When was the last time you paid for something online? Probably quite recently. These days, our lives are mostly centered on the digital world, and that means we pay for goods and services by pressing a few buttons. As a business, choosing the right types of payment gateway for your needs is key.
To break it down, A payment gateway is a platform or type of technology that facilitates and processes online payments. It acts as an intermediary between the customer’s bank or payment provider and the business’ bank or merchant account. The sheer number of transactions that go through payment gateways every year is mind-blowing. In fact, according to Statista, the entire digital payment market is expected to hit $20,37 trillion by the end of 2025.
If your business is classed as high-risk, choosing the right payment gateway and knowing how to navigate the challenges of high-risk payment processing is even more important. But don’t worry; in this guide, we’re going to cover everything you need to know.
The Evolution of Payment Gateways
Let’s go back to the very beginning, because payment gateways have come a long way since they were first developed.
From Cash Registers to Cloud-Based Solutions
Many of you may not remember old-fashioned cash registers. These were the first type of payment gateway and were mechanical, often broke down, and were clunky at best. At the time, these registers relied on manual input and physical components, making them prone to human error. Thankfully, we now have cloud-based solutions that do much of the hard work for us and can be accessed anywhere, at any time. This is a huge leap forward in terms of payment gateway advancement. Not only are our modern solutions faster, but they’re more secure, convenient, and can handle a wide range of transactions.
The Birth of Electronic Funds Transfer
In the 1970s, the Electronic Funds Transfer (ETF) system was born and it revolutionized everything almost on the spot. This system opened the doors for the payment gateway systems we have in place today and allowed for the secure transfer of funds without cash changing hands.
The Rise of E-commerce and Online Payments
As the 1990s arrived, e-commerce started to pick up pace, meaning a deeper need for secure payment gateway solutions. This was the trigger for global markets to open up, with new challenges in digital security emerging. To counteract these risks, SSL encryption was introduced in 1994, bringing added security to online transactions.
Another notable mention during this decade is the appearance of PayPal in 1998, creating an easier route for peer-to-peer transactions. Then, in 2004, PCI DSS (Payment Card Industry Data Security Standard) was established to protect cardholder data, making payment gateways more secure.
The Mobile Revolution and Its Impact
Image of a person paying using a smart watch.
These days, we spend more time on our phones than anything else. The mobile revolution has certain impacted payment gateway design. Mobile-optimized routes are now commonplace, creating a specialized mobile payment gateway for customers who prefer to purchase goods and services on-the-go. Contactless payments are also very commonplace these days, and becoming more so as time goes on. This development has promoted new technologies, including QR payments and mobile wallets, such as Google Pay and Apple Pay.
NFC Technology and Contactless Payments
NFC stands for Near Field Technology and this has been a game-changer in developing a payment gateway that suits customer preferences. Here, contactless transactions can be made through mobile devices or even wearable items, such as a watch. Not only has this made payments much easier but it’s facilitated higher speeds.
The Emergence of Digital Wallets
We mentioned digital wallets, and here we’re talking about Google Pay and Apple Pay in particular. These are increasingly popular and can be integrated with a payment gateway to offer secure and convenient payment options.
The Anatomy of Modern Payment Gateways
Of course, every payment gateway is complex and it’s designed to be secure and efficient. Understanding how they work is important to help you optimize your payment processes while also also protecting customer data. The table below gives some information into various parts of a payment gateway and their function.
| Component | Function |
|---|---|
| Encryption Module | Secures sensitive data during transmission |
| Authorization Engine | Verifies transaction details with issuing bank |
| Fraud Detection System | Identifies and flags suspicious activities |
| Tokenization Service | Replaces card data with secure tokens |
| Reporting Interface | Provides transaction analytics and insights |
Encryption: Safeguarding Sensitive Data
The main line of defense in safeguarding sensitive personal and financial information is encryption. As you may expect, it’s extremely complicated and transfers data into a code that cannot be read. As a result, the information is protected from threats during the transmission phase and storage, creating a secure payment gateway.
Within this, SSL/TLS protocols work to encrypt the data as it moves from the customer’s device and as it moves through the payment gateway itself. AES, which stands for Advanced Encryption Standard, is another form of technology used to encrypt stored data, while Public Key Infrastructure (PKI) creates a secure key exchange between both encryption and decryption.
Tokenization: The Unsung Hero of Payment Security
Tokenization is another vitally important security measure within a payment gateway. This replaces card data with unique identifiers that are randomly generated and do not connect mathematically with the original data. As such, they cannot be read. Tokenization is often done at the point of sale or it takes place within the payment gateway itself. Overall, tokenization increases security without slowing down the transaction.
End-to-End Encryption: A Fortress for Financial Data
If the previous options help to boost security in a payment gateway, end-to-end security creates a solid wall around and over it, ensuring that nobody can get in. From the second the data leaves the customer’s device until it reaches its final resting point, this layer of encryption acts as an impenetrable barrier.
Within this, point-to-point encryption, called P2PE secures the data from where it is captured to the processor. We can also mention HSMs (Hardware Security Modules) that protect and manage the encryption keys. Finally, homomorphic encryption allows for encrypted data computations without actually decrypting the data.
Authorization: Verifying Transactions in Real-Time
At every point during a transaction, it’s important to check that no fraud takes place, and the initial point of the payment gateway is where authorization comes in. This process is complex and involves several different areas simultaneously. Ultimately, authorization determines whether a transaction is declined or accepted.
Authorization usually involves the merchant, payment gateway itself, card network, and the issuing bank working together. Within this, 3D Secure protocols add extra authentication, along with risk-based authentication which automatically changes the level of scrutiny depending on the transaction itself.
The Role of Payment Processors
It’s easy to confuse payment processors with payment gateways, but these are two separate things. A payment processor such as PayCompass, PayPal, Stripe, or Square, works in conjunction with a payment gateway to complete a transaction. However, the payment gateway handles the processing, front-end and back-end operations, which allows the funds to be transferred.
Fraud Detection Algorithms
AI seems to be at the heart of everything we do these days, and with good reason. In terms of a payment gateway, AI-powered algorithms look for patterns in transactions in real-time. The aim is to spot and identify fraud, working silently behind the scenes.
Machine learning models are particularly powerful here as they have the ability to analyze many data points within each transaction. Behavioral analytics can also be used to track user patterns and spot any abnormalities. Additionally, real-time decisioning allows for fast and immediate action to be taken on any transactions that appear suspicious.
The Spectrum of Payment Gateway Types
There are several types of payment gateway, and it’s important to understand them to have a full picture.
The table below gives in-depth information into how many types of payment gateway options there are and their specifics.
| Payment Gateway Type | Brief Summary | Technicals | Best For (Business Type) | Example Providers |
|---|---|---|---|---|
| Hosted Payment Gateway | Redirects customers to a third-party site for payment. Easy setup, reduced security burden, but may impact checkout experience. | HTML redirects or form posts; reduces PCI scope; gateway handles data. | Small to mid-sized eCommerce stores, non-tech-savvy merchants | PayPal, Stripe Checkout, PayCompass |
| Self-Hosted Payment Gateway | Provides full control of payment process; requires more technical expertise and greater security investment. | Direct server integration; full control over UI; full PCI DSS responsibility. | Large eCommerce platforms, SaaS businesses, enterprise merchants | Braintree, Magento Payments |
| API Integration (Self-Hosted) | Uses APIs for fully customized payment flows; flexible but development-intensive. | RESTful APIs; Webhooks; SDKs for simplified integration. | Tech-savvy businesses, SaaS platforms, custom checkout flows | Stripe API, Authorize.Net, PayCompass |
| Local Bank Integration Gateway | Supports regional bank transfers and e-wallets; suitable for country-specific payment preferences. | Bank transfer support; currency conversion; integration with credit bureaus. | Businesses operating in international markets, regional eCommerce platforms | iDEAL (Netherlands), FPX (Malaysia), PayCompass |
| Mobile Payment Gateway | Optimized for mobile commerce, supporting wallets like Apple Pay and responsive design. | Supports touch interfaces; mobile wallets; app framework integration. | Mobile-first brands, DTC eCommerce, service-based apps | Apple Pay, Google Pay, PayCompass |
Hosted Payment Gateways: The Hands-Off Approach
A hosted payment gateway sends customers to a third-party site to finish their transaction. It’s a simple and secure option for merchants, however it’s not without its downsides. This type of payment gateway can affect how smooth the checkout experience is, adding an extra step. These types of payment gateways can also reduce PCI DSS compliance control for merchants, taking some of the process out of your hands.
iFrames: Bridging the Gap Between Convenience and Control
The next thing to consider is iFrame technology, which allows a business to integrate hosted payment pages into their website. The plus point here is that it maintains brand consistency, yet it also maintains the benefits of having a secure hosted payment gateway solution.
iFrames embed into your content and it’s possible to customize the appearance of the payment form to match your site. This type of technology is very responsive, and it can adapt to screen sizes, making it compatible with mobile usage.
Self-Hosted Gateways: Taking the Reins
On the other hand, a self-hosted payment gateway gives even more options for customization but does need more technical know-how and added security measures. If you want total control over your payment processes and you have in-depth knowledge about security, this could be a suitable option for you.
In this case, the payment gateway integrates directly into your server, giving you flexibility in customizing your payment flow. However, you have full responsibility for PCI DSS compliance.
API Integration: Tailoring the Payment Experience
An API allows you to create your own payment flow and integrate it into your system. It’s an extremely flexible approach but it does ask for a large amount of resources in the development stage.
The most common type of payment gateway integration is RESTful API, yet webhooks can also be useful and allow for real-time notifications. Additionally, Software Development Kits, or SDKs help to simplify the whole integration process.
Local Bank Integration Gateways: Bridging Global and Local
A smoother option for specific countries and regions is to use a local bank integration gateway. These are ideal if your business works within a market with a specific payment preference or if there are in-depth requirements to take into account.
This type of payment gateway supports local payment methods, such as e-wallets and bank transfers, and they handle currency conversions easier, along with local tax calculations.
One of the most useful aspects of local bank integration gateways is their ability to help you comply with financial regulations in specific regions. In a complex regulatory environment, this type of payment gateway is a big advantage. They comply with local data protection laws, support country-specific authentication methods, and adhere to local tax and reporting requirements.
Mobile Payment Gateways: Commerce in the Palm of Your Hand
Due to the rise in demand, mobile payment gateways are vital. As the name suggests, these are designed for mobile transactions and they’re an essential tool if you want to capitalize on the growing trend of shopping via mobile devices.
A mobile payment gateway is optimized for a smaller sized screen and touch interface. These gateways support mobile specific payment options, like Google Pay and Apple Pay, and they integrate with mobile app development frameworks.
In fact, the ability to accommodate in-app purchases is the cornerstone of a mobile payment gateway, giving extra flexibility and convenience to customers. Games and apps in particular benefit from this.
Biometric Authentication: The New Frontier of Mobile Security
Image of a man using biometric information to verify his identity.
Within mobile payment gateways, it’s important to ascertain that the person paying is indeed the person they say they are. That’s where biometric authentication comes in, including facial recognition and fingerprinting. These boost security and convenience at the same time. However, it’s a good idea to combine more than one type of biometrics for multi-factor authentication.
The Future of Payment Gateways: Emerging Trends and Technologies
Technology constantly ebbs and flows, affecting payment gateways too. New innovations look set to revolutionize the way payments are processed and it’s important to stay up-to-date to utilize the most useful technologies. Let’s take a look at some of the most interesting options.
Blockchain and Cryptocurrency Integration
Blockchain shows great promise in many different areas, including payment processing, and this goes hand in hand with cryptocurrency. Both of these are decentralized, which gives extra security and no need for an intermediary. This is particularly useful for high-risk businesses, who may struggle to access traditional financial partnerships, e.g. banks or other payment platforms. For instance, PayPal does not accept high-risk payments and often flags these, causing problems for the merchant. With that in mind, PayCompass is a great PayPal alternative as we have specifically designed accounts for high-risk merchants, with in-built chargeback protection.
In general, blockchain is a useful option for faster and cheaper transactions and it supports major cryptocurrencies as an option for payment.
Smart Contracts: Automating Complex Transactions
Within the blockchain umbrella we can also talk about smart contracts. These can change payment gateways for the better by allowing you to set conditions for transactions. These are then self-executed depending on your predefined rules. Automated payments and complex business arrangements benefit from smart contracts in particular.
Artificial Intelligence and Machine Learning: The Next Frontier
We’ve touched upon how AI and machine learning can be used to reduce fraud, but there are many new developments on the horizon. Predictive analytics and personalization are two other areas where AI and machine learning can help develop payment gateways.
Behavioral Biometrics: The Invisible Guardian
AI-powered behavioral biometrics are something to keep a strong eye on. These can authenticate users based on how they interact with their devices, adding an extra layer of security without affecting how the user interacts with the platform. For instance, this technology can look at typing patterns or mouse movements to spot anomalies.
Predictive Fraud Analysis: Stopping Threats Before They Happen
Prevention is always better than cure and when it comes to fraud prevention, that’s certainly true. Advanced machine learning algorithms can be used to stop any potentially fraudulent transactions before they even happen. This is done based on real-time analysis of huge amounts of data. It’s a proactive approach and it’s one that can integrate very easily with global fraud databases for more in-depth pattern recognition.
The Internet of Things (IoT) and Ambient Commerce
IoT stands for the Internet of Things and it has the potential to change many aspects of payment processing. In this case, transactions can be made in contexts that aren’t considered the norm, making it much easier for customers to pay for goods and services wherever they are.
For instance, let’s touch upon vehicle based payments, which effectively turns your car into a wallet. A connected vehicle becomes part of the payment gateway, creating an easy way to pay for fuel, drive-through services, and parking.
Voice-Activated Payments: The Power of Speech
Another IoT development is voice-activated payments. Rather than using a device to type in numbers or scan something, it’s possible to give a voice command instead. This enables hands-free payments through smart speakers and virtual assistants. Natural Language Processing (NLP) is used to boost accuracy of voice command interpretation and voice biometrics are in place for authentication at the sign-up point. This all adds to security while giving extra convenience to the customer.
Regulatory Landscape and Compliance Challenges
Regulations are important to understand for all businesses, but they’re something that high-risk businesses in particular have more trouble with. Complex regulatory oversight adds additional layers of difficulties to payment processing, making it even more important to choose a payment gateway that suits your business needs.
The table below gives some useful insights into the main regulations and their requirements, along with how they impact payment gateways.
| Regulation | Key Requirements | Impact on Payment Gateways |
|---|---|---|
| PCI DSS | Data encryption, access control, regular security testing | Stringent security measures, annual audits |
| GDPR | User consent, data protection, right to erasure | Enhanced data handling processes, user privacy controls |
| AML/KYC | Customer identification, transaction monitoring | Integration of identity verification systems |
| PSD2 | Strong customer authentication, open banking APIs | Development of new authentication methods, API standardization |
Global Regulatory Frameworks: A Patchwork of Standards
Many regions have their own regulations that must be adhered to. This isn’t only for businesses based in that particular region, but those who sell goods and services to customers based there too. All of this affects how payment gateways operate, creating both opportunities and challenges for businesses.
GDPR and Data Protection: Balancing Privacy and Functionality
In the European Union, GDPR is a vital regulation that must be adhered to. This focuses on data protection and affects payment gateway design along with operation. Payment providers must have a clear balance between how they handle data, along with user concerns over privacy.
One of the main regulatory points is that only the minimum information must be kept and it must be limited to the necessary purpose. This means that developing user-friendly consent management interfaces is a key step, along with data portability and mechanisms to delete data that complies with the rights of the user.
Open Banking Initiatives: Disrupting Traditional Gateway Models
Another point to consider is open banking regulations. These create both innovation but extra competition at the same time, yet they’re creating new possibilities for data sharing and integrating financial services.
The development of APIs that are compliant with open banking standards is key here, along with implementing secure authentication methods that can be accessed by necessary third-parties only. Finally, the creation of consent management systems allow for user data sharing with the regulatory framework.
Anti-Money Laundering (AML) and Know Your Customer (KYC)
Secure and effective payment gateways aren’t all about facilitating the smooth movement of money, it’s also about identifying any potential fraud and financial crime. Many advanced technologies can be used to meet AML and KYC requirements, which are becoming more stringent as time goes on. However, these must balance fraud prevention with smooth processing of transactions.
Blockchain-Based Identity Verification
Again, this is somewhere that blockchain can be used very effectively, and it shows particular promise in streamlining KYC processes within payment gateways. The development of self-sovereign identity solutions on blockchain platforms is a solid first step, along with zero-knowledge proofs.
Transaction Monitoring: The Sentinel of Financial Integrity
With all the technology in place, it’s still important to have advanced monitoring systems too. These can flag any activities that show suspicious behavior, helping you to comply with regulatory reporting rules. Of course, with the development of big data analytics and AI, these systems are becoming even more complex than before.
For instance, machine learning can be used to detect anomalies, while graph analytics can identify complex patterns within transactions. SAr (Suspicious Activity Report) filing systems can also be automated to streamline the process.
The Economics of Payment Gateways
Within the payment gateway subject, there is an entire ecosystem at play. By learning more about this, you can understand the various stakeholders involved, and fee structures.
Fee Structures Demystified: Beyond the Percentage
Image of US dollars, representing considerable hidden fees.
First let’s talk about payment gateway fees, as this is quite a complicated subject. There isn’t just one flat percentage rate that applies to every transaction, and it depends on several different elements as to the fee charged. For instance, this could include interchange rates, markup charges, and assessment fees. By learning more about these, you can make better decisions.
Interchange Optimization: The Art of Fee Reduction
Within any payment gateway, there are providers that use specific strategies to optimize rates and pass savings onto merchants. To do this, careful categorization of transactions must take place, along with utilizing different pricing tiers. For instance level 2 and 3 data is best for B2B transactions, and dynamic descriptor systems can create more accurate transaction categories. We can also mention automated interchange optimization algorithms, eliminating the need for manual work.
Volume-Based Pricing: Economies of Scale in Action
The volume of transactions influences pricing structures in a big way. By learning how to leverage volume and access more preferential rates, you can save in the long-run.
For instance, you could analyze tiered pricing models based on monthly transaction volume, or implement volume-based incentive programs. Careful understanding of these will lead to bigger savings over time. Additionally, predictive models can be used to forecast volume, so you can make better decisions in terms of optimizing pricing structures.
The Hidden Costs of Payment Processing
There is a basic fee to processing any transaction within a payment gateway, however there are also hidden fees to consider too. These include currency conversion, and chargeback fees. High-risk businesses often have a higher instance of chargebacks, so choosing the best high-risk merchant services is key here. In these cases, there are often advantageous benefits, such as chargeback protection. This is certainly the case with PayCompass’ high-risk merchant accounts.
Chargeback Economics: The Ripple Effect of Disputes
Chargebacks are one of the biggest issues for high-risk businesses in particular, but these can happen for businesses not in that category too. When a chargeback happens, it has a financial impact upon your business, yet advanced gateway features can help to reduce these costs and streamline the dispute process.
Some useful strategies here include real-time fraud scoring. This can help to identify any potential chargebacks before they happen, giving you time to take proactive measures. Machine learning can also be a very useful tool in this regard, helping to predict when a chargeback might happen.
Foreign Exchange Margins: The Price of Global Commerce
Many businesses sell to overseas customers and that brings currency conversion into the equation. In the majority of cases, customers prefer to pay in their home currency to avoid extra charges, so it’s important to offer dynamic currency conversion (DCC) options to facilitate this. However, this can also have an impact and it’s important to be aware of this from the start.
Another option is to use multi-currency accounts to reduce conversion fees. Again, this is something PayCompass can help you with. Our multi-currency payment gateway allows you to make international transactions in many different currencies, automating the process and streamlining it from the start.
Niche and Specialized Payment Gateways
Not all businesses are created the same, and if you operate within a niche or specialized area, you’ll need payment options that tick the same boxes. A few payment gateway examples in this category include high-risk merchant accounts, cryptocurrency payment gateways, and continuity-subscription merchant options.
Let’s dive deeper into these.
High-Risk Merchant Gateways: Navigating Choppy Waters
As we’ve already mentioned, some industries have a high-risk label placed upon them by financial institutions. This is usually because of increased regulatory scrutiny, a higher instance of chargebacks, and large transaction amounts.
As a result, you’ll need a specialized payment gateway to get around these problems. That’s where a high-risk merchant account comes in very useful. At PayCompass, our high-risk accounts are designed to overcome the issues that cause you the biggest problems, with fast acceptance, and a range of features to boost your experience.
Subscription Billing Gateways: Powering the Recurring Revenue Economy
The subscription economy has boomed in the last few years and again, this is an area that requires a specialized payment approach. In most cases, these businesses have a complex billing model, and a niche gateway handles all the hard work, including trial periods, cancellations, and upgrades.
Cryptocurrency Payment Gateways: Bridging Digital and Fiat Currencies
Cryptocurrencies have become more mainstream over the last few years too, and that means specialized payment gateways have appeared to allow their use. Such options understand and address the challenges that crypto payments face, especially their increased volatility and regulatory issues.
Micro-Transaction Gateways: Enabling the Digital Penny Economy
Another industry that often requires a specialized approach to payment processing is the digital content and gaming industry. These businesses often have a very high number of low value transactions, so specialized micro-transaction gateways can provide a suitable solution.
Learnings Recap
Understanding the world of payment gateways is vital if you want to leverage their power to your advantage. After all, it comes down to making the best choice, and understanding the technologies that can make your life as a business owner that much easier. There are many different types of payment gateway to learn about, with several niche and specialized options for businesses that don’t fall into the ‘regular’ category. After all, there is no ‘one-size-fits-all’ approach here to payment processing.
It’s fair to say that payment gateways have evolved in a big way since the days of the old-fashioned cash register. That evolution started small but moved extremely fast as time went on, leading us to cloud-based solutions with a large range of technological innovations. Utilizing tools such as AI, machine learning, blockchain, and IoT can revolutionize how your business handles financial transactions, allowing you to spot fraud, streamline your processes, and create a better environment for your customers.
However, payment processing is certainly complicated when you’re a high-risk business, leading to higher costs, the risk of PayPal account blocks, and a world of problems that add to your stress. The answer? Choose a merchant account that is designed specifically for the issues you face.
At PayCompass, we’ve designed our merchant accounts to overcome the problems that affect the day-to-day running of your business. We offer chargeback protection, fast acceptance, virtual cards, and responsive customer support to make your life easier from the start.
So, if you’re ready to revolutionize your payment gateway problems, fill in our contact form today and one of our experts will be in touch.
