Payment gateways: What are they and how do they work?

Key takeaways

• A payment gateway is the technology that collects and encrypts your customer's payment details at checkout, then passes them to the payment processor and financial institutions to complete the transaction.

• Payment gateways come in three main types (self-hosted, redirect, and API-integrated), and the right choice depends on your technical setup, PCI compliance appetite, and how much control you want over the checkout experience.

• Airwallex acts as a gateway, processor, and acquirer in one platform, letting you accept 160+ payment methods in 130+ currencies with competitive FX rates and like-for-like settlement.

A payment gateway is the technology that lets your business accept payments online. It's the digital version of a card terminal in a physical shop: the place where your customer enters their payment details and those details get securely passed along to complete the transaction.

Digital payments are going through a surge in growth, with mobile wallets, payment apps, and the increasing speed of digital payments speeding up adoption, particularly among younger generations. The total transaction value of digital payments is expected to grow by almost 10% annually between 2024 and 2028, with a projected total of US$16.62 trillion by 2028. In this guide, we'll cover how gateways work, the different types available, how to choose the right one for your business, and how Airwallex can help.

How does a payment gateway work?

The payment gateway is the first thing your customer deals with when they check out. It's where they enter their card number, expiry date, and CVV, or tap a button to pay with Apple Pay or Google Pay. From there, the gateway starts a chain of events that happens in seconds.

You can think of the gateway as the rails that carry payment information between you and your customer's bank, and then back again. It doesn't move the money itself, but nothing moves without it.

Step-by-step transaction flow

Say a customer in London buys a pair of trainers from your online store. Here's what happens behind the scenes:

• Customer enters payment details: Your customer fills in their card information (or selects a saved payment method) on your checkout page. The gateway captures this data.

• Gateway encrypts the data: The payment gateway scrambles the sensitive information so it can't be read if intercepted. That encrypted data is then sent to the payment processor.

• Processor contacts the card network: The payment processor sends the transaction details to the relevant card network (Visa, Mastercard, Amex, etc.), which routes it to the customer's issuing bank.

• Issuing bank approves or declines: The customer's bank checks whether they have enough funds and whether the transaction looks legitimate. It sends back an approval or decline.

• Response travels back through the chain: The card network passes the response to the processor, which sends it to the gateway.

• Customer and merchant get notified: The gateway shows the result to your customer. If approved, you fulfil the order. If declined, the customer can try another payment method.

Key functions of a payment gateway

Beyond moving payment data from A to B, a gateway also handles:

• Encryption: The gateway encrypts customer data before it leaves your checkout page. This stops anyone from intercepting readable information in transit and helps keep you compliant with Payment Card Industry (PCI) standards.

• Tokenization: When a customer's details are entered, they're replaced by a string of meaningless symbols, known as a token. This token can be stored for future transactions, whilst the actual card details sit in a secure vault, only unlocked by financial institutions when needed.

• Fraud prevention: Fraud-detection algorithms, address verification systems (AVS), and card verification value (CVV) checks help work out whether a transaction looks suspicious before it's processed.

• Data collection: Gateways can track transaction patterns, chargeback rates, and decline reasons, giving you insights that help you spot problems and improve your checkout over time.

Payment gateway vs payment processor: What's the difference?

This part gets confusing because many companies bundle these services together. But they're different roles in the payment chain.

The payment gateway is the checkout counter where your customer taps their card. It collects, encrypts, and sends their payment information. The payment processor is the back office that moves the money. It takes that encrypted data and communicates with the card networks and banks to approve and settle the transaction.

"Payment provider" or "payment service provider (PSP)" is an umbrella term for any company offering payment services. More and more, providers bundle gateway, processor, and acquirer functions together, which can mean cost savings and simpler operations for merchants. Airwallex, for example, acts as a gateway, processor, and acquirer, so you can collect, process, and settle payments through a single platform.

Now that you know who the players are, let's look at the different ways a payment gateway can be set up.

Types of payment gateways

There are three main types of payment gateway, and the right one depends on your business setup.

Self-hosted payment gateway

Also known as "on-site," this type of payment gateway is hosted on your own servers. The customer enters their payment details on a page within your website, and that information is sent from there to the payment service provider (PSP) to approve the payment.

The benefits of self-hosted gateways include a smoother customer journey. Customers don't have to click through to a separate checkout page that may look and feel different from the rest of your site. By removing friction, this can help drive higher conversion rates and lower cart abandonment. You also get more control over the design and flow of the checkout experience.

The downside is that you take on more responsibility for PCI compliance, since customers' payment information passes through your own servers. You'll likely need more technical expertise and resources to set up and maintain the gateway. This setup tends to suit larger businesses with dedicated dev teams and compliance resources.

Redirect payment gateway

Also known as "hosted," a redirect payment gateway takes customers away from your website to a page hosted on the payment service provider's server to fill out their payment details.

This is simpler for you as the merchant. You don't need to worry about processing the payment, preventing fraud, keeping card details secure, or maintaining PCI compliance, because the gateway provider handles all of that. But it adds an extra step for the customer, which creates friction in the user journey. You also have less control over the design of the hosted page.

This approach suits small businesses without dedicated tech teams that want to get up and running quickly.

API-integrated payment gateway

Payment gateways can be integrated into your website using a payment API (application programming interface).

This lets you keep control of the design and user flow, whilst data is securely sent to the relevant financial institutions to complete the transaction. You get the customisation benefits of self-hosted without the full PCI burden, since sensitive data goes directly to the provider's servers through the API.

Airwallex lets merchants take full control of their checkout experience without building a payment gateway from scratch. You can implement an API in the back end or accept payments in an iOS or Android app using mobile SDKs (software development kits). That flexibility makes API integration a good fit for businesses that want customisation but don't have the resources to manage everything in-house.

Those are the structural options. So what do you gain, and what should you watch out for, when you use a payment gateway?

Benefits and trade-offs of using a payment gateway

Payment gateways open up a lot for online businesses, but they also come with a few things worth understanding upfront.

Benefits

• Your customers can pay the way they prefer: With a payment gateway, you can offer local payment options and multiple currencies. This removes obstacles to conversion, so a customer in the Netherlands can pay with iDEAL, whilst someone in China uses WeChat Pay. Fewer barriers mean more completed purchases.

• Transactions process automatically and scale with you: Gateways automate authorisation and settlement, so you're not manually approving every order. As your transaction volumes grow, the system handles the load without you needing to add headcount.

• You get data to improve your checkout: Many gateways provide reporting and analytics on transaction patterns, decline reasons, and chargeback rates. These insights help you spot where customers drop off and make data-informed decisions to boost revenue.

• You can sell globally without setting up everywhere: A gateway with multi-currency support lets you accept payments from customers around the world. Combined providers that also act as acquirers can let you hold funds in multiple currencies, avoiding unnecessary FX fees when you're collecting and paying out in the same currency.

Trade-offs to watch for

• High fees that eat into your margin: Transaction fees vary depending on payment method, volume, and geography. Chargeback fees can add up too, particularly for businesses with high transaction volumes or low-value orders. Look for a provider with a fee structure that matches your transaction profile.

• Integrations can take up your team's time: Setting up a secure payment gateway, especially one that integrates with your eCommerce platform, accounting software, and other tools, can require technical expertise and coordination. Ongoing maintenance and updates are part of the deal too. Ask potential providers about their integration support before committing.

• Security and compliance rules shift often: Payment gateways must meet industry standards like the Payment Card Industry Data Security Standard (PCI DSS). Regulations evolve, and you need a provider that stays current, wherever you or your customers are based.

• You're dependent on your provider's reliability: Your checkout is critical to your business. If your gateway provider has downtime, you can't take payments. Choose a provider with a strong uptime track record and responsive support.

Understanding these trade-offs helps you ask the right questions when you're comparing providers. So here's how to approach that decision.

How to choose a payment gateway

Choosing a gateway is a bit like choosing a courier service. You need to think about where you're shipping, how often, and what level of tracking and control you need. Here are the key criteria to evaluate.

For a deeper comparison of specific providers, see our guide to the top payment gateway providers and services.

Multi-currency and local payment method support

If you're selling to customers in other countries, they should be able to check out just as easily as local ones. That means pricing in their currency and accepting the payment methods they use.

WeChat Pay and Alipay are widespread in China. iDEAL is the preferred method in the Netherlands. A gateway that only accepts Visa and Mastercard will leave money on the table. Look for providers offering a wide range of local payment methods. Airwallex, for example, accepts 160+ payment methods in 130+ currencies.

Combined providers that also act as acquirers can let you hold funds in multiple currencies. This helps you avoid FX fees when you're collecting in euros and paying European suppliers in euros.

Pricing and fee structures

Gateway costs usually include some combination of:

• Setup fees

• Flat monthly or annual fees

• Transaction fees: a percentage, a flat amount, or both for each transaction processed

• Additional fees for chargebacks, currency conversions, or other administrative operations

Match the fee structure to your transaction volume. If you're processing relatively few transactions, look for lower monthly fees and setup costs, because transaction fees will add up to less than they would for a high-volume business. If you process 500 transactions a month at an average of £30, a 0.5% difference in transaction fees saves you £75 monthly.

Recurring billing and subscription management

If you run a subscription model, look for a gateway that handles automated billing, trial management, and plan changes through API. You'll also need to store customer payment details securely for repeat charges.

Make sure your provider uses tokenization to protect this sensitive information. The customer's actual card details stay in a secure vault, whilst a token is stored for future transactions, keeping you compliant without compromising convenience.

Why choose Airwallex as your payment gateway

If you're selling across borders, you need a gateway built for global commerce. Airwallex acts as a gateway, processor, and acquirer in one platform, so you can collect, convert, and settle payments without juggling multiple providers.

Accept payments globally with 160+ payment methods

Conversions improve when customers can pay the way they prefer, in their own currency. Airwallex accepts payments via 160+ payment methods in 130+ currencies and 180+ countries. Beyond the major card networks, Visa, Mastercard, American Express, you get regional methods like GoPay, GrabPay, E.SUN, WeChat Pay, and Alipay.

Wine Kin, a Singaporean fine wine retailer, uses our payment gateway integrated with their WooCommerce site. They accept credit cards alongside WeChat and Alipay, and can send Payment Links for customers who prefer that option. The result is that they can serve customers across regions without payment friction getting in the way.

Our machine-learning-powered 3D Secure (3DS) optimisation engine also helps improve acceptance rates through merchant category code assignment, automatic retries, and ISO message optimisations.

Save on FX with like-for-like settlement

Like-for-like settlement means you collect in a currency, hold it, and pay out in that same currency, with no forced conversion. If you're collecting €10,000 a month from European customers and paying European suppliers, you avoid conversion fees in both directions.

Airwallex lets you collect and store funds in a multi-currency account, which removes unnecessary conversion fees. You don't need to set up multiple entities or deal with hidden FX markups.

Reduce fraud and chargebacks

Built-in fraud detection automatically identifies suspicious transactions, so you can decline them before they become chargebacks. Dispute management tools help you respond quickly when issues do come up, reducing the time and cost of resolution.

Integrate your way

You can integrate an Airwallex payment gateway into your online store regardless of your team's size or technical expertise:

• Plug-and-play integrations: Connect to Shopify, WooCommerce, and other popular platforms without writing code

• Airwallex-hosted page: Let Airwallex handle the entire payments journey

• API integration: Build directly via our API for full control over the checkout experience

• Mobile SDKs: Accept payments in your iOS or Android app

Network tokenization keeps saved payment details secure whilst improving card acceptance rates and reducing processing costs. And with built-in Expense Management at no additional fee, you can manage more of your financial operations in one place.

Want to compare more providers? See our guide to the top payment gateway providers and services.

Frequently Asked Questions (FAQs)

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

A payment gateway collects and encrypts your customer's payment details. A payment processor takes that data and communicates with the banks and card networks to move the money. Many providers now bundle both services together, so you may be working with a single company that handles the entire flow.

Do I need a payment gateway?

Yes, if you accept payments online, you need a payment gateway. It's the technology that securely captures your customer's payment information and passes it to the financial institutions that process the transaction. If you use a platform like Shopify, a gateway may be included, but you can often integrate a different one if it better suits your needs.

Is PayPal a payment gateway?

PayPal works as both a payment gateway and a payment processor, bundling multiple services into one. Standalone gateways usually give you more control over the checkout experience and may offer more competitive pricing for certain transaction profiles.

Is Google Pay a payment gateway?

No, Google Pay is a digital wallet, a payment method, not a payment gateway. It's one of the ways a customer can pay through your gateway, alongside credit cards, Apple Pay, and other options.

How much does a payment gateway cost?

Costs vary but usually include a mix of setup fees, monthly fees, and per-transaction fees (a percentage, a flat amount, or both). Some providers also charge for chargebacks and currency conversions. The right fee structure depends on your transaction volume and average order value.