Payment gateways and online payment systems: A guide for SMEs

Understanding payment gateways: A complete guide for small businesses.

Navigating the world of online payment systems might seem daunting, but it’s a game-changer for any business looking to thrive online.

With 34% of shoppers buying online each week and expectations that around 20% of 2024’s transactions will be online, a payment gateway ensures the customer’s payment gets from their bank to yours safely.

We highlight what a payment gateway is, some of the most trusted payment gateway providers, unpack what a payment gateway is, how it works, and the benefits for your business and customers.

What is a payment gateway, and how do they work?

Think of a payment gateway as a secure digital bridge between you, the merchant, and your customers. It’s the technology that checks if a customer's payment can go through and then handles the transaction safely and securely. This is particularly crucial for online sales, where you can’t physically swipe a card.

Here's how it works:

Customer checkout – your customer hits the ‘pay’ button on your website or app.

Payment gateway – the payment gateway springs into action, encrypting data and using fraud prevention tools to keep customers’ sensitive details safe from cybercriminals. It also communicates between the payment processor and your site to ensure everything’s good to go.

Authorisation request – the bank verifies the information and checks your customer has the funds to pay.

Approval/Decline – the bank tells you yes or no.

Funds transfer – the money is transferred from the customer’s account to a holding account for you.

Order confirmation – You and your customer receive confirmation and you’re good to go with the customer’s order.

The entire process happens in a matter of seconds, ensuring a seamless and secure experience for everyone.

Types of payment gateways

There are two main types of payment gateways to choose from – hosted and integrated.

Hosted payment gateways send your customers off to a secure and trusted third-party payment page and bring them back once everything’s approved. It’s a quick and easy solution – especially for smaller businesses that might not have the in-house technical expertise to set up an integrated gateway. It also has the added bonus of taking the security burden off your shoulders. However, you have less say in the checkout design.

Integrated payment gateways make the checkout seamless, keeping everything on your website without redirecting your customers. These systems offer greater control and often extra features, though may need some technical skills to set up, so are a good option for larger organisations with IT expertise. They also allow you to customise the checkout experience to match your brand.

Stripe, Worldpay, PayPal, Square, and Shopify are just a few of the available and most trusted payment gateway providers. Each offers unique features, transaction fees and pricing structures, so it's important to shop around and find the one that best suits your business needs and the checkout experience you want for your customers.

To find out more, check out our How to take card payments guide.

Who needs a payment gateway?

If you sell online through your website or app, you need a payment gateway. Whether you’re shipping goods, offering subscriptions, or running an e-commerce store, a payment gateway makes sure you can handle transactions smoothly and securely.

Even if your primary focus is on in-person sales, offering online payment options can expand your customer base and streamline your sales process.

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

Both are crucial but have different roles in processing customer payments.

A payment gateway is like the front door, carrying out the initial authorisation to ensure the customer's payment can be processed safely. A payment processor is the behind-the-scenes team that actually moves the money, talks to the banks, and carries out the security checks to make sure the transaction is genuine.

Understanding payment gateways is a critical part of ensuring your online business runs smoothly. By choosing the right provider, you can give your customers a secure and convenient way to pay that keeps them coming back, attracts a wider customer base, and boosts your online sales.

For 1-2-1 advice on choosing the right payment gateway for your business and customers, speak to our V-Hub advisers today.