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Payment Gateways Explained: What They Are and How They Work

They form an essential part of accepting electronic payments, but what are they?

What is a Payment Gateway?

A payment gateway is a technology that authorises and transmits payment information between a customer, the business they're buying from, and the bank systems involved.

 

Suppose your business is an online shop, for example. In that case, a payment gateway receives the card information from your customer's card and then encrypts the data, and sends it to the customer's bank for approval. Once the bank approves the transaction a confirmation of the sale is then sent to your business. 

 

In short, a payment gateway ensures a smooth and secure flow of information during online payments. They also come with features to prevent fraud and keep your financial information safe.

Who Needs a Payment Gateway?

As you've read, a payment gateway facilitates communication between the various systems involved in the online payment process, and so they form an essential part of any digital transaction your business makes. 

 

Whether you have a small online business or a large one with multiple physical shops, every digital payment you accept with go through a payment gateway. 

Payment Gateways vs Payment Processors

The difference between payment gateways and payment processors is slight but important. A gateway works as a checkpoint; one that makes sure a transaction can happen between your business and the customer concerned. A processor, meanwhile, is responsible for the actual transfer of funds from your customer to your business. 

 

The next part involved is your merchant account, which is where the funds end up once a sale has gone through the previous two stages. After this, the money can then be transferred from your merchant account into your business bank account.  

Who Provides Payment Gateways?

There are various payment gateway providers that will enable your business to accept digital payments, with many of them offering different methods of doing so. The best payment gateway for your business will likely be one of the three main types of payment gateways, which are:

  • Hosted
  • Self-hosted
  • API-hosted

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Hosted

A hosted payment gateway is one of the most simple ways to accept payment. All your website would have to do is have a payment link on the payment page which, when clicked, would take your customer to a separate payment page where they would make payment. Providers of hosted payment gateways include companies like PayPal and Amazon Pay, which have pages that customers are directed to from a separate website.

 

A hosted payment gateway has the advantage of being simple and relatively hassle-free, taking a lot of the stress away from your business. It does, however, mean your customers are taken away from your website when making payments, limiting your control.

Self-Hosted 

A self-hosted gateway does largely what it says on the tin. Rather than being directed to a separate webpage, customers will see a payment page displayed within your business's website, where they will enter payment details. Their card details are then sent to a 3rd party payment gateway to be authorised. 

 

This makes for a better customer experience as customers won't be thrown onto a different website to make payment. You still lack full control, however, as you are unable to control the payment page itself. 

API-Hosted

API Hosted Gateways enable the entire payment process to occur on your website. Your website will host the payment and your servers will handle the data. This is more suited to bigger businesses that have large volumes of sales day-to-day. 

 

One thing to remember is you'll need to pay extra for SSL certification, and also ensure that the payment process is PCI DSS compliant if you want to use this kind of payment gateway.  

Payment Gateway Integration

The steps required to make a simple transaction can, and often do, seem complex. If you're new to taking card payments you may have never even heard of some of the things explained in this article, but there's no need to worry. 

 

Many companies offer fully integrated payment solutions to businesses just like yours, whereby the payment gateway, payment processor, and merchant account are all handled by the same company. Companies like this are often the best option for businesses that are either small or just don't want the hassle of having a separate provider for each of the steps. 

Which is the Best Solution for Your Business?

The best way to take electronic payments depends on the specific needs of your business. If you're a small business that has limited knowledge or resources at your disposal, then using a hosted gateway like PayPal could be the best option for you. Paypal also offers businesses a Paypal merchant account, which can be an added benefit to businesses that want a third party to handle the heavy lifting. 

 

Something else to consider is the nature of your business. Is it fully online or do you have any physical shops? If you do have a physical shop, you'll need a card machine to accept electronic payments; which means choosing not just a payment gateway, but also a card machine. Luckily, we've also got you covered there. Read about the best card machines to get started. 

Does Your Business Need a High-Risk Payment Gateway?

If your business is categorised as high-risk, you'll need a high-risk payment processor. If you're not sure what a high-risk business is, or you want to find out what it means for your business, read our article on high-risk merchant accounts to find out more

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  • Barclays Bank PLC
  • FirmEU BV
  • Fiserv (Europe) Limited
  • Handepay Limited
  • Independent Merchant Services Limited
  • Inspire Payment Services Limited
  • ResQ Limited
  • SumUp Payments Limited
  • Take Payments Limited
  • The Redwood Group and Associates Limited
  • Tide Platform Limited
  • WorldPay (UK) Limited
  • Yotta Digital Ltd
Our Products
  • Business Accountancy
  • Business Epos Systems
  • Business Telephone Systems
  • Commercial Waste Collection
  • Digital Marketing
  • Fleet Tracking
  • Invoice Finance
  • Merchant Accounts
  • Website Design

FAQs

Your Questions Answered

A payment gateway acts as a secure intermediary between your online shop and your customers' bank.

 

It encrypts a customer's credit card number, verifies the transaction, and transfers the funds from your customer's bank to your business's.

There are several things to consider when you choose a payment gateway including transaction fees, supported payment methods, and security features. 

 

One of the most important things for your business could be the ease of integration a payment gateway has. A fully integrated payment gateway could be your best option if you want to have a hassle-free way of accepting payments, as there are fewer things for you to worry about. 

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The Best Card Machines For Small Businesses 2024

If your business still operates a cash-only policy when it takes payments, or you're looking to upgrade the cash machines you've already got, choosing the right card reader for your business can be a trickier job than it sounds.While card machines aren't the most glamorous thing to spend your money on, they are an essential part of your business. Recent years have seen them grow in popularity and now many people use their cards to pay for the vast majority of their goods and services. You, then, need a reliable, useable, and cost-effective card machine to ensure your business is not only able to take payments by card but also take them quickly and easily with a device you understand.  The Best Card Machines for Small BusinessesDifferent machines offer your business different benefits, and knowing which is the best choice isn't always clear. That's why we've done most of the research for you, and compiled this list of some of the best card machines on the UK market. We've compared them, so you don't have to. As you're probably aware, card machines come in a variety of shapes and sizes. Some are portable and pocket-sized, while others are large and fixed to your business's countertop. We've covered all bases in this list, so you'll find a mix of different types of card machines. 

How Much Do Business Bank Accounts Cost?

What is a Business Bank Account?Business bank accounts enable you to separate your personal and business expenses; creating a convenient way to organise your tax and bookkeeping. This makes paying taxes easier and means your files are clear and easy to understand. There are several advantages to having a business bank account. For a deeper dive into what a business account can offer you and your business, read on. In this article, we outline the costs associated with opening and maintaining a business bank account and explain what you need to get started. How Much Does A Business Account Cost?Each bank has its own set of criteria for opening a business bank account. It's important to evaluate and compare the available options to find the best business checking account that suits the needs of your business. If you already have a personal account with a particular bank, there might be special offers or benefits available to you if you choose to open a business bank account with the same one. Some banks require an initial deposit or a minimum balance, while others impose varying fees for different types of transactions, such as monthly service fees, excess transaction fees, or cash handling fees.

Direct Debit Explained

A direct debit payment is a payment taken automatically from a customer's bank account periodically. It's often offered as a payment method by businesses that provide subscription services or other services that require an ongoing commitment from a customer. The main benefit of direct debit payments, for businesses and consumers, is their simplicity. Neither your business nor the customer has to worry about remembering the payment, so payments aren't missed and the relationship between you and your customers is more easily managed. How to Take Direct Debit PaymentsThe way direct debits work is fairly simple. Your customer's payment is taken from their account automatically, usually on a predetermined date, and your business then continues to provide the customer with your service. You need an agreement from your customers to take payments automatically, so make sure it's clear what they are opting in for. You don't want your customers to be confused about what it is they've committed to.  You also need to be eligible to take direct debit payments, which means you need to get a Service User Number (SUN) - a six-digit number businesses use to get paid via direct debit. You can get a SUN directly from your bank, provided you meet its criteria.  Once your bank and your customers have given you the green light to take payments automatically, you just need to set up the frequency and size of your payment. The most important thing to remember about this part is that your customers must be given 10 days' notice before each payment is taken. The notice needs to detail when the payment will be taken and how much it will be. Benefits of Taking Direct Debit PaymentsAs mentioned above, the most obvious benefit of accepting direct debit payments is the simplicity it brings to the hassle of keeping on top of recurring payments. That's not where the benefits of direct debit payments though. Other benefits include having greater predictability, greater retention, and better relationships with your customers. Having a better idea of exactly how much revenue you've got coming in from your customers and knowing exactly when you'll be receiving it can make your business's general finances more predictable and therefore more manageable. You can also use this information to inform future decisions about your business growth.  Having customers committed to your business on an ongoing basis also means they're more likely to stick around as they already know they like what you provide, making the job of your CRM that much easier.  With customers already engaged heavily with your business and your brand, they're right where you want them to be to develop your relationship with them. You can use their pre-existing interest to market more of your services, offer special discounts or offers, or reward their loyalty with a giveaway. These things will help keep their engagement with your brand nice and high.