What Is a Payment Gateway and How Do They Work?

Every year, the global number of ecommerce transactions is in the trillions (yes, trillions). We buy products and services online every day, often without consideration for the sophisticated technology that makes it all possible. When it comes to online shopping, payment gateways are the real MVP of the purchase process. They allow shoppers to send secure payments that reliably land in a merchant’s bank account.

Here are the fundamentals of this online payment technology and how it works.

An ecommerce payment gateway is the technology that encrypts and transmits payment data between your customer, their issuing bank, and your merchant account. It can handle transactions across both digital storefronts and physical point-of-sale (POS) systems. It communicates with payment processors and banking networks to verify funds, detect fraud, and approve or decline transactions in real time, typically within a few seconds.

The gateway supports various payment methods, including credit cards, debit cards, and digital wallets — all while maintaining security standards, such as compliance with the Payment Card Industry Data Security Standard (PCI-DSS ), that protect sensitive card data. In simple terms, it's the secure digital pipeline that connects your sales channels to the financial system, enabling a seamless checkout process.

A payment gateway facilitates a transaction’s real-time authorization by communicating between the merchant, the acquiring bank, and the customer’s issuing bank to confirm funds and approve the sale. Here’s what the flow looks like:

1. Customer initiates payments: The customer enters their card details at checkout (online or at the POS) and clicks "Pay Now," which triggers the transaction request.
2. Gateway encrypts and transmits: The payment gateway instantly encrypts the sensitive payment data and securely sends it to the payment processor for authorization.
3. Processor routes to banks: The payment processor forwards the request through the card network (Visa/Mastercard) to the customer's issuing bank, which checks for available funds and fraud indicators before approving or declining the transaction.
4. Response returns to customer: The bank's decision travels back through the processor and gateway to your checkout page, displaying "Payment Approved" or "Payment Declined" within seconds, and approved funds are flagged for settlement into your merchant account.

To choose the right solution, you need to understand how the gateway interacts with your website and your customers. These are generally categorized by where the transaction data is handled and how much control you have over the user interface.

A Redirect or Hosted gateway takes the customer away from your site to a secure payment page managed entirely by a third party (like PayPal or Stripe’s pre-built checkout). Once the payment is authorized, the customer is automatically sent back to your site for the confirmation page. Because the provider hosts the form, they handle almost all the security risks.

• Pros: Rapid deployment, no need to handle sensitive data, and instant trust by using recognized provider branding.
• Cons: The "redirect" can feel disjointed to some users, potentially hurting conversion rates if they feel they are leaving your brand's ecosystem.
• Best for: Small and medium businesses (SMBs), startups, or lean teams that want to launch quickly without worrying about complex security audits.

With a Self-Hosted gateway, you install the payment software directly onto your own servers (often via a platform-specific plugin or a licensed software package). You collect the data on your own site before it’s encrypted and sent to the payment processor.

• Pros: You own the entire journey and data flow. It’s more cost-effective for high-volume merchants who want to avoid per-transaction "platform fees."
• Cons: You’re responsible for the technical upkeep, server uptime, and a significant portion of the security infrastructure.
• Best for: Large enterprises who want to keep the entire transaction "in-house" and have a dedicated IT team to manage the servers.

With an Integrated or application programming interface (API) gateway, customers enter their payment details directly on your website. Your server communicates behind the scenes with the gateway through an API. This allows you to design every pixel of the checkout experience, keeping the customer on your domain from start to finish.

• Pros: A completely seamless, professional user journey that increases brand loyalty and conversion potential.
• Cons: You’re responsible for the highest level of security. This requires significant engineering resources to build and maintain the connection and protect against data breaches.
• Best for: Established enterprises and tech-heavy organizations that prioritize a bespoke brand experience and have the budget for rigorous compliance.

The Hybrid method (often called Direct Post) offers a strategic middle ground. The payment form is styled to look exactly like your website, but when the user hits "submit," the data is sent directly from their browser to the payment processor’s server. The sensitive information never actually touches your own server.

• Pros: You get the "seamless" look of an API gateway without the massive technical burden or the highest level of PCI compliance.
• Cons: While easier than a full API, it still requires more front-end development than a simple redirect.
• Best for: Mid-sized businesses that want a custom checkout look but want to keep their technical and security liabilities as low as possible.

For any business with an online store, accepting diverse online payments is crucial. This includes payment methods such as digital wallets, Buy Now, Pay Later (BNPL), and gift cards. Digital transactions are growing by 62% every year. Here are the most common payment methods and how customers use them:

This is the most traditional and widely used method, relying on the major credit card networks (Visa, Mastercard, Amex, Discover).

• Credit cards: Allows customers to pay using a line of credit from their bank.
• Debit cards: Deducts funds directly from the customer’s linked bank account.
• EMV (chip) and contactless: Modern physical cards that use a silicon chip or NFC "tap" for higher security compared to old-school magnetic stripes.

These are becoming the primary way people pay online and in-store. They securely store card or bank information on a device, which makes contactless payments possible and allows online shoppers to skip manual entry of any payment details.

• Mobile wallets: Uses biometric security like FaceID, thumbprint, and NFC technology for instant, "tap-to-pay" transactions. For example, Apple Pay, Google Pay.
• Web wallets: One-click checkout options store shipping and payment information so customers don't have to re-enter data. For example, PayPal, Venmo, and Shop Pay.

These methods often bypass traditional card networks to save on fees or provide more flexibility.

• Bank transfers: Think of automated clearing house (ACH) or account-to-account (A2A), where money moves directly from one bank account to another. It’s slower (typically one to three days) but has significantly lower fees, and is ideal for business-to-business (B2B) or large invoices.
• Buy Now, Pay Later (BNPL): Services like Klarna or Affirm that let customers split a purchase into interest-free installments while the merchant gets paid upfront.
• Real-time payments: Instant bank-to-bank transfers (common in Europe and Asia) that settle funds in seconds rather than days.
• Cryptocurrency: Accepting digital assets like Bitcoin or USD Coin (USDC) through a specialized gateway that often converts the crypto to cash instantly for the merchant.

Few companies use the following methods, because they serve as a critical backup for high-value B2B transactions or "offline" sales where the customer isn't physically present to tap a card.

• Virtual terminals: Allows merchants to manually type in card details received over the phone or through mail.
• Pay-by-link: A secure link sent through email or SMS that takes the customer to a hosted payment page to complete their transaction.

At least 50% of businesses consider a fraud prevention strategy when implementing new payment types. In an era where digital fraud evolves as quickly as the technology that prevents it, a secure payment gateway is the most critical component of your ecommerce tech stack. Here’s why:

• Builds customer trust: Security is a major driver of conversion. Shoppers abandon their carts if they don't feel a site is secure.
• Protects reputation: A single data breach can lead to permanent brand damage and a loss of customer loyalty that takes years to rebuild.
• Financial integrity: Advanced security reduces the risk of costly chargebacks and revenue loss from unauthorized transactions.

To operate legally and safely, your gateway must adhere to rigorous global standards.

• PCI DSS compliance: This is a mandatory set of security rules. Top-tier gateways handle the bulk of this for you, to make sure your business meets the latest encryption and vulnerability management requirements.
• 3D secure (3DS) authentication: This adds a verification step (like a one-time code sent to a phone) to ensure the person making the purchase is the actual cardholder.
• End-to-end encryption (E2EE): Data is "locked" the moment it is entered and only "unlocked" when it reaches the authorized bank, making it unreadable to hackers in transit.
• PSD3 and open banking: If you have global customers (say in Europe), mention Payment Services Directive 3 (PSD3). It mandates even stricter authentication and opens the door for Pay by Bank options that bypass traditional cards entirely.

These tools work behind the scenes to validate every transaction in milliseconds:

• Tokenization: Replaces sensitive card numbers with a unique, randomized "token." If your system is compromised, hackers get useless codes instead of actual credit card data.
• Address Verification Service (AVS): Cross-checks the billing address provided by the customer with the one on file at their bank to catch identity thieves.
• CVV checks: Requires the 3- or 4-digit code from the physical card, proving the shopper has the card in hand and isn't just using stolen numbers from a database.
• Fraud scoring: Uses artificial intelligence (AI) to analyze hundreds of data points (like IP address and purchase velocity) to flag or block suspicious orders automatically.

A whopping 71% of fintech organizations are using AI and machine learning (ML) technologies to combat cyber threats. Intelligent, autonomous AI agents like Agentforce can monitor transactions, detect fraud, and perform real-time risk assessments. Here are a few ways AI can help:

• Behavioral biometrics: AI can now analyze how a user interacts with the page — keystroke speed, mouse movement, and even how they hold their phone — to distinguish a human from a bot or fraudster.
• Adaptive risk scoring: Instead of a simple "Pass/Fail," AI assigns a risk score to every transaction. Low-risk orders sail through, while high-risk ones are challenged with extra security steps (like a fingerprint scan).
• Real-time transaction monitoring: AI agents can scan millions of transactions per second to catch fraudulent patterns or rapid-fire bot attacks before the money leaves the bank.

A single point of friction can instantly erase the marketing dollars spent getting a shopper to your site. To protect your revenue, you must identify these common processing hurdles before they lead to abandoned carts.

Challenge: Security lapses can lead to significant data loss and customer trust. Encryption failures or poor PCI compliance create vulnerabilities that hackers can exploit to steal your data. This can result in loss of trust and potential legal consequences.

Solution: Make sure your organization maintains strict security protocols and PCI-DSS compliance, and thoroughly verify that your payment gateway partners meet the same standards through regular audits and certifications. A customer relationship management (CRM) like Salesforce with built-in payment security features can centralize customer data protection, enforce role-based access controls, and maintain encrypted audit trails of all payment interactions.

Challenge: Site lags or crashes can frustrate customers. This can lead to shopping cart abandonment. If your website is slow or crashes during checkout, you lose immediate revenue and future customers.

Solution: Invest in a reliable payment gateway with proven system resilience and partner with a trustworthy provider that guarantees high uptime and can handle traffic spikes during peak sales periods. Integrate your CRM to capture abandoned cart data and customer behavior during outages, enabling automated follow-up campaigns to recover lost sales and maintain customer relationships.

Challenge: False payment declines can sometimes occur due to technical problems with your gateway. This could be due to poor site integration, data miscommunication, or processing errors, rather than actual insufficient funds. This can frustrate legitimate customers.

Solution: Conduct thorough testing before launch, ensure proper API integration, and partner with a trusted provider that offers robust error handling and clear transaction logging to quickly identify and resolve issues. An AI CRM can track decline patterns by customer, flag false declines for manual review, and trigger immediate support outreach to affected customers. This turns a negative experience into a trust-building moment.

Challenge: Businesses unprepared to accept certain international payment types face false declines when global customers try to purchase, limiting market reach and revenue potential.

Solution: When setting up your gateway, configure at least one processing mode that accepts international payment methods to capture sales from customers worldwide. Use a gateway that supports local payment methods and offers dynamic currency conversion (DCC) so customers can pay in their native currency. A CRM like Agentforce Commerce can analyze customer location data and payment preferences to identify which international payment methods to prioritize, and it can automate personalized checkout experiences that show region-appropriate payment options.

Challenge: The steady accumulation of transaction fees — often 2-3% per sale plus additional charges — can significantly reduce profit margins, especially for high-volume or low-margin businesses.

Solution: Research different fee structures (flat-rate, interchange-plus, tiered) to identify which works best for your business model, and select a provider that minimizes additional charges such as setup fees, monthly fees, or chargeback fees. Audit your monthly statements to find your effective rate. Once you hit a certain amount of sales (for instance, $10,000/month in sales), move from flat-rate to interchange-plus pricing to capture lower costs on debit and basic credit cards. Selecting the right pricing model is one of the most significant financial decisions you'll make. The following will help you choose the right one:

To select the right partner for your business, look for options that balance technical capability with long-term financial growth. These four steps help you get started:

First, determine whether a Redirect (Hosted), Self-Hosted, or Integrated (API) solution aligns with your technical resources. Hosted solutions are typically best for SMBs because the provider manages the security and user interface (UI). Midsize businesses often benefit from self-hosting to gain more brand control without building from scratch, while large enterprises almost always prefer API-hosted gateways for total customization. For mission-critical stability, consider Stacking Payment Gateways that use multiple providers so that if one integration fails, your checkout stays live.

The reputation of your payment partner is paramount, especially when trusting them with your brand's security. Beyond basic uptime, look for a partner that offers 24/7 technical support and high-level PCI-DSS certifications. A reliable provider should act as a proactive partner, offering robust fraud detection and clear communication during transaction disputes. If you’re scaling, make sure the gateway can handle traffic spikes during peak sales seasons.

Select a gateway that accepts every payment method your customers expect — from standard credit cards to digital wallets like Apple Pay and BNPL services. If you have a global footprint, multi-currency support is a non-negotiable requirement. Your gateway should allow customers to browse and pay in their local currency while providing you with seamless settlement on your own. This reduces "sticker shock" from exchange rates and significantly lowers international cart abandonment.

A gateway that cannot communicate with your existing tech stack is a nonstarter. Beyond basic ecommerce platform compatibility, consider how the gateway integrates with your broader business tools. Look for solutions that sync with your CRM for customer insights, mobile apps for on-the-go sales, and even social media "Buy" buttons. Modern gateways should also support omnichannel commerce, bridging the gap between online sales and POS hardware for a unified view of your revenue.

All set to get started? The following steps will guide you:

Implement hosted or tokenized payment fields provided by your gateway rather than collecting raw card data on your own servers. This approach keeps sensitive payment information off your infrastructure, and reduces your PCI-DSS compliance burden and security risks.

Don't just test successful transactions. Instead deliberately trigger declined payments, expired cards, insufficient funds, network timeouts, and 3D Secure failures to check if your error handling is robust. Create a comprehensive test matrix covering at least 10-15 different failure scenarios.

Pro tip? Most payment gateways provide specific test card numbers that simulate different failure types like card declined, fraud detected, or expired cards. Document these in your development environment and create automated tests that run these scenarios before each deployment to catch integration regressions early.

Minimize form fields, enable autofill, provide real-time validation with clear error messages, and display trust signals with security badges and payment methods. Reduce checkout to a single page when possible, and ensure mobile responsiveness, because most transactions now happen on mobile devices.

Implement client-side validation before server submission to catch formatting errors instantly. These could be card number length, expiration date format, and CVV. Use your gateway's validation API endpoints to verify card details without processing a charge, and log UX friction points to continuously optimize. Implement AI chatbots to help customers at checkout and answer questions instantly to improve customer satisfaction.

Set up detailed transaction logging that captures gateway responses, error codes, timestamps, and customer identifiers — without storing sensitive card data. Create alerts for unusual patterns like spike in declines, gateway timeouts, or integration errors.

Deploy AI anomaly detection that learns your normal transaction patterns. It can automatically alert you to unusual spikes in failures, fraud attempts, or processing delays before they become major issues.

Build in smart retry systems for temporary glitches, and offer alternative payment methods if one isn't working. Save the customer's cart so they don't have to start over if something crashes. Always inform customers what's happening: "Processing your payment..." is better than a spinning wheel with no explanation.

Pro tip? Implement AI-powered payment routing that automatically switches to backup gateways during outages. AI can predict which payment method will most likely succeed for each customer based on their history and transaction patterns. This reduces failures before they happen.

Your payment gateway is the silent workhorse that turns browsers into buyers. Choose the one with smart integration practices, as they directly impact your revenue and customer trust. From rock-solid security to frictionless checkouts — all of these create payment experiences that convert rather than frustrate. With tools like Agentforce Commerce, you can give your customers a unified experience and accept safe, secure payments. Get started today.