Payment Gateway

What is a Payment Gateway?

A payment gateway is software that authorizes and processes online payments by securely transmitting transaction data between a merchant's website, the customer's bank, and the merchant's bank. When a customer enters payment information on a website, the payment gateway encrypts that data and routes it through the card networks to verify funds are available and complete the transaction.

Payment gateways handle credit cards, debit cards, digital wallets, and bank transfers while maintaining PCI DSS compliance standards that protect sensitive financial data.

How Payment Gateways Work

The payment authorization flow involves multiple parties:

Transaction participants:

1. Customer initiates payment at checkout

2. Payment gateway encrypts and transmits data

3. Acquiring bank (merchant's bank) receives the request

4. Card network (Visa, Mastercard, etc.) routes to issuing bank

5. Issuing bank (customer's bank) approves or declines

6. Response travels back through the same chain

7. Gateway updates merchant system and customer sees result

The gateway's core functions are encryption, data transmission, and response handling. Tokenization replaces actual card numbers with secure tokens, so merchants never store raw payment data on their servers.

Types of Payment Gateway Integration

Hosted Payment Pages

The gateway redirects customers to a separate secure page to enter payment information. PayPal Checkout and Stripe Checkout use this model.

This approach minimizes PCI compliance requirements since payment data never touches your servers. The tradeoff is less control over the checkout design and user experience.

Server-to-Server Integration

Your server communicates directly with the gateway's API. The payment form remains on your site, but card data is immediately transmitted to the gateway without being stored.

This requires more stringent PCI compliance but allows complete customization of the checkout flow. You'll need development resources to implement and maintain the integration.

Client-Side Integration

JavaScript libraries collect payment data in the browser and send it directly to the gateway, bypassing your server entirely. Stripe Elements follows this pattern.

This balances security with user experience. Your site maintains design control while the gateway handles sensitive data transmission.

Why Payment Gateways Matter for Billing Systems

Security and Compliance

Payment gateways maintain PCI DSS certification, which requires extensive security controls around cardholder data. By using a certified gateway, you avoid building and auditing these controls yourself.

Key security mechanisms include:

• TLS encryption for data in transit

• Tokenization to avoid storing card numbers

• Address Verification Service (AVS) to confirm billing addresses

• Card Verification Value (CVV) checks

• 3D Secure authentication for supported cards

Subscription and Recurring Billing

Gateways designed for recurring revenue store payment tokens and process scheduled charges. This enables subscription billing without repeatedly collecting customer card information.

Many gateways include retry logic for failed payments, automatically attempting to charge a card again after initial decline. Some integrate with card account updater services that automatically receive updated card numbers when customers' cards are replaced or renewed.

Multi-Currency and International Payments

Gateways that support multiple currencies can present prices and charge cards in a customer's local currency. The gateway or acquiring bank handles currency conversion.

Regional payment methods matter for international expansion. European customers often prefer SEPA direct debit, while ACH bank transfers are common for B2B transactions in the United States.

Selecting a Payment Gateway

Cost Structure

Payment gateway fees typically include:

• Percentage of transaction amount (often 2-3% for card payments)

• Fixed fee per transaction (commonly $0.20-$0.30)

• Monthly account fees

• Chargeback fees

• Currency conversion markup

• Fees for specific payment methods

The pricing model varies. Some gateways use interchange-plus pricing where you pay the actual card network costs plus a fixed markup. Others use blended or tiered pricing with flat rates that differ by card type.

Transaction volume usually determines rates. Higher volume merchants can often negotiate lower fees.

Technical Capabilities

Integration complexity depends on your development resources. Hosted pages require minimal technical work but offer less customization. Direct API integration provides maximum flexibility but requires more engineering time.

Consider the gateway's API documentation quality, availability of SDKs in your programming language, and webhook support for asynchronous event handling.

Business Model Fit

Different business models have distinct gateway requirements:

B2B SaaS companies often need ACH/wire transfer support, invoice generation, and the ability to handle custom payment terms rather than immediate card charges.

Consumer subscription services benefit from strong retry logic for failed payments, support for digital wallets, and automatic card updater services to reduce involuntary churn.

Marketplaces require split payment functionality to route funds between the platform and multiple sellers, along with escrow capabilities for certain transaction types.

Geographic Coverage

If you operate globally, verify the gateway supports your target markets. Some gateways have strong banking relationships in specific regions but limited presence elsewhere.

Processing payments locally (with a domestic acquiring bank) typically results in higher authorization rates than routing international transactions.

Common Implementation Considerations

Webhook Event Handling

Payment gateways send webhook notifications when payment status changes. These asynchronous events signal successful payments, failures, disputes, and refunds.

Implement webhook endpoints on your server to receive these notifications. Payment status should be updated based on webhooks, not solely on the synchronous API response, since some payment methods complete asynchronously.

Error Messages

Generic "payment failed" messages don't help customers resolve issues. Payment gateways provide specific decline codes indicating why a payment failed. Translate these into actionable customer-facing messages when possible.

Testing

Use sandbox environments to test integration before processing real payments. All major gateways provide test credentials and test card numbers that simulate different scenarios like successful charges, insufficient funds, and fraud detection.

Idempotency

Network issues can cause the same payment request to be sent multiple times. Implement idempotency keys so duplicate requests don't result in duplicate charges.

Payment Gateway vs Payment Processor

These terms are sometimes used interchangeably but technically describe different functions:

A payment gateway handles data transmission and encryption between parties.

A payment processor (or acquiring processor) has the banking relationship and actually moves funds from the customer's account to the merchant account.

Many companies like Stripe and Braintree function as both gateway and processor. When using a dedicated gateway, you typically also need a separate merchant account with an acquiring bank or payment processor.

Integration with Billing Systems

Billing platforms like Meteroid integrate with payment gateways to automate the full quote-to-cash cycle. The billing system manages subscriptions, calculates charges, and determines when to bill, while the gateway handles the actual payment processing.

This separation allows billing logic to remain independent of payment infrastructure. You can switch payment providers without rebuilding subscription management, invoicing, and revenue recognition systems.