What Is a Payment Gateway?

A payment gateway is a technology used by merchants to accept debit or credit card purchases from customers. The term includes not only the physical card-reading devices found in brick-and-mortar retail stores but also the payment processing portals found in online stores. However, brick-and-mortar payment gateways in recent years have begun accepting phone-based payments using Near Field Communication (NFC) technology.

Key Takeaways

  • Payment gateways are the consumer-facing interfaces used to collect payments.
  • In physical stores, payment gateways consist of the point of sale (POS) terminals used to accept payments by card or by phone.
  • In online stores, payment gateways are the “checkout” portals used to enter credit card information or credentials for services such as PayPal.

How Payment Gateways Work

The payment gateway is a key component of the electronic payment processing system, as it is the front-end technology responsible for sending customer information to the merchant acquiring bank, where the transaction is then processed.

Payment gateway technologies are always evolving to reflect new consumer tastes and technical capacities. In the past, terminals would accept credit cards using magnetic strips, which would require paper signatures from the customer. With the development of chip technologies, the signature phase could be removed in favor of a personal identification number (PIN) entered directly into the payment gateway. Today, contactless purchases are also available, with many customers now using their phones as a payment device instead of plastic credit cards.

Of course, the architecture of a payment gateway will differ depending on whether it is an in-store gateway or an online payment portal. Online payment gateways will require application programming interfaces (APIs) that allow the website in question to communicate with the underlying payment processing network. In-store payment gateways will utilize a POS terminal that connects to the payment processing network electronically using either a phone line or an Internet connection.

Example of a Payment Gateway

Merchants can gain access to payment gateway systems through merchant acquiring bank partnerships, or else they can select their own payment gateway system. Large banks such as Bank of America (BAC) and JPMorgan Chase (JPM) have sophisticated payment gateway systems that they offer to customers along with their own merchant acquiring bank services. Ultimately, merchants can choose a variety of payment gateway technologies as long as they are compatible with the merchant acquiring bank that is being used for payment processing.

One recent example of a payment gateway is Square (SQ), which emphasizes flexible mobile payments for retail businesses. The company’s Square Reader technology allows customers to easily accept payments at ad-hoc locations such as conventions or farmer’s markets, or through roaming storefronts such as food trucks. 

With the Square Reader payment gateway technology, a merchant can attach a small piece of hardware to their mobile phone which allows the customer to swipe their payment card for processing through the mobile phone’s electronic connection. The Square Reader sends the payment information to a merchant’s acquiring bank which then processes the information for the merchant momentarily.

It is likely that new products will continue to increase the versatility and speed of payment gateways in the years ahead, as technology and consumer habits continue to evolve.