E-commerce is booming with every passing year. In the UK in 2021, e-commerce sales accounted for 36.3% of the total retail market (International Trade Administration Report). If you’re selling a product or service online through your website, payment gateway is one term that you might have come across quite frequently.
In this article, I will explain what an e-commerce payment gateway is, how many types of payment gateways are there and how to choose the right one for your business. Let’s begin.
What is an e-commerce payment gateway?
An e-commerce payment gateway is a software application that enables you to accept digital payments from your customers who are purchasing from your e-commerce website. It serves as a bridge between your website and the financial institutions that process payment, ensuring that sensitive financial information is transmitted securely.
When a customer makes a purchase on your e-commerce site, the payment gateway encrypts the transaction details, verifies the customer’s payment information and then processes the payment.
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How does an e-commerce payment gateway work?
Step 1:
The customer places an order through your e-commerce website. This involves adding an item to their cart, proceeding to the checkout and filling in the payment details, such as credit card credentials.
Step 2:
The payment gateway securely transmits the card and order information to the payment processor via an HTTPS connection enabled by an SSL certificate. All these details are encrypted to ensure maximum security.
Step 3:
The customer is redirected to the payment processor’s website (in most cases) to finalise the transaction.
Step 4:
The payment processor communicates with the customer’s bank to either authorise or decline the transaction, depending on the availability of the funds. If verified, the message for a successful transaction will be displayed by the payment gateway.
Step 5:
The customer’s bank settles the money with the payment gateway and the payment gateway with the merchant.
Types of payment gateways
Generally, most e-commerce payment gateways can be divided into 3 categories – on-site, off-site and API-based.
1. On-site gateway
An on-site gateway allows you to receive transactions directly on your website. This means the customer will enter his card details and pay for the product without being redirected to an external payment gateway provider website.
They can either be visible or invisible which means the customer will either see the payment gateway provider’s branding or they won’t. Small to medium-sized businesses usually opt for a visible onsite gateway as it’s cheaper.
Pros:
- The customers remain on the website during the payment process which reduces the chances of them getting confused. This also reduces potential friction points resulting in card abandonment.
- Managing payments on-site provides businesses with comprehensive access to transaction data. They can monitor how customers are interacting with the payment process and analyse it to optimise their checkout process.
Cons:
- Implementing an on-site payment gateway requires upfront costs. This includes expenses for developing the infrastructure, obtaining necessary security certifications and the integration of the system with existing platforms.
- It requires you to have technical knowledge about payment APIs, so you might need to hire a dedicated developer for it.
Example of this payment gateway: Amazon.
2. Off-site gateways
In an off-site gateway, the customer is taken from your website to the payment gateway provider’s website to make the payment. That means the service provider is responsible for handling the transactions.
Pros:
- The biggest advantage of an off-site gateway is the low cost. They can be set at a fraction of the cost of an on-site gateway.
- They are quite easy and speedy to set up and integrate into your e-commerce website. The third-party provider handles the heavy lifting, including security and compliance.
Cons:
- The redirection to an external site can sometimes cause confusion among customers, leading to higher cart abandonment rates.
- Businesses will have limited access to detailed transaction data because the payment process occurs on a third-party platform.
Example of this payment gateway: PayPal.
3. API-hosted gateways
In an Application Programming Interface (API)-hosted gateway, the business handles transactions on its e-commerce website while leveraging the security and functionality of a third-party payment processor.
Pros:
- It offers a wide scope of customisation, which allows businesses to design the payment process to fit their brand’s look.
- These gateways come with certain security features like tokenisation, to protect sensitive payment data.
Cons:
- Requires technical know-how for integration, especially for API calls and handling responses.
- Managing an API-hosted gateway demands continuous updates and maintenance to keep the system secure and compatible with evolving technologies.
Example of this payment gateway: Stripe.
Benefits of e-commerce payment gateways
You can achieve multiple benefits for your e-commerce business by integrating a payment gateway into it.
Better security:
It provides enhanced security through encryption and PCI DSS compliance, which protects sensitive customer data from fraud and breaches. Compared to traditional methods like direct bank transfers, payment gateways offer better security features.
Global reach:
It facilitates international transactions by supporting multiple currencies. This capability allows businesses to expand their customer base globally without the complexity of dealing with different payment systems. In contrast, traditional methods often face limitation in handling cross-border transactions.
Improved customer experience:
By providing an efficient checkout system and fast transactions, the payment gateway enhances the overall shopping experience of your customers.
Choosing an e-commerce payment gateway
Opting for a compatible e-commerce payment gateway may seem confusing because there are so many options around you. But the following considerations will make the job easier for you.
1. Costs
The pricing structure of the payment gateway might be your first consideration. Keeping in view your budget, you should look for a provider that gives you the most number of benefits for the least amount of money. Generally, the costs are divided into:
- Setup fees: A one-time fee to set up the payment system.
- Monthly fee: This is the running fee which is charged monthly to a business, usually between £10 – £30.
- Transaction fee: This is what you get charged for each transaction. Typically, it’s in the range of 2% – 3% + £0.2 – £0.4.
2. Customer support
You will certainly run into technical issues when running your e-commerce website in the UK. That’s when you would need the customer support of your payment gateway provider.
Check that the provider has a working contact number that you can call in case of emergencies. Ideally, it should be based in your own country and it’s preferred if they display multiple contact options on their website or app.
Make sure their support team is readily available on short notice (you can always test that out while contacting them for market research). Also, look at their online reviews on platforms like Glassdoor and Trustpilot.
3. Security
When considering a payment gateway in e-commerce, security is of utmost importance because your customers’ sensitive payment information is at stake. You don’t want your website compromised due to an insecure payment gateway. Look for the following compliances and security features:
- Encryption.
- 3D Secure.
- Tokenisation.
- SSL certificate.
- PSD2 compliance.
- PCI DSS compliance.
Other significant considerations include whether the gateway requires you to set up a merchant account, whether it will provide off-site, on-site or API-hosted functionality and whether it supports multiple currencies.
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