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28 May 2024 Article

What is a Payment Gateway? And are They Vital for Online Payments?

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In the rapidly evolving world of e-commerce, understanding the role and functionality of online payment gateways is essential. These systems streamline transactions and enhance the security and efficiency of online shopping for customers. Meanwhile, for merchants well-versed in the payment industry, recognising the intricacies of how these gateways operate can provide significant advantages in navigating the digital marketplace.

In the following article, we’ll explore payment gateways, delve into their mechanics, and discuss why they’re critical for the seamless operation of online payments. From enhancing customer trust to enabling the secure transfer of funds, payment gateways play a pivotal role in the infrastructure of modern e-commerce. This discussion aims to demystify the technology and shed light on its strategic importance for merchants looking to optimise their sales processes and expand their operational capabilities.

What is a payment gateway?

A payment gateway works as a digital cashier who takes payment from a customer’s debit or credit card when they buy online.  A payment gateway is a bridge between the customer’s bank and the store, ensuring that the payment is safe and smooth.

Thus, a payment gateway acts as the intermediary between a merchant’s website and its banking system, ensuring that sensitive information (such as credit card numbers) is passed securely from the customer to the merchant and between the merchant and the customer’s bank.

How does a payment gateway work?

To fully appreciate how an online payment gateway facilitates e-commerce transactions, it’s vital to understand the seamless and intricate process that occurs behind the scenes each time a customer makes a purchase. This aids merchants in selecting the right payment gateway that aligns with their business needs and ensures they can provide secure and efficient service to customers.

There are four key stages in the operation of a payment gateway, each designed to ensure the secure and efficient processing of online transactions:

Stage 1 – Transaction initiation 

The process begins when a customer decides to make a purchase and enters their payment details on the merchant’s checkout page. The payment gateway then captures the customer’s data (including credit card or bank account details) and encrypts it to ensure privacy and customer security against cyber threats.

Stage 2 – Data transmission

Once the customer’s payment information is encrypted, the payment gateway transmits it to the payment processor appointed by the merchant’s bank (the acquiring bank). This step involves several layers of security protocols to ensure that the data is transmitted safely over the internet. During data transmission, the payment gateway acts as a mediator, ensuring that the transaction data moves securely from the merchant to the acquiring bank. 

Stage 3 – Bank authorisation

The acquiring bank then sends the transaction details to the card association (e.g., Visa, MasterCard, etc.), which routes the information to the card-issuing bank to verify the transaction and confirm sufficient funds are available. This verification step is crucial, as it involves authenticating the transaction by the issuing bank, which either approves or declines the transaction based on the customer’s available funds and account status.

Stage 4 – Completion and confirmation

Upon authorisation from the issuing bank, the payment gateway communicates the outcome to the merchant and the customer. This response indicates whether the transaction has been approved or declined.

If the transaction has been approved, the funds are transferred from the customer’s bank to the merchant’s account, typically within a few days. The merchant can then complete the sale and arrange for the delivery of goods or services.

By delving into these stages, we can better understand how payment gateways not only facilitate e-commerce but also enhance transaction security, making online shopping a reliable option for consumers and businesses alike.

Why are online payment gateways important?

Payment gateways protect the details of the credit card by encrypting sensitive information it holds, ensuring that information is passed securely between the customer and merchant, as well as between the merchant and the bank.

An online payment gateway is crucial for preventing fraud in online transactions, ensuring transactions are fast and secure, and maintaining a seamless flow of accurate information.

How to get started with payment gateways?

Businesses typically need to set up a merchant account to begin using a payment gateway. This is a type of bank account that allows a business to accept and process credit or debit card payments from customers. After setting up a merchant account, businesses must choose a payment gateway provider and integrate it with their online shopping cart software, such as Magento, Shopify or Squarespace Commerce.

Which are the most popular payment gateways in Europe?

The European e-commerce market is highly diverse, meaning that the most popular payment gateway can vary depending on the country. However, the following payment gateways stand out for their reliability, wide range of features, and adaptability. Here are six of the top European contenders:

  1. PayPal: Offers comprehensive payment solutions, recognised globally for its security and broad merchant services.
  2. Stripe: Highly popular among developers for its flexible API, which supports a wide array of payment methods and currencies.
  3. Adyen: Known for its ability to handle transactions globally and its support for many local payment methods, providing a seamless payment experience.
  4. Worldpay: One of the largest payment processing companies globally. It offers a wide range of services, including credit card processing and mobile payments.
  5. PayU: Provides payment services tailored to the needs of local markets, with a strong presence in many emerging markets.
  6. Sage Pay (now part of Elavon): Popular in the UK and Ireland, and known for providing secure payment services for both small and large businesses.

How to select a payment gateway for your business

When choosing a payment gateway, merchants should evaluate not only the transaction fees and security measures but also compatibility with their existing systems and specific needs (like support for international transactions or mobile payments). Each gateway has strengths that cater to different aspects of e-commerce, making it essential to align the choice of gateway with the business’s strategic goals.

Is it necessary to use a payment gateway?

In short, no. Thanks to open banking, the need for traditional payment gateways is evolving, and there is now a viable alternative to using an online payment gateway.

Within the varied landscape of payment solutions across Europe, new online payment providers are emerging as a pioneering force in the fintech sector. One such provider is Brite Payments. Why is this?

Payment gateways and Brite Payments 

Brite leverages a proprietary Instant Payments Network to offer seamless Pay by Bank (account-to-account payments) services; connecting over 3,800 banks within the EU. This innovative approach simplifies the payment process and bypasses traditional payment gateways, directly facilitating bank-to-bank transfers.

Unlike conventional payment gateways that process card payments, Brite Payments focuses on A2A (Account-to-Account) transactions. This method eliminates the need for card networks, thereby reducing transaction fees and enhancing payment security. By directly linking with merchants, Brite ensures that communications and transactions are safe, secure and efficient, streamlining the flow of funds without the intermediation of a gateway.

For merchants, integrating Brite’s services through a contracted gateway provider can accelerate the technical setup. This allows access to Brite’s A2A payment solutions alongside other payment methods, like card payments and invoices. 

Thus, Brite’s strategic focus on open banking and payment innovations positions it as a key player in the digital economy. A digital economy in which you do not need a gateway and can therefore save time and money. By adopting Brite’s Instant Payments Network, businesses can enjoy improved transaction security, lower costs, and greater adaptability. This positions them advantageously in a competitive market, enabling them to harness efficient, transparent, and secure transaction mechanisms.

Get in touch with our payments experts today to see what Brite Payments can do for your business.

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