Payment GatewayThe Mechanism That Helps Protect Merchants from Expired Cards & Closed Accounts

What Do Payment Gateways Do? Why Do Merchants Need Them?

US merchants submitted 56.2 billion credit card transactions for processing in 2024. To put that in perspective, that’s 1,781 transactions per second.

Add in debit card payments, which make up about 30% of transaction frequency in the country, and it’s reasonable to project that American merchants handle more than 200 million in-person and remote transactions per day.

But how exactly do funds move? How does a dollar get from a cardholder’s account to the merchant? And, what happens between authorization and payment capture?

Payment gateway providers are a key node in the payment network. So, in this article, we’ll explore what payment gateways are and how they help make credit card transactions possible.

What is a Payment Gateway?

Payment Gateway

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Payment gateways are software applications that encrypt and transmit customer and bank information between the merchant, the bank, and the payment processor.

Payment gateways are software applications that serve as conduits to allow cardholder data to pass securely between parties. Gateways are primarily used for eCommerce; for all practical purposes, online stores can’t accept credit card payments without one.

While brick-and-mortar stores can use a gateway, they typically rely on their physical card readers to transmit payment data from the cardholder to the acquiring bank. Obviously, online stores don’t have that advantage, so they require a different solution. 

Having a gateway eliminates your need for manual input of credit card numbers. This speeds up the checkout process and increases accuracy. Customers are actually interacting with the gateway when they key in card data on your checkout page. The gateway encrypts the information so it isn’t accessed and misused by cyber criminals, then transmits it to the processor. 

The application will also tell you whether a transaction has been authorized or declined by the issuer. More sophisticated gateways may provide additional functions, such as screening transactions for potential fraud.

How Do Payment Gateways Work? 

There are two types of payment gateways. First, we have integrated gateways, which are built directly into a merchant’s eCommerce platform. In contrast, third-party systems send customers to an external site for checkout.

The payment gateway’s role in this process is primarily to ensure that the transaction is routed through a secure connection. It encrypts cardholder information, and also performs fraud checks before sending the card data to the processor.

The process typically follows the same basic flow:

• Cardholder places an order through merchant's checkout page. Transaction details are forwarded to payment gateway.
• Gateway submits this information to merchant’s acquiring bank. This is often done through a third-party processor.
• Transaction information goes to the card network (Visa, Mastercard, etc.), which routes it to issuing bank.
• The bank checks available funds or credit, then informs the network whether the transaction is approved or declined.

Up to this point, the information has been flowing primarily in one direction. Now, though, the data does an about-face and travels the same course, but in reverse:

• Issuer’s response is sent back to the card network, who routes it to the merchant’s payment processor.
• Payment processor forwards the information to the payment gateway, which forwards it to the merchant.
• Merchant informs cardholder that the transaction has either been approved or declined, as per bank response.
• If everything checks out, merchant completes the transaction and receives the funds after finalizing and batching.

The entire process is usually completed within 5 seconds, which is why it seems so uncomplicated to the end user.

How Much Does a Payment Gateway Cost?

Pricing on a gateway system can be hard to determine because there are so many moving pieces. Multiple parties are involved, and most add their own fees to the mix. While merchants may not pay these fees directly, they will be added to the cost of the gateway.

Each provider has their own terms of use and their own way of calculating pricing. Some typical fees involved include:

Why Do I Need a Payment Gateway?

A payment gateway protects your customers’ data. It also helps ensure your funds and all transaction information get sent to the right place.

Strictly speaking, you don’t absolutely need to have one. There are ways of skirting the issue, such as only accepting payments through a service provider like PayPal. That could limit your options substantially, though. For most entities that accept online payments — regardless whether you’re a retailer, a service provider, a nonprofit organization, etc. — you probably don’t have much of a choice. 

With no access to the customer’s actual card, the risk posed by payment fraud is considerably higher for online stores. If personal cardholder data is compromised, your business may get the blame. Payment gateways safeguard your shopper’s payment data, and in the process, protect you from fraud and chargebacks. They follow strict procedures for securing data, as defined by the PCI-DSS compliance standard.

Gateways offer other benefits, as well. They simplify the payment process for your online store and help you receive payments faster. At the same time, your gateway shields your business from expired cards or accounts with insufficient credit.

Payment Gateways vs. Payment Processors

While the terms are often used interchangeably, “payment gateways” and “payment processors” are not the same thing. Any merchant who wishes to accept credit cards must have a payment processor. As we mentioned above, though, the need for a payment gateway is primarily for online commerce. Here’s a side-by-side comparison of the two services.

Payment Processor	Payment Gateway
Facilitates communication between the merchant and bank for fund transfer	Collects and verifies the buyer’s credit card information; encrypts data for transmission
Validates card information for card-present sales	Validates card information for card-not-present sales
Necessary for any merchant accepting credit cards	Necessary for online merchants
Can function as a stand-alone service	Still requires a payment processor

Complicating the issue even further, a number of payment processor gateway providers, such as PayPal and Stripe, fulfill a dual function. They offer payment processing and acquiring services, as well as a built-in payment gateway on the platform. These services are a “one-stop shop” for merchant services.

Alright, so now that all that information is out of the way, it’s time for the $64,000 question: how should you go about choosing a payment gateway?

I recommend approaching it like any other business purchase: consider pricing, features, and any sticking points that you might consider a dealbreaker. In the next sections, we’ll do a rundown of key considerations to help you choose the right payment gateway provider.

Payment Gateway Costs

Likely at the very top of your mind is how much your payment gateway will cost. Unfortunately, credit card processing fee structures are complex, and there are many different costs to consider. These include:

Evaluating Payment Gateway Features

Of course, pricing is only half the equation. You’ll also want to consider what you get for your money, and whether a payment gateway’s features are right for your business’ needs. Take into consideration:

Payment Gateway Red Flags to Avoid

Don’t just pay attention to the “good” features. Warning signs deserve your attention as well.

Compile a list of non-negotiables that every vendor must meet, and immediately strike those that raise red flags. These should include:

Leading Payment Gateway Providers Compared

There are dozens of payment gateways to choose from, so it can be difficult to sift through all the noise to find one that’s best for your business.

To save you time, we’ve summarized the key features offered by several leading payment gateway providers below:

Optimizing Your Payment Gateway Performance

Once your gateway is running, you can set it and forget it. That’s fine for some merchants, but it’s not going to result in the best performance, highest approval rates, or lowest costs. For optimal performance, you’ll need to invest time into fine-tuning how your payment gateway handles transactions and manages risk.

Best practices for improving performance include:

Dynamic billing descriptors that include your recognizable brand name alongside a product or service identifier can help customers recognize the charge on their statement. This, in turn, can lower the incidence of accidental friendly fraud chargebacks from customers who simply don’t remember they bought something from you.

Implement intelligent retry logic that attempts to re-process soft declines (e.g. insufficient funds, temporary technical issues, etc.) at a later time or through a different processor if you use a multi-processor setup. You can customize the logic based on decline codes for the best results.

Use an automatic account updater service offered by your gateway or a third party. These services automatically update expired or replaced card details for recurring billing, which can help prevent failed subscription renewals and unnecessary customer churn.

If you sell internationally, route transactions through a local acquiring bank whenever possible. Cross-border transactions generally have higher decline rates, so using a gateway that supports local processing in your key markets can significantly boost approvals.

Regularly review your gateway’s fraud filter settings and denied transactions. If you see a pattern of good orders being declined from a specific geolocation or IP address cluster, you may want to adjust the rules. Avoid using default, out-of-the-box filter settings, and customize them to your address threats from your fraud surface.

Apply 3-D Secure dynamically, rather than for every transaction. Use it for high-risk orders, such as unusually large purchases or transactions from new customers in high-risk regions. Forcing it on every customer can add friction and lead to abandoned carts.

Consider customizing your Address Verification System (AVS) settings to allow partial matches. For example, instead of requiring a perfect match on both the street address and ZIP code, consider accepting transactions from trusted customers that match the street address, but with a one-digit mismatch on the ZIP code. This can prevent declines caused by minor typos or formatting differences.

If you primarily engage in B2B transactions, try to pass on as much transaction data as possible, including Level 2 and Level 3 card data like invoice numbers and line-item details. This enhanced data provides more security for issuers, who may in turn reward you with lower interchange rates.

Settle your authorized transactions in a single batch each day. Closing batches more frequently can sometimes incur extra fees, while waiting too long can lead to authorizations expiring. Check with your provider for their recommended best practice for settlement timing to minimize costs.

A downgrade occurs when a transaction fails to meet the requirements for a specific interchange category and gets processed at a more expensive rate. This is often caused by settling authorizations too late or failing to pass required data fields. Monitor your processing statements for downgrades and work with your provider to fix the root cause.

Common Payment Gateway Problems & How to Fix Them

Even with the right payment gateway provider, you can face technical and operational issues. Here’s a look at common problems and how to troubleshoot them.

High decline rates often stem from fraud filters that are too restrictive or a mismatch between your business and the issuing bank’s risk tolerance.

How to fix: Analyze your decline codes to see if the issue is with fraud rules, customer data entry, or issuing banks, and then adjust accordingly.

Integration errors can cause a variety of data issues, from orders that fail to appear in your system to incorrect sales tax calculations. These often result from API misconfigurations or outdated plugins.

How to fix: Use a sandbox environment to conduct end-to-end testing before going live, and ensure your development team follows your gateway provider’s integration documentation precisely.

Slow processing — where the checkout page hangs for several seconds before confirming a payment — can be caused by server latency, complex fraud checks, or network issues between the gateway and processors.

How to fix: Work with your gateway’s technical support team to address configuration or plugin issues, determine whether you have adequate hardware, and audit your caching and load balancing practices.

Subscription-based businesses often see payment failures when a customer’s stored card expires or is replaced.

How to fix: In addition to using a card updater service, automatically email customers before their card expires and implement smart dunning strategies that orchestrate retry attempts at different times of the day.

Selling internationally can lead to problems with currency conversions or declines from foreign banks that are wary of cross-border fraud.

How to fix: Use a gateway that supports multi-currency processing and local acquirers to settle transactions in your customer’s native currency, which can significantly improve success rates.

Allowing customers to easily update their payment information in a self-service portal is important, but it can also be a security challenge.

How to fix: Use your payment gateway’s tokenization services to ensure that sensitive card data is never stored on your servers.

Managing Your Payment Gateway Relationship

Your payment gateway is one of the key components of your tech stack. Your relationship with your gateway vendor can make or break your business.

Proactively managing this relationship helps you resolve issues faster, negotiate better rates, and gain access to new features that can help you grow. I suggest that you:

Track your gateway performance daily by monitoring your approval rate, decline rate, and any fraud or error codes. On a monthly basis, review your processing statements for fee accuracy and transaction downgrades. Annually, review your overall costs against your transaction volume to determine if you have enough leverage to negotiate better rates.

Stay informed about evolving compliance mandates like PCI-DSS and 3-D Secure. Your gateway provider should offer resources and support to help you meet these requirements, but ultimately, the responsibility is yours. Regularly check your provider’s documentation and establish dialogue about upcoming changes that may affect your business.

Use your provider’s emergency support hotline immediately for urgent issues like a widespread outage. For non-urgent issues, like questions about a specific transaction or a feature, submit a detailed support ticket through the provider’s portal. To get the best results, provide as much information as possible — including specific transaction IDs, timestamps, and error messages — so your gateway vendor’s support team can diagnose the problem without unnecessary back and forth.

As your business grows, you can use your transaction volume to your advantage. Schedule a quarterly or annual review with your point of contact and come prepared with data on your volume growth, your chargeback ratio, and average ticket size. Frame your request for lower rates as a reflection of your low risk profile and your value as a long-term partner.

Express interest in participating in beta programs for new features or alternative payment methods like buy now pay later (BNPL). Getting early access allows you to stay ahead of competitors and provide more options to your customers.

Treat your assigned account manager as a strategic partner, rather than just a contact person for problems. Schedule brief quarterly check-ins to discuss your business goals, upcoming marketing campaigns, and international expansion plans. A manager who understands your business is more likely to advocate for you internally and bring you proactive solutions.

Keep meticulous records of all communications with your provider, including support tickets, rate agreements, and any custom rule changes made to your account. This documentation can help you hold your provider accountable, troubleshoot recurring issues, and ensure a smooth transition if you ever decide to migrate to a new gateway.

Even if you’re satisfied with your provider, you should have a basic plan for a potential migration. This involves ensuring your customer payment data is stored as portable tokens with the provider so you can transfer them to a new gateway if needed. Without token portability, switching gateways can mean asking every customer to re-enter their payment information, a massive undertaking that is likely to cause customer churn.

Payment Gateways: One Small Step in the Payment Process

Payment gateways play a vital role in the payment process, particularly for eCommerce. This software helps merchants streamline their operations and – more importantly – protect cardholder information in transit. Because each transaction is reviewed prior to authorization, gateways also have a role in preventing card fraud.

Pre-transaction fraud screening may not significantly impact customer disputes and chargebacks, though. Many disputes are the result of first-party fraud, which happens after the fact. True fraud prevention and risk mitigation requires a more comprehensive approach. 

To learn about chargeback management help that goes beyond the minimal assistance offered through PayPal and other processors, talk to Chargebacks911® about a free chargeback analysis today.