms.

Partnering with a payment facilitator that has its own gateway not only provides a means of securely transferring and authorizing cardholder data, but also streamlines the entire payment process and makes it easier to manage. Using a payment facilitator also allows you to customize and seamlessly integrate the merchant onboarding experience with your platform. 

Examples of Standalone Payment Gateways

By now, you should have a good understanding of what a payment gateway is and how it works, but it’s always helpful to see some real-life examples. 

Companies like these offer a standalone gateway option that other businesses can use to take payments on their sites:

  • Amazon Payments

  • PayPal

  • Authorize.net

  • NMI

  • Spreedly

Examples of companies that are a PayFac with a built-in payment gateway:

  • Finix

  • Stripe

  • WePay

  • Stax

  • Square

  • Tilled

A payment gateway is part of the technology at Finix

With so many options, how do you choose which payment gateway provider is best for you? It essentially boils down to your priorities. While a standalone gateway is an option, if you want to simplify the payments process as much as possible, and have the ability to optimize your checkout process, a payments company like Finix, which has a built-in gateway, is the way to go. If your platform processes payments on behalf of merchants, you’d also have the benefit of earning revenue on your payment transactions.

Because a payment gateway is a part of Finix’s technology, SaaS companies can not only accept online payments, but can also seamlessly integrate our gateway into their application via APIs for a truly white-labeled experience. We also act as a payment facilitator and can handle all your payment needs. You can outsource the payments process to Finix, or become a PayFac with Finix, and own more of the payment experience—either way, you reap the benefits.

If you’re ready to take ownership of your payment process, let's connect and explore your options.

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