What is a payment gateway and how does the process work?

When you’re running a small business, you need a reliable way to take payments. That’s where a payment gateway comes into play. This type of software platform lets you accept debit and credit card payments from your customers in a secure and convenient way. 

A wide range of businesses use this type of technology, and you’ll need to consider your options if you want to accept payments for your own enterprise: 

• At a brick-and-mortar location.

• Through an online store.

• With mobile devices.

Understanding how payment gateways work can help you choose the solution that best fits the needs of your small business.

Whether you’re looking to modernise a cash-only business, exploring how to start an online business, or considering additional payment options for small businesses, this guide provides the facts on the payment gateway process so you can make an informed choice on how your business receives revenue.

What is a payment gateway?

A payment gateway is the front-end technology that captures, authenticates and securely transmits your customer’s payment details. Payment gateways offer several useful features, including:

Enhanced security

Payment gateways use advanced tools like encryption and tokenized payments to keep your customers payment information safe. This added security helps protect your business from fraudulent payments which could lead to costly chargebacks. 

For example, here are some of SumUp’s security features and credentials:

• EMV certification – Europay, Mastercard, and Visa certified, meeting the global standards for card security.

• PCI DSS compliance – Complies with PCI DSS (Payment Card Industry Data Security Standard), which sets the benchmark for handling cardholder data securely.

• Authorised by the FCA – Authorised as a payment institute by the Financial Conduct Authority (FCA), ensuring adherence to strict regulatory standards.

Streamlined operations

Payment gateways and associated services automate much of the payment process, allowing you to focus on other important aspects of how to run a business. 

This means less time spent on the nitty-gritty of financial transactions and more on growing your business. For example, developing new customer retention strategies, broadening your range of products or services, or planning a marketing strategy for small business success.

Comprehensive reporting

Payment gateways can often generate detailed transaction reports, making it easier to track sales, monitor trends, and manage small business finances. These insights help you make better decisions and identify possible business growth strategies. 

Some systems can also assist with VAT for small business by automatically adding VAT to transactions and keeping the required digital records.

How do payment gateways work?

A gateway for online payments can be a vital tool for your small business, but it doesn’t work alone. It’s part of a broader electronic payments system that also includes a payment processor and merchant account:

• Payment processor – The back-end service that handles the actual transaction, communicating with card networks and banks. It moves the money from the customer’s bank account to your merchant account and often includes debit and credit card fraud detection tools.

• Merchant account – A special type of account where the money from your sales is deposited before being transferred to your regular business account. 

Here’s how the different components work together to make it possible for you to accept card payments quickly and securely:

1. Customer initiates payment – When a customer makes a purchase, they provide their card details, either online or in-person at a physical store.

2. Payment gateway encryption – Your payment gateway steps in to encrypt this information and send it to your payment processor.

3. Payment processor verifies funds – The payment processor contacts the customer’s bank to verify there’s enough money for the transaction.

4. Funds transfer approval – If everything checks out, the payment processor instructs the customer’s bank to transfer the money to your merchant account.

5. Funds received – Finally, the funds are deposited into your merchant account. Typically, they’ll be paid into your regular account within a few days.

Different ways to use payment gateways

Now that we’ve had a quick look at how payment gateway technology works, let’s take a look at the different ways you can utilise it, both in terms of your general business type and specific business activities. 

Business types

Here’s how payment gateways can be used by offline, online, and mobile businesses. 

Brick-and-mortar locations

In brick-and-mortar locations like retail premises or hospitality businesses like hotels or restaurants, a payment gateway integrated into point-of-sale hardware can make a huge difference to your checkout experience.

Take the example of a busy newsagent in a train station with a card machine at the counter – customers can quickly swipe or insert their cards or smartphones, speeding up the checkout process and keeping everyone happy and on time for their journey.

Or, we can imagine a food and drink outlet using card readers to keep the line moving during peak periods. In a bar or restaurant, mobile readers might be brought to the table so customers don’t have to get up to pay, making the dining experience more enjoyable.

Self-service kiosks are another fantastic option for debit and credit card payment gateways, especially if you have a quick-service restaurant. Customers can place their orders and pay on their own, reducing queues and freeing up your team.

Online stores

For e-commerce businesses, payment gateways are essential for processing online payment methods securely at checkout. Integrating a gateway into an existing e-commerce site is typically straightforward, though the process varies depending on your website setup.

To give you an idea of how it might work, here’s how you can use the SumUp payment gateway online with three popular e-commerce platforms:

• WooCommerce – If you have a WordPress website, you can use the SumUp payment gateway for WooCommerce plugin, which allows you to easily integrate payments into your online store without any coding.

• WIX – You can accept payments on a WIX online store by connecting your WIX dashboard to SumUp with a secret API key, available in the SumUp developer portal.

• PrestaShop – To accept payments on PrestaShop, you can use the SumUp payment module plugin. You’ll need to configure a few settings in your SumUp dashboard.

For custom websites, the payment gateway is integrated manually. This can be done with the SumUp API (application programming interface) or widget, both available in the developer portal.

Mobile businesses

For mobile businesses, like food trucks and market stalls, payment gateways let you accept payments on the go, making transactions quick and convenient for both you and your customers.

Mobile card readers are as useful here as they are in brick-and-mortar establishments. These handy devices connect to your smartphone or tablet, letting you swipe or insert cards wherever you are. Some readers, like the SumUp Solo, have a built-in SIM card with unlimited data, providing mobile connectivity wherever your business takes you.

Let’s imagine you’re running a pancake stall at a busy festival site. With a mobile card reader, customers can pay quickly without needing to dig for cash, and you’ll free up time to sell more pancakes.

Your array of on-the-go payment options can also include QR codes which customers can scan with their phones to complete transactions instantly, and contactless payments via your mobile phone.

Business activities

A payment gateway can also help you out with specific business activities. Here’s how your business could benefit:

Social media

Learning how to use social media for small business success? Payment gateways can be really useful. For instance, if you’re hosting a sales night on Instagram or Facebook, you can send payment links to your customers. This remote payment option makes it simple for customers to pay on the spot. 

Invoicing

Invoicing software integrated with payment gateways can also streamline your payment process. If you’re a freelance designer, for example, you can use smart invoicing software to send invoices with built-in links so your client can pay you online as soon as they’re able, rather than having to set up a bank transfer.

Sell gift cards

Selling gift cards for your business is a great way to use a payment gateway. You can offer digital gift cards online, which can be particularly effective during holidays or special promotions. If you’ve been thinking about how to improve cash flow, gift cards can help bump up sales and customer acquisition rates, providing an upfront influx of cash. 

Benefits of accepting card payments

For online businesses, accepting card payments is crucial to daily operations, but these transactions are also increasingly vital for customer-facing enterprises as fewer and fewer people make payments in cash. Here’s how having payment gateways in place could make a difference to your business:

Boosts sales

Customers tend to spend more when they can pay with a card, leading to a higher average order value. This could help turn side hustle ideas into serious money makers as customers are more likely to impulsively add that extra item when paying by card.

For example, imagine you run a weekend jewellery stall. With card payments, a customer might start with a pair of earrings but end up buying the whole set with a necklace and bracelet too.

Adds convenience

Card payments are quick and easy, cutting down wait times and making the whole experience better for your customers. This means happier customers who are more likely to come back, building customer loyalty and spreading the word about your business.

For instance, if you run a busy sandwich shop, taking card payments can really speed things up. You’ll be able to serve more people more quickly and keep the line moving, and you won’t put off passers-by who don’t happen to have the right cash to hand (which, these days, is likely to be the majority of your potential customers).

Improves cash flow

Faster transactions mean money in your account quicker, improving cash flow and helping you manage your small business budget better. With quicker access to funds, you can also invest back into your business sooner.

Let’s say you run a home-based craft business. With an efficient payment gateway and payment processor system in place, you can expect card payments to be processed quickly, allowing you to buy materials for things to make and sell sooner, fulfil orders faster, and keep your customers happy.

Attracts a wider customer base

Accepting cards attracts a broader audience, including those who simply prefer cashless payments. This expands your market reach, bringing in customers who might otherwise walk away if cash was the only option.

For example, if you have a café/bookshop targeting university students, you could significantly increase your customer base by accepting card payments, as younger consumers often prefer cashless payments.

Gives a professional image

Offering card payments can really boost your business’s professionalism and credibility, which can be crucial when you’re considering how to get clients or how to successfully roll out business growth strategies.

For example, if you’re a freelance consultant who implements small business cyber security solutions, accepting card payments will make you appear considerably more established and reliable than if you insist on cash payments.

Makes bookkeeping easier

Digital records of transactions make bookkeeping for small businesses simpler and more efficient. Instead of sorting through piles of receipts, you can easily track sales and small business expenses electronically.

For instance, if you run a small bakery, keeping track of daily sales can be a real chore. However, your card payment transactions are recorded digitally, making it easy to see your sales and manage expenses. Factoring in accounting tools for small businesses makes staying on track even simpler.

Keeps pricing flexible

Being able to accept card payments online means you can be more agile and flexible when it comes to how you price products or how to price services, safe in the knowledge customers can see them and jump on them wherever they happen to be. And this isn’t just the case for online enterprises. 

Say you run a local fitness studio with an active website and social media presence. You’ll be able to adjust your pricing strategies whenever you like by running special deals and changing class prices online, allowing customers to snap up the offers remotely before coming in for classes in person.

This flexibility helps when you’re figuring out how to advertise your business, allowing you to promote offers effectively and boost customer engagement. You could even promote a discount for gift cards for your business, using a payment gateway service to get the funds quickly and boost your working capital.