NOVEMBER 9, 2023
15 min read
Payment gateways are an integral component of the digital payment processing flow that ensures secure, efficient, and convenient online transactions. Notably, businesses across diverse industries can benefit from both custom payment gateways and seamless payment gateway integrations, enhancing their operations and customer experiences.
According to Statista, the total transaction value in the US is expected to show a CAGR of 15.24%, resulting in a projected total amount of €3,381.00bn by 2027. It clearly shows that the number and the amount of finance transferred digitally is rising. So, there is still room for businesses aiming to become owners of payment gateway products.
In this post, I’ll delve you into how to set up a payment gateway and what its components are. You’ll also explore the benefits and challenges of owning custom payment solutions.
What is a Payment Gateway?
The payment gateway is a software solution that acts as an intermediary between a merchant’s website, where the transaction requests are created, and a payment processor.
The functions of a payment gateway are: Handling customer-facing aspects of the transaction processing. Besides, they are responsible for gathering information securily, encrypting it, and sending it to the acquiring bank.
By and large, payment gateways enable customers to enter their payment information, such as credit card details, on a merchant’s website during the checkout process and then just pass the data to the payment processor and return a data verification response back.
Payment Gateway vs. Payment Processor
The Payment Processor is a financial institution or service provider that acts as an intermediary in the transaction process, connecting merchants and consumers with the broader financial infrastructure.
The functions of a payment processor are: Handling technical aspects of the transaction processing, including authorization, routing, depositing funds into merchants’ accounts, and performing chargebacks. They are also responsible for verifying the validity of payment methods, ensuring that the customer has sufficient funds, and safeguarding the transaction details’ security.
In the case of credit card transactions, payment processors liaise with credit card networks and banks to facilitate the movement of funds, making it possible for businesses to receive payments from customers.
Let’s compare payment gateway and payment processor in several factors:
- Functional role
Payment gateway: Acts as an interface between the customer and the payment processor, facilitating the secure transmission of payment data.
Payment processor: Handles the authorization, settlement, and actual processing of the payment transaction.
- Customer Interaction
Payment gateway: Customer-facing, as customers enter payment details on a merchant’s website during checkout.
Payment processor: Non-customer-facing, and customers do not directly interact with them during the checkout process.
- Security role
Payment gateway: Responsible for encrypting and securing sensitive payment data during transmission, often complying with security standards like PCI DSS.
Payment processor: Focuses on verifying the validity of new payment methods, authorizing transactions, and handling risk management.
Payment gateway: Requires APIs and SDKs for merchants to integrate into their websites or applications.
Payment processor: Interacts with payment gateways and financial institutions to complete transactions without direct merchant integration.
Payment gateway: Stripe, PayPal, and Authorize.Net, which offer merchant-friendly tools for customer-facing payment processing.
Payment processor: Financial institutions like JPMorgan Chase Paymentech, which provide transaction processing and settlement behind the scenes. Credit card networks like Visa or Mastercard can also act as payment processors
In essence, both payment processors and payment gateways are part of the transaction processing system. So, I can easily claim that they are never alternatives to each other. When the detailed explanation of how to develop a payment gateway solution is discussed in the below sections, the matter of how to build a payment processor is way more complicated.
Who Needs a Custom Payment System and Why?
I believe that the decision between custom and ready-made solutions should be based on a thorough analysis of a business’s current needs, future growth prospects, available resources, and industry-specific requirements. Businesses that most often have the need to develop a payment gateway solution fall within these four categories:
- Large corporations. Such businesses often deal with a diverse range of financial transactions, both domestically and internationally. A custom payment system can facilitate seamless interdepartmental transfers, handle multiple currencies, integrate with other enterprise software, and ensure compliance with varying regional financial regulations.
- Large e-commerce and retail companies. These businesses thrive on customer transactions, often in high volumes, especially during peak seasons. A custom payment system ensures a smooth checkout experience for customers, offers multiple payment options, integrates with inventory and supply chain solutions, and can potentially reduce transaction fees. That’s why strategizing for a custom payment gateway is absolutely worth it when you build an e-commerce business.
- IT companies. Such organizations, especially those dealing in B2B services or software-as-a-service (SaaS) platforms, may have unique billing models like subscription-based or milestone-based billing. A custom payment system can automate recurring digital payments, handle international transactions, and integrate with project management tools.
- Banks, credit unions, and other financial institutions. Being at the core of the financial world, these institutions have intricate and often unique transactional needs. A custom payment system can streamline internal financial processes, offer innovative services to their customers, integrate with other banking systems, and adhere to strict financial regulations and security standards.
At the same time, I can also define a range of other companies that potentially can also benefit from owning custom payment processing systems:
- Government and public sector agencies. Custom payment systems can help manage large-scale transactions like tax collections, fine payments, and public fund disbursements, ensuring accuracy and regulatory compliance.
- Healthcare providers. Tailored systems in healthcare can help handle patient billing, integrate with health records, and manage insurance claims, ensuring both efficiency and data protection compliance.
- Educational institutions. In this case, custom systems enable to cater to tuition fees, donations, and other charges, integrating with student databases for a seamless financial experience.
- Non-profit organizations. They may require specialized systems for handling donations, memberships, and fundraisers, ensuring transparency and donor trust.
- Real estate and property management companies. Custom solutions can streamline rent collections, property sales, and lease payments, integrating with property databases.
- Subscription-based businesses. Tailored systems can manage recurring billing cycles and payments, enhancing the user experience.
- Hospitality and travel industry. Customized solutions can help cater to bookings, ticketing, and reservations, integrating with booking databases and managing multiple currencies.
- B2B businesses. Their unique invoicing and bulk transaction needs can be managed efficiently with custom systems that also handle international digital payments.
- Crowdfunding platforms. With an integrated payment gateway, specialized systems can cater to campaign-specific fund collections and disbursements, ensuring transparency and security.
You may think, why do any businesses even care to get involved with payment gateway software development? After all, some of them may stick with conventional bank-provided solutions, while others, such as e-commerce businesses, can exploit the built-in payment processing provided by platforms like Shopify or WooCommerce. Well, depending on the number of transactions, location of the business, and other factors, companies may opt to implement payment gateway solution for the following reasons:
- Tailoring to specific needs
- Cost efficiency in the long run
- Flexibility and scalability
- Competitive advantage
- Integration with your own software solutions
- Enhanced security options
- Better ownership and control
- Avoiding third-party limitations
- Better User Experience
- Regulatory compliance
Typically, larger businesses looking for tailored solutions to align with their unique operational, security, regulatory, or scalability needs can find payment gateway development as a promising investment opportunity.
How to Build a Payment Gateway
For starters, let’s get an insight into the entire gateway payment processing flow:
As we can observe, the online payment gateway system is a fintech solution that is tightly coupled with other participants of the processing flow. Now, let’s review how to create a payment gateway step by step:
#1 Research & Planning
Before diving into payment gateway implementation, conduct comprehensive market, user, and product research. Take into consideration the following:
- Target audience
- Regional regulations
- Type of transactions
- Types of currencies
- Prevalent payment methods
- Potential user requirements.
Besides, you need to set a clear project scope and budget in this step. The preliminary phase establishes a strong foundation, guiding the subsequent steps and ensuring that your payment gateway aligns with user expectations and industry standards.
#2 Create Your Payment Gateway Infrastructure
Design a robust and scalable architecture. The main elements of an online payment gateway system are:
- Backend architecture. Build a strong fintech server architecture that can handle large traffic levels while maintaining excellent uptime. Consider cloud-based solutions because of their scalability and redundancy.
- Database. Create a safe database system to hold transaction records, user data, and other important information.
- API. Develop or request ready-made APIs that allow your payment gateway to be easily integrated into merchant systems.
You will also need to choose a reliable hosting solution that guarantees uptime and quick response rates. Besides, factor in redundancy mechanisms to handle failures and maintain seamless operations.
#3 Choose a Payment Processor
As I mentioned previously, you don’t need to create a payment processor yourself, as you can choose among ready-made and freely available options on the market. When selecting one, consider their transaction fees, settlement times, supported payment methods, and regions of operation. Ensure the chosen processor aligns with your business needs and can integrate seamlessly with your infrastructure.
#4 Select a Processing Method
Here you can choose between direct processing or using hosted payment gateways:
- Direct processing. When using direct processing, businesses handle transactions right on their website or platform. This means they have full control over the user experience, allowing them to maintain consistent branding throughout the payment process. While this method offers greater flexibility, it comes with the responsibility of handling sensitive customer data.
- Hosted payment gateways. Opting for hosted payment gateways means businesses entrust the payment process to third parties. When customers are ready to pay, they’re redirected to a secure page managed by the payment service provider. Once the transaction is complete, they’re then directed back to the original site. This method alleviates much of the security and compliance burdens of the business.
Guide the choosing between these two options based on the business’s requirements, capabilities, and priorities.
#5 Ensure Security
For a payment gateway, it’s essential to implement end-to-end encryption to safeguard sensitive data. Implementing security protocols like Secure Socket Layer (SSL) certificates ensures encrypted links between servers and browsers. Compliance with standards such as the Payment Card Industry Data Security Standard (PCI DSS) is also crucial, protecting both your business and your customers from potential breaches.
#6 Integration with Banks and Card Networks
To accept digital payments, your custom gateway must seamlessly connect with banks and major card networks like Visa, Mastercard, and American Express. Probably you are not obligated to partner with all the mentioned, but you have to have at least one institution backing you up.
Establishing secure and efficient communication channels with financial entities ensures smooth transactions. Integration may involve API integrations, partnerships, or contracts with banking institutions and card networks.
#7 Interface Development
After all, a payment gateway is a customer-facing software. The user interface (UI) has a significant impact on the experience of a user using your customer payment gateway, for example, to purchase an item from an e-commerce store. An intuitive, well-thought-out interface can help reduce cart abandonment rates and improve customer satisfaction.
Interface development involves creating:
- The merchant dashboard, where businesses can view and manage transactions
- The customer payment interface, which is responsive and accessible across devices
An intuitive, well-thought-out interface can help reduce cart abandonment rates and improve customer satisfaction. At the same time, a good dashboard makes it easier for businesses to work with your system and ensures that they stick with it for a prolonged time.
Before going live, thorough testing is essential. This involves checking for any vulnerabilities, ensuring integrations work as expected, and simulating transactions to guarantee the system processes payments correctly.
Regularly conducting both manual and automated tests, including stress and load testing, ensures that the custom gateway works reliably and all emerging cyber threats are adverted.
After exhaustive testing, it’s time to launch the payment gateway. Roll out the system, preferably in phases, to monitor and address any unexpected issues. Inform your stakeholders, especially potential clients and users, about the new gateway and its features.
#10 Ongoing Maintenance and Updates
The modern business environment evolves rapidly. Regularly updating your payment gateway ensures it remains compatible with changing technology, maintains high-security levels, and incorporates any necessary improvements or new features. This involves periodic code reviews, updating software components, and ensuring compliance with any new regulations.
#11 Customer Support
Offering stellar customer support is vital for any service, but especially so for custom gateways where issues can directly impact a business’s revenue. Establish a dedicated team to:
- Assist users
- Troubleshoot issues
- Address emerging concerns.
Providing round-the-clock support, creating comprehensive FAQs, and offering resources like tutorials can significantly enhance user trust and satisfaction.
Components of a Payment Gateway Architecture
You already have an idea of a payment processing system as of multi-layered sandwich. At the same time, a custom gateway is a complex software with various functionalities included on its own. Here is the list of basic components, layers, and features that most payment gateway has:
Payment Request API
Payment request API acts as a bridge between the merchant’s digital platform, whether it’s a website or an app, and the payment gateway. It standardizes how payment initiation requests are made.
As soon as a customer confirms their intention to buy, this API swiftly communicates with the gateway, signaling it to jump into action. Its seamless integration ensures that users experience an uninterrupted payment flow, which is central to maintaining user trust.
The UI transcends being just about visuals. While it certainly comprises elements such as buttons, input fields, and confirmation screens, it’s fundamentally about crafting a seamless and intuitive payment experience.
Every element should be designed with the user in mind, ensuring they can swiftly navigate through the payment process. Not only does it increase the rate of successful transactions, but it also reduces the burden on customer support.
The security layer envelops every piece of sensitive data, such as credit card details and personal identification information, in layers of encryption, typically SSL/TLS protocols. Beyond encryption, tokenization is another technique often employed. It replaces confidential data with unique identification symbols, retaining all the essential information without compromising security.
This multi-faceted security approach ensures that data remains impervious to breaches and cyber-attacks. Sensitive customer financial information is probably the most critical data that must be protected as well as possible. Failure to establish reliable security mechanisms not only damages a company’s reputation but may also result in PCI compliance fines and penalties.
Payment Methods Support
The importance of supporting multiple payment methods rises as the digital payment environment becomes more diverse. Modern gateways need to cater to a range of options:
- Traditional credit cards
- Traditional debit cards
- Digital wallets
- Direct bank transfers
This inclusivity ensures that users are never constrained by choice, allowing them to opt for the method they’re most comfortable with, leading to a higher probability of transaction completion.
The ability of a payment gateway to support and convert multiple currencies expand its reach to the international level. An effective custom gateway doesn’t just show the amount in local currency but seamlessly handles the intricacies of currency conversion. Behind the scenes, it synchronizes with foreign exchange data sources, ensuring that the conversion rates applied are current.
This transparent process eliminates any confusion for the user and ensures businesses can operate smoothly across borders.
Payment Gateway Servers
You’ll need a server to host your gateway, either your own or one provided by a third party. If you use your own server, you must consider audits and maintenance for any related data centers.
The servers are tasked with processing vast numbers of transactions, interfacing with bank systems, and ensuring the transaction’s successful culmination. The performance of payment gateway servers dictates the gateway’s overall efficiency, making them crucial for maintaining operational fluidity and ensuring timely, successful online payments.
Fraud Detection and Prevention
Fraud detection and prevention mechanisms are the sentinels that stand guard against any malicious actors attempting to exploit vulnerabilities. The measures that can be taken here include:
- Dynamic monitoring. Sophisticated fraud detection systems that dynamically monitor every transaction, analyzing patterns and behaviors in real time.
- Multi-factor authentication (MFA). MFA requires users to provide multiple forms of identification before a transaction is approved. This could be something they know (password), something they have (a phone or token), or something they are (biometric verification).
- Geolocation checks. By determining the geographical location of the transaction initiator, systems can flag transactions initiated from high-risk locations or those that don’t align with a user’s typical activity pattern.
- Tokenization. Instead of transmitting actual card or account details, tokenization replaces this sensitive information with unique identification symbols. This ensures that even if data is intercepted, it remains useless to fraudsters.
It’s important to understand that companies often use services by third-party providers to build those security layers. For example, sending an OTP code to a user’s device during multi-factor authentication may require assistance from a communication service and bulk messaging provider. It’s important to ensure that such external vendors are trust-worthy.
Ensuring that a payment gateway adheres to recognized global standards is not just about meeting regulatory requirements; it’s about establishing a foundation of trust and reliability. Besides the mentioned PCI DSS as well as SSL and TLS, it’s worth paying attention to the following:
- General Data Protection Regulation (GDPR). For organizations operating within the European Union or dealing with EU citizens, GDPR compliance is crucial. It mandates the protection of personal data and upholds the data rights of individuals.
- Local regulations. Beyond global standards, payment gateways must be attuned to local regulations and standards. These might pertain to data storage, transaction data thresholds, or specific reporting requirements.
- Regular audits. Adhering to standards is not a one-time activity. Regular audits, both internal and external, ensure that the gateway remains compliant and any potential vulnerabilities are identified and addressed promptly.
As I can confirm, by succeeding in taking all that into consideration and adhering to best practices, the business can achieve in creating a truly secure software solution for payment processing.
Pros and Cons of Creating and Owning a Custom Payment Gateway
Before full-scale investing in a payment gateway project, you need to weigh the pros against the cons. Here’s the list of benefits you will reap if you create your own payment gateway:
- Lower monthly and per-transaction fees over time
- Full control over payment processing
- The ability to create your own custom features
- The opportunity to sell your payment gateway services to other companies
- Custom payment systems are more versatile because they allow multi-currency transactions.
As with any digital product development, you will face these issues when building a payment gateway:
- Considerable set-up costs, including all required certifications, developer fees, and audits
- Lengthy set-up time between development, UX testing, and ongoing maintenance
- Requires more manpower than an out-of-box solution
- Responsibility for security falls solely on your shoulders
- Creating a secure payment system requires the expertise from a fintech provider
In case you are not willing to get started with your payment gateway but still need the technology to enable direct payment processing, you can consider requesting integration.
For example, you can consider integrating with Stripe — a provider of financial infrastructure.
The payment gateway integration process includes the following steps:
- Choose a payment gateway
- Set up a merchant account
- Obtain API keys
- Integrate the payment gateway
- Test the payment gateway
- Go live
*For additional information on who merchants in fintech are, read another our blog post. *
There are dozens of organizations offering payment gateway services. Choose among them based on payment service fees, payment methods, security options, easiness of integration, and the reliability of customer support.
A payment gateway is a complex, multi-component software that serves as one of the participants in the digital transaction processing workflow. The development of such a custom solution gives businesses and their customers more flexibility in handling transactions online, as well as grants additional business opportunities.
Partnering with a provider of fintech services, including custom payment gateway development and integration, is how you can ensure the success of your project. Let DashDevs, a company with more than 12 years of experience in the market, assist you in this matter.
Contact us to book your free strategy session. Let’s discuss the development of a custom payment gateway or other IT opportunities for your business.