In today’s digital world, online payments have become interwoven into the fabric of our lives, transforming the way we engage with products and services. The payment process must be user-friendly and secure, ensuring customer confidence and comfort during transactions, and prioritising a seamless experience.
Different types of payment gateways support online transactions. So, which payment gateway should you opt for? We will answer this question and more in this blog.
Table of Contents
What is a Payment Gateway?
A payment gateway serves as a secure online technology that connects your customers’ electronic payment methods to your bank, ensuring smooth and secure transactions.
Payment gateways ensure secure digital transactions, prompt payments, and reduced cash-on-delivery costs for merchants. They also offer data collection, analysis, and actionable insights for smarter marketing strategies and SKU management.
Read in Detail: What is a Payment Gateway and How it Works?
4 Different Types of Payment Gateway
As you consider to opt for the best payment gateway for your website or app, think about your business needs and infrastructure.
The main difference between the four types of payment gateway is how you integrate them to your website. Some may require continuous maintenance and technical support, while some may offer support from the host right away.
The four different types of payment gateway are:
Hosted Payment Gateway
API-hosted Payment Gateway
Self hosted Payment Gateway
Local bank integration Payment Gateway
1. Hosted payment gateway
A hosted payment gateway is a payment processing solution where a third-party service provider hosts the payment system for your businesses, post which you integrate the payment system onto your websites or mobile application.
When the customer is prepared to make a purchase, they simply click on a ‘buy now’ link, which then leads them to the host or payment service provider (PSP) page.
How Hosted Payment Gateway Works
When a customer initiates a payment, the hosted payment gateway processes the transaction securely on its servers, handling the payment details, and then sends the transaction status back to the business’s website or app.
Key Components
The hosted payment gateway comprises the merchant’s website or app, the hosted payment gateway service, and the payment processor. The payment gateway service provider handles the security and processing aspects.
When to Use Hosted Payment Gateway
In an online store with a hosted payment gateway, customer transactions are securely processed on the gateway’s servers, guaranteeing data security and compliance. This offloads payment security and compliance duties from the business, ensuring seamless transactions and prompt payments.
Pros:
- Hosted payment gateways, usually PCI DSS compliant, provide businesses with a secure, user-friendly solution for accepting payments and simplifying compliance and development efforts.
- Integrating a hosted payment gateway is often straightforward. You typically need to embed a code or use a plugin/module for your e-commerce platform, and you are ready to accept payments.
- Hosted payment gateways are maintained by dedicated service providers, ensuring high uptime and reliability. This means fewer instances of downtime or technical issues affecting your payment processing.
Cons:
- The redirection of customers to a payments gateway page might impact the overall customer experience.
- Businesses get limited branding opportunities on the final payments page hosted by the payment gateway.
2. API-hosted payment gateway
An API-hosted payment gateway is a payment gateway that processes payments through an Application Program Interface (API), thereby enabling customers to stay on the merchant’s website throughout the checkout experience.
API hosted payment gateway offers a fully customisable checkout experience and can be integrated into a variety of systems, including mobile. As a merchant, you are in complete control of the website design, and are responsible for the end-to-end security of transactions.
To ensure security, you must invest in resources like SSL certification to secure sensitive data and ensure compliance with stringent security standards like PCI DSS.
A good example of an API-hosted payment gateway is Razorpay. It has platform-specific features like customization and ease of diverse integration needs for websites, mobile apps, CMS-based plug-ins, industry-specific features for startups, small businesses, e-commerce, and a host of other features. This effectively leads to Checkout Process Optimization as the API payment gateway streamlines the checkout experience effectively and enables customers to effortlessly complete their purchases.
How API-hosted payment gateway works?
When a customer initiates a payment, the API-hosted payment gateway processes the transaction by securely transmitting payment data to the payment processor and then back to the website or app to confirm the transaction’s status.
Key Components
The API-hosted payment gateway consists of three main components: the merchant’s website or app, the payment gateway provider’s API, and the payment processor. The API acts as a bridge between the website/app and the payment processing infrastructure.
When to Use API-hosted payment gateway?
Imagine an e-commerce website that integrates an API-hosted payment gateway. When a customer makes a purchase, the API securely transmits the payment details to the payment processor, authorises the payment, and returns the result to the website. Customers complete purchases, and businesses receive prompt payments, ensuring data security and PCI DSS compliance in this seamless process.
Pros:
- Both the payment details and processing are handled on the merchant’s website.
- Customers get a seamless payment experience as they don’t have to leave the merchant’s website to complete the transaction.
- With API integration, businesses can scale their payment processing as their operations grow, without significant disruptions or changes to their checkout flow.
- These gateways often support a wide range of currencies and payment methods, enabling businesses to cater to a global customer base.
Related Read: What are Different Types of Payment Methods?
Cons:
- API integration between the merchant and payment gateway necessitates a certain level of technical expertise in areas such as programming, web development, and data security.
- Merchants must invest in resources to secure sensitive data adequately, ensuring compliance with stringent security standards. This added responsibility can pose challenges for businesses aiming to maintain robust payment security.
3. Self-hosted payment gateway
A self-hosted payment gateway is a solution that empowers businesses to effectively and securely maintain full control over the entire payment process. With the self-hosted approach, merchants manage and execute payment transactions directly within their infrastructure, ensuring a secure, customized and accountable payment journey.
Self hosted payment gateways allow businesses to tailor and control the entire checkout process according to their specific requirements which may include branding and user experience goals. In a self-hosted setup, the ownership and custody of payment information, such as credit card details or digital wallet data, remain firmly within the merchant’s purview. This minimizes reliance on third-party providers and strengthens data ownership and security.
How Self hosted payment gateway works?
When a customer initiates a payment, the self-hosted payment gateway processes the transaction within the business’s environment, from collecting payment details to transmitting them to the payment processor.
Key Components
Self-hosted payment gateway involves the merchant’s website or app, a self-hosted payment gateway software, and a connection to the payment processor. The business takes responsibility for securing the payment data.
When to Use Self-Hosted Payment Gateway?
A large enterprise, prioritising security and compliance, chooses a self-hosted payment gateway. They maintain control over payment data, minimising data exposure risk. This approach, while demanding more security responsibility, aligns with their stringent security policies and compliance requirements.
Pros:
- Businesses have control over consumer and transaction data.
- Self-hosted gateways offer customisation, aligning the payment platform precisely with a company’s requirements.
- They provide businesses with potential cost savings.
Cons:
- Self-hosted payment gateways require more technical expertise and effort to set up and maintain, making them less user-friendly for merchants without extensive IT knowledge.
- Merchants are responsible for ensuring the security of customer payment data, which can be a significant burden in terms of compliance and data protection.
- Self-hosted gateways may involve higher initial costs for infrastructure and ongoing maintenance expenses, potentially outweighing the benefits for smaller businesses.
4. Local Bank integration gateway
Local bank integration gateway is a payment processing solution that enables businesses to integrate with local banks to facilitate online payments, ensuring seamless and region-specific transaction processing. This primarily serves as an entry-level solution with limited features, often lacking capabilities for returns or recurring payments.
How Local Bank Integration Gateway Works?
When a customer initiates a payment, the local bank integration gateway facilitates the transaction by routing payment data to the respective local bank, which processes the payment and returns the result to the business.
Key Components
The local bank integration gateway involves the business’s website or app, the local bank integration gateway software, and connections to local banks. This setup ensures that customers can make payments using local payment methods.
When to Use Local Bank Integration Gateway?
Imagine an e-commerce platform operating in multiple countries. To enhance user experience and trust, they integrate a local bank integration gateway for each region they serve. Utilising a local bank for payment processing in a customer’s country can enhance satisfaction and transaction success.
Pros:
- Seems more trustworthy as the local bank integration gateway caters to the preferences of customers in specific regions by offering payment options they are familiar with.
- Lesser transaction fees for merchants, while a local bank integration gateway increases conversion rates for businesses operating in various locales.
Cons:
- Requires high technical skills to integrate banks’ APIs.
- Merchants can only provide limited payment options to customers.
Differences between the four payment gateways
All four types of payment gateways are unique in their ways. So, let’s understand their differences properly based on parameters like flexibility, ease of integration, costs, security and reconciliation:
Hosted payment gateway | API-hosted payment gateway | Self-hosted payment gateway | Local bank integration gateway | |
Flexibility of accepting payments | Limited payment options and customisation | Most payment options and customisable payment modes. | Highly flexible with many payment options | Limited to certain banks |
Ease of integration | Easiest to integrate | Slight technical skills | Highly complex | Complexity depends on banks’ APIs |
Speed | Swift integration and payment collection | Can offer the fastest processing, depending on the merchant’s website | Depends on the merchant’s servers, which could be on the slower side | The bank’s responsiveness determines speed. Could be the slowest of all. |
Costs | Low setup, ongoing commissions, affordable start | Generally no set-up or integration costs, and lower commissions | High setup, maintenance, customisation investment | High costs due to multiple APIs |
Security and Compliance | Provider ensures protocols and security methods such as PCI DSS, SSL, etc | High security, compliance with gateway service | Merchant security, compliance challenges potential | Secure pages, bank-wise compliance complexities |
Success rates | Reliable | Highest | Moderate | Varies from bank to bank |
Customer service | Generally good support, but limited branding | Variable support | Variable | Variable |
Easy reconciliation | Simplified process, but limited access to detailed transaction data | Access to transaction data, but requires data handling, responsibly and securely | Extensive data access and complex reconciliation | Local data access, but complex reconciliation |
Considerations for Choosing the Right Payment Gateway
Here are a few factors that merchants must consider before choosing the right payment gateway:
Ease of integration:
One of the foremost considerations when selecting a payment gateway is the ease of integration. The chosen gateway should seamlessly integrate with your website or mobile app. Look for gateways that offer well-documented APIs and plugins for popular e-commerce platforms. A straightforward integration process can save time and resources for your development team.
Types of payment cards and methods:
Payment cards come in various types, including credit, debit, and prepaid. Each serves a unique purpose, offering diverse benefits and limitations. When selecting a payment gateway, compatibility with these card types is crucial. Consider factors like transaction fees, security measures, and integration capabilities to ensure seamless and secure transactions for your business and customers.
Brand trust:
Brand trust is paramount in the world of online payments. Customers need to feel secure when providing their financial information. Opting for a reputable payment gateway with a strong track record, such as Razorpay, can boost the confidence of your customers. Established brands have a proven history of security and reliability, which can lead to increased trust and conversions.
Pricing:
Payment gateway pricing structures can vary significantly. Evaluate the fees associated with each transaction, including setup fees, monthly fees, and per-transaction charges. Consider your business’s transaction volume and average transaction value when assessing pricing to ensure the payment gateway aligns with your budget and revenue expectations. Be aware of any hidden fees that might impact your overall costs.
Availability of documentation:
The availability of comprehensive documentation is vital for a smooth integration process. Look for a payment gateway that provides well-documented APIs, SDKs, and developer resources. A robust knowledge base and responsive developer support can save your team valuable time when troubleshooting issues or customizing payment flows.
Seamless onboarding and customer experience:
A seamless onboarding process for your business and your customers is essential. The payment gateway should offer a straightforward account setup process, enabling you to start processing payments quickly. The payment process should be user-friendly, secure, and confidence-inspiring for customers.
Tip: Read our detailed guide on Factors to Consider While Choose a Payment Gateway
Other factors:
- Merchants should also consider facts like the global availability of a payment gateway service provider if they want to sell their products or services globally.
- Businesses could check a platform’s mobile performance for completing native or off-page transactions since worldwide most buyers use the internet on their smartphones.
- Another factor to look out for before selecting a payment gateway service provider is its fraud protection mechanism.
Key Takeaways
There is no doubt that payment gateways have become the backbone of the digital economy. However, since there are different types of payment gateways, it is important to know the ins and outs of each one of them before a merchant makes the final decision to tie the knot with the best gateway suited for their website and app.
While this journey might appear overwhelming, it’s a gateway to elevated success and competitiveness in today’s digital age. For those considering a robust and user-friendly solution, integrating Razorpay can be a strategic choice.
Frequently asked questions (FAQs)
How many types of payment gateway exist?
There are four types of payment gateways: hosted payment gateway, API-hosted payment gateway, self-hosted payment gateway, and local bank integration gateway.
Which payment gateway is most popular?
Hosted payment gateway and API-hosted payment gateway are the most commonly used payment gateways across the world as they offer merchants enough resources to focus on their growth, rather than handling payments. They are also affordable and secure, ensuring a pleasant experience for customers.
What are the advantages and disadvantages of a payment gateway?
A payment gateway offers numerous advantages to businesses, including an option to accept payments digitally, widen their customer reach, improve customer convenience, and expand business globally.
On the other hand, payment gateway service could appear as an additional cost, as some payment gateways require technical expertise in integration, management and maintenance.
How do I choose a payment gateway?
Before selecting a payment gateway, you should consider several factors. For one, you should see how easy it is to integrate their services into your website or app. Further, aspects such as credibility, affordability and availability of documentation should also come into play before you make the final call.
