Payment gateways explained – What they are, how they work, and emerging UK trends for 2024

Last updated on 8 December 2023

Payment gateways form the backbone of any modern e-commerce business. As an online business owner, these gateways pave the way to securely receiving funds from customers. As the digital world evolves, so do these gateways, allowing businesses to accept a broader range of payments, spanning credit cards to digital wallets.

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This comprehensive article will explore everything you need to know about payment gateways in 2024, catering specifically to a UK business audience.

Video: Card readers and payment machines explained

Understanding payment gateways

Payment gateways function as intermediaries in the online transaction process. When a customer inputs their payment details into your website, the payment gateway encrypts this information and forwards it to the issuing bank or card provider.

The bank or card provider then verifies the transaction details and either approves or declines the transaction. If approved, the transaction amount is transferred from the customer’s account to the merchant’s account.

The pivotal role of payment gateways ensures that customers’ financial data remains secure throughout the transaction process, providing a safe environment for online shopping.

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The robust encryption technology inherent in payment gateways deters potential cyber-attacks, reducing the risk of data theft.

Usage examples

The versatility of payment gateways ensures that they can be used across a broad range of industries and applications. Here are a few common usage examples:

  1. E-commerce Stores: One of the most prevalent uses of payment gateways is in e-commerce stores. Businesses selling products or services online utilise these gateways to accept payments from customers securely. Whether it’s a small online boutique or a large multinational retail platform, payment gateways are a fundamental component of the checkout process.
  2. Subscription Services: Many businesses operate on a subscription model, such as streaming platforms, digital news outlets, and software-as-a-service (SaaS) providers. Payment gateways allow these businesses to securely process recurring payments, providing a seamless customer experience.
  3. In-app Purchases: Mobile apps offering in-app purchases or upgrades, such as gaming or fitness apps, use payment gateways to process these transactions. The gateways are typically integrated directly into the app, offering a smooth, in-app purchasing experience.
  4. Non-Profit Donations: Charities and non-profit organisations often use payment gateways to process online donations. By offering a secure online payment option, these organisations can reach a broader donor base, facilitating easy and secure transactions.
  5. Education and eLearning Platforms: Educational institutions and eLearning platforms use payment gateways to accept payments for courses, materials, and certifications. They enable students to pay tuition fees or access paid content securely.
  6. Online Marketplaces: Online marketplaces that host multiple sellers, such as Etsy or eBay, use payment gateways to ensure the secure transfer of funds between buyers and sellers. These platforms typically use a payment gateway to hold funds in escrow until the buyer has received their goods, offering protection for both parties.
  7. Travel and Accommodation Booking: Online travel agencies, airlines, hotels, and vacation rental platforms use payment gateways to secure bookings. They ensure that customers’ card details are safely processed and that payments are handled securely.
  8. Food Delivery Services: Online food delivery services also rely on payment gateways to process transactions. Whether ordering from a restaurant or a grocery delivery service, customers can pay online knowing their financial details are secure.

These are just a few examples of how payment gateways are utilised across various sectors. The common thread across all these examples is the need for secure, efficient, and reliable online payment processing. In our increasingly digital world, the importance of robust payment gateways cannot be overstated.

How do payment gateways work?

A payment gateway facilitates online transactions by transferring information between a payment portal (e.g., a website or mobile app) and the bank or card issuer.

The process, although seemingly instantaneous for the end-user, comprises several steps that ensure the secure and efficient transfer of funds. Here’s a breakdown of how payment gateways work:

  1. Transaction Initiation: The process starts when a customer places an order on a website by entering their card or digital wallet details into the payment portal. This information is then securely captured and transmitted to the payment gateway.
  2. Data Encryption: The payment gateway encrypts the transaction data, turning it into a secure code to ensure it is safely transmitted. This step protects sensitive information like credit card numbers from potential interception by malicious entities.
  3. Transaction Forwarding: The encrypted data is then forwarded by the payment gateway to the card issuer or bank associated with the payment method used.
  4. Transaction Verification: The bank or card issuer verifies the transaction. They check several aspects, including whether the account associated with the payment method has sufficient funds to cover the transaction, the validity of the card, and any potential red flags that might suggest fraudulent activity.
  5. Approval or Decline: Based on this verification process, the bank or card issuer either approves or declines the transaction. This decision is then communicated back to the payment gateway.
  6. Communication with Merchant and Customer: The payment gateway communicates the result (approval or decline) to the merchant’s website or app. The system then generates a corresponding message to the customer – either confirming the order (if approved) or asking the customer to try a different payment method (if declined).
  7. Funds Transfer: If the transaction is approved, the bank transfers the funds from the customer’s account to the merchant’s account. This process doesn’t happen instantly and usually takes a couple of days to complete.
  8. Transaction Completion: Once the transfer of funds is confirmed, the order is deemed complete, and the merchant can now fulfil the customer’s order.

In summary, a payment gateway acts as a conduit for the secure and efficient processing of online transactions, handling everything from data encryption and transaction verification to communication with involved parties and facilitating the actual transfer of funds.

Its primary role is to provide a seamless, secure, and fast transaction process that instils confidence in online shoppers and enables the smooth operation of e-commerce platforms.

Trends in payment gateways

Payment gateways have evolved dramatically since their inception. In 2023, a host of new features and trends have emerged.

  1. Increased Use of Mobile Wallets: Digital wallets such as Google Pay, Apple Pay, and Samsung Pay have seen increased adoption rates. Offering seamless, one-click payments, these platforms have provided a quicker and easier way for consumers to pay online.
  2. Cryptocurrency Payments: Cryptocurrencies like Bitcoin, Ethereum, and a host of other altcoins are gaining acceptance in the e-commerce space. This trend has seen payment gateways integrating cryptocurrency payment options into their systems, enabling businesses to accept these currencies.
  3. Biometric Authentication: To enhance security, biometric authentication in payment gateways has become more prevalent. Facial recognition and fingerprint scans add an extra layer of security to transactions, making it harder for cybercriminals to commit fraud.
  4. AI and Machine Learning: To mitigate fraud, payment gateways are integrating AI and machine learning algorithms to identify suspicious patterns in transactions. These technologies have significantly reduced fraud rates, increasing the trust customers have in online transactions.

Selecting a payment gateway in the UK

When choosing a payment gateway for your UK-based business, consider the following factors:

  1. Transaction Fees: Payment gateways charge per transaction. These charges vary between providers, so choose one that offers competitive rates for your business model.
  2. Payment Methods: Your selected payment gateway should support all the major payment methods used by your target customers. This may include credit and debit cards, bank transfers, mobile wallets, and, increasingly, cryptocurrency payments.
  3. Security: Look for a payment gateway that uses robust security measures, such as encryption, tokenization, and two-factor authentication. It should also be Payment Card Industry Data Security Standard (PCI DSS) compliant.
  4. Integration: Your chosen payment gateway should seamlessly integrate with your existing e-commerce platform. This ensures a smooth checkout process for your customers.
  5. Customer Support: Excellent customer service is crucial in resolving any issues that may arise. Ensure that your chosen provider offers reliable support.
  6. Currency Support: For businesses selling internationally, multi-currency support is a must. Ensure your chosen gateway supports all the currencies of your target markets.

Notable payment gateways in the UK

Several payment gateways stand out in the UK market. These include:

  1. Stripe: Stripe offers a comprehensive solution for businesses, supporting all major credit cards, digital wallets, and even cryptocurrencies. It’s known for its robust API, which allows for extensive customisation.
  2. PayPal: PayPal is a globally recognised payment platform. It provides a user-friendly interface, strong customer protection policies, and an extensive network of users, making it a popular choice.
  3. WorldPay: WorldPay offers a wide range of services, including online payments, card machines, and integrated payments. It supports over 120 currencies, making it ideal for international businesses.
  4. Sage Pay (now Opayo): Sage Pay offers fraud prevention tools and provides round-the-clock customer support. It is an excellent choice for small businesses due to its competitive pricing structure.
  5. Adyen: Adyen provides a platform that supports a multitude of payment options. It is known for its excellent fraud detection capabilities, making it a reliable choice for high-risk businesses.

Conclusion

In conclusion, payment gateways form an essential part of any online business. With emerging trends like digital wallets, cryptocurrency payments, and enhanced security measures, payment gateways are continually evolving.

Selecting the right gateway for your business requires a thorough understanding of these trends and the needs of your customers.

With the right payment gateway, you can ensure secure, seamless transactions, fostering trust with your customers and driving the growth of your business in 2023 and beyond.

FAQ

What is a payment gateway?

A payment gateway is a technology used by merchants to accept debit or credit card purchases from customers. The term encompasses the physical card-reading devices and the payment processing networks that handle the transactions.

How does a payment gateway work?

A payment gateway facilitates online transactions by encrypting sensitive information, communicating with the customer’s bank, and authorising payment transfers between the customer and the merchant.

Are payment gateways safe?

Yes, payment gateways are designed with stringent security measures to protect sensitive financial information. They employ encryption, tokenization, and other security methods to safeguard transaction data.

What is the difference between a payment gateway and a payment processor?

A payment gateway is the technology that captures and transfers payment data from the customer to the merchant. A payment processor, on the other hand, is a company that manages the transaction process, serving as a liaison between the merchant, the payment gateway, and the banks.

Do I need a merchant account to use a payment gateway?

Some payment gateways require you to have a merchant account, but others, known as payment service providers (PSPs), bundle their payment gateway with a merchant account.

Can I use multiple payment gateways?

Yes, many businesses opt to use multiple payment gateways to offer more payment options to their customers and as a backup in case their primary gateway experiences downtime.

How much does it cost to use a payment gateway?

The cost varies depending on the payment gateway provider. Some charge a flat per-transaction fee, while others may charge a percentage of each transaction. There may also be monthly fees, setup fees, and other costs involved.

Can payment gateways process international transactions?

Yes, many payment gateways support international transactions and can handle multiple currencies. However, fees for international transactions may be higher.

Are payment gateways mobile-friendly?

Most modern payment gateways are designed to be mobile-friendly, offering seamless transactions on smartphones and tablets.

Do payment gateways support subscription payments?

Yes, many payment gateways support recurring payments, making them a good fit for businesses with a subscription-based model.

Can I use a payment gateway for my physical retail store?

While primarily used for online transactions, some payment gateways also offer solutions for physical retail stores, including POS systems and card readers.

What is a hosted payment gateway?

A hosted payment gateway redirects the customer to the gateway provider’s platform to process the transaction, then redirects them back to the merchant’s website once the transaction is complete.

What is a non-hosted payment gateway?

A non-hosted payment gateway allows customers to complete transactions directly on the merchant’s website, without being redirected to a third-party platform.

What is the payment gateway’s role in mitigating fraud?

Payment gateways employ a variety of techniques to detect and prevent fraud, including encryption, CVV verification, and AI-powered fraud detection algorithms.

What happens if a payment is declined by the payment gateway?

If a payment is declined, the payment gateway will relay the message to the merchant’s platform, which will then notify the customer. The customer can then choose to try a different payment method.

How quickly are transactions processed through a payment gateway?

While the authorization process is nearly instantaneous, the actual transfer of funds from the customer’s account to the merchant’s account typically takes a few days.

Do payment gateways store credit card details?

To comply with PCI DSS standards, payment gateways do not store credit card information after the transaction is complete. Some gateways offer tokenization services, where the sensitive data is replaced with a unique identifier for future transactions.

Can I integrate a payment gateway with my existing e-commerce platform?

Yes, most payment gateways offer integration with popular e-commerce platforms such as Shopify, Magento, WooCommerce, and others.

How can I choose the right payment gateway for my business?

When choosing a payment gateway, consider factors like the types of payment methods it supports, transaction fees, security measures, ease of integration with your existing platform, customer support, and whether it supports international transactions and multiple currencies.

Can customers use digital wallets with payment gateways?

Yes, many payment gateways have adapted to emerging trends and now support digital wallets such as Google Pay, Apple Pay, and Samsung Pay.

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