A payment gateway processes online payments by connecting a business’s website or app with financial institutions. It securely captures payment details, encrypts sensitive information, and sends it to the payment processor or acquiring bank for authorisation. Once the customer’s bank approves or declines the transaction, the gateway sends the response back to the business’s site. This entire process happens in seconds, creating a smooth transaction experience for both the business and the customer.

Top-tier payment gateways handle online transactions effectively while protecting sensitive customer data. They also help businesses comply with industry standards such as the Payment Card Industry Data Security Standards (PCI DSS), which can reduce the risk of fraud and chargebacks. With global digital payments expected to exceed $31 trillion in 2028, a reliable payment gateway is important for accepting payments and driving revenue.

Below, we’ll explain the different types of payment gateway solutions, how payment gateways work, and how to choose the right solution for your business.

What’s in this article?

• Types of payment gateway solutions
  
• How payment gateways work
  
• How to choose the right payment gateway solution
  

Types of payment gateway solutions

There are many types of payment gateways you can choose from, each of which can meet different needs. Here are the main types of payment gateway solutions:

• Hosted payment gateways: These gateways redirect customers away from your website to complete the payment on a third-party platform. They send customers back to your website after the payment is processed.

• Self-hosted payment gateways: Self-hosted gateways collect payment details directly on your site. This option provides more control over the user experience and branding during checkout but requires greater responsibility for data security and compliance.

• API-hosted payment gateways: Application programming interfaces (APIs) allow these gateways to integrate directly with your website or app. As with self-hosted payment gateways, customers complete their transactions without leaving your site. This enables a fully branded experience and flexibility in customising the payment flow but also requires the business to uphold high security standards.

• Local bank integration gateways: This gateway type connects directly to local banks and financial institutions. Businesses operating in specific regions or markets often use them. They can offer a more localised payment experience but might lack some of the advanced features and global reach provided by larger, international gateways.

How payment gateways work

Payment gateways process online transactions by connecting a business’s website or app with the appropriate financial entities. Here’s a step-by-step overview of how payment gateways work:

• Customer checkout: The process begins when a customer decides to make a purchase. At checkout, they provide their payment details (e.g. credit card number, contact information). Your payment gateway securely collects this information through either a hosted checkout page or an embedded form on your site.

• Data encryption and transmission: Once the payment details are submitted, the payment gateway encrypts this sensitive information to protect it from potential breaches or fraud while in transit. The payment gateway then transmits the encrypted information from your site.

• Authorisation request: The payment gateway forwards the encrypted payment data to the payment processor or acquiring bank (the bank that works with your business). The acquiring bank sends the transaction details to the issuing bank (the customer’s bank or card issuer) for authorisation. The issuing bank verifies the card details, checks that funds are available, and evaluates any fraud indicators to determine whether the transaction should be approved or declined.

• Approval or decline: After assessing the transaction, the issuing bank sends an approval or decline response back through the acquiring bank to the payment gateway. The payment gateway communicates this result back to your website or app and updates both you and the customer on the status of the payment.

• Transaction completion: If the transaction is approved, the payment gateway completes the payment process by notifying your business and allowing you to proceed with order fulfilment. At this stage, the payment amount is authorised but not yet settled. This stage holds the funds temporarily to ensure they are available while the transaction is finalised.

• Settlement and funding: The acquiring bank aggregates the approved transactions and sends them to the payment network to be settled. The funds move from the customer’s issuing bank to your business’s bank account. This process can take a few days, depending on the banks and payment method involved. The payment gateway facilitates this entire process, including managing any currency conversions, handling disputes, and providing reporting tools.

How to choose the right payment gateway solution

Choosing the right payment gateway is all about finding a solution that aligns with your business needs and plans for growth. Here are some of the factors to consider when you’re assessing your options:

• Integration: Select a payment gateway that integrates easily with your tech stack, whether it’s a custom-built website, mobile app, or platform (e.g. Shopify, WooCommerce). Look for gateways with well-documented APIs, software development kits (SDKs), and pre-built plug-ins. Stripe offers comprehensive API documentation and libraries for multiple languages, including Java, Python, and Ruby. Stripe also enables you to build custom payment flows or use pre-built user interface (UI) components such as Stripe Elements to embed a secure, fully customisable checkout experience directly on your site.

• Payment methods: The right gateway should support the payment methods your customers prefer, whether they’re credit and debit cards, digital wallets, local payment methods, or buy now, pay later (BNPL). Stripe supports all major credit and debit cards and more than 100 payment methods, including Apple Pay, Google Pay, Klarna, and Alipay. If your business operates internationally, Stripe’s support for local payment methods such as SEPA Direct Debit in Europe, iDEAL in the Netherlands, and Bancontact in Belgium allows you to serve regional preferences.

• Security and compliance: Look for gateways that offer the highest level of PCI compliance (Level 1) and features such as tokenisation, encryption, and advanced fraud detection. Stripe’s security framework complies with PCI Level 1 requirements and comes with Stripe Radar, a machine learning–powered fraud prevention tool that analyses transaction data across millions of global businesses. It also has features such as dynamic 3D Secure to require verification for riskier transactions, which can minimise chargebacks without compromising the customer experience.

• Cost structures: Factor in costs such as setup fees, monthly fees, fees for handling international cards, chargeback fees, and any expenses associated with extra features. Stripe’s pricing model is straightforward: a standard per-transaction rate, depending on the payment method, with a small additional fee for currency conversions.

• Global reach and multi-currency support: If you’re operating globally, you need a gateway that can handle multiple currencies and cross-border transactions easily. Stripe supports payments in more than 135 currencies and automatically converts and settles transactions in your preferred currency. It also offers Adaptive Pricing, which converts your prices to customers’ preferred currencies.

• Customisation and customer experience: Select a highly customisable gateway. You should be able to design the checkout experience to fit your brand while fine-tuning it for mobile and desktop. Stripe Elements provides pre-built, easily customisable UI components. For faster setups, Stripe Checkout is a pre-built payment page that’s designed for conversion and includes features such as real-time card validation and support for multiple languages.

• Reporting and analytics: Beyond just processing payments, a gateway should offer insight into transaction trends, customer behaviour, and cash flow management. Stripe has a detailed dashboard with real-time reporting, advanced filters, and the ability to export data for deeper analysis. Stripe Sigma is an SQL-based analytics tool that enables you to write custom queries for more granular insight. This feature also allows you to identify high-risk customers or track revenue trends across different payment methods or regions.

• Billing models: If you have a subscription-based business or need to manage recurring billing, your gateway should have flexible tools to accommodate these payments. Stripe Billing offers extensive support for different billing models, including tiered pricing, usage-based billing, and multi-currency subscriptions. It also automates invoicing, handles prorations for subscription changes, and supports advanced features such as Smart Retries for failed payments, which helps improve revenue recovery.