The 4 Types of Payment Gateways and How Each Works

Here’s what ecommerce merchants need to know about the four payment gateway types, including pros, cons and which to use for your company.


January 11, 2024

Payment gateway graphic

The saturation of the ecommerce subscription market means merchants must stand out if they want a chance at success — and there’s one big differentiator that doesn’t immediately come to mind for merchants: Shoppers want payment options.

Our May 2022 Subscription Commerce Conversion Index found that 82% of subscribers wanted merchants to allow them the option to pay with their preferred method. That means accepting more payment types is almost always going to be a good proposition for merchants.

Different types of payment gateways process different kinds of online payments. Some only handle the basics (like Visa and Mastercard); others give you a range of options. But before you choose the best payment gateway for your business, you must understand the different types.

Choosing the right payment gateway type for your ecommerce business means navigating tradeoffs between convenience, customer experience and functionality. Read on to learn where each type of payment gateway shines and where it falls short.

How Do Payment Gateways Work?

Payment gateways are one step in the payment processing chain. They transmit a customer’s credit card details to the payment processor, then inform you (and your customers) whether a payment has been declined or approved.

As a foundational part of your payments process, payment gateways are also the source of some vital functionalities that shape how customers experience that process. For one, they’re the root of Payment Card Industry (PCI) compliance, which card brands require of merchants who want to accept their payments. In some states, PCI compliance is also required by law. You want your payment gateway to follow PCI standards, so you don’t have to build them into your site on your own (which takes a lot of work and resources).

Payment gateways also determine everything about the types of payments your company can accept. Some only process credit card payments; others accept payments from digital wallets like PayPal and buy now, pay later (BNPL) services. Some are local to the United States and can only process transactions in USD; others only operate in other countries and currencies. Because every gateway will only work for a certain segment of buyers, many sellers use more than one to give their customers more payment choices.

These functionalities (and limitations) are shared across all payment gateways. Each payment gateway type also has its own benefits and drawbacks for ecommerce merchants.

Type 1: Hosted Payment Gateways

Hosted payment gateway flow chart

Hosted payment gateways are the easiest for ecommerce merchants to set up but come with less control. Rather than being embedded on your site, these gateways live on the provider’s site. Shoppers are redirected to that site during the purchase process, so they won’t be entering their payment details on your site — they’ll be giving it straight to the payment gateway.

You’ve probably heard of many of these payment gateways: services like PayPal, and Square Online all fall under this umbrella.

Pros of Hosted Payment Gateways

Since you’re not the only one handling customers’ payment information, you don’t have to worry about safety and security issues like PCI compliance and fraud protection. These gateways are also the simplest to set up because all you have to do is configure your payment flow to redirect buyers to the gateway site (and then have the gateway site send them back to you once the purchase is complete).

Cons of Hosted Payment Gateways

Redirecting buyers away from and then back to your site complicates the payment experience for the customer. They’ll have to load multiple pages as part of the checkout process. Plus, the payment gateway site won’t match your branding, and the UI and UX may not be what you would choose.

Hosted payment gateways also tend to charge higher costs as they provide more services to merchants.

Who Are Hosted Payment Gateways Best For?

We recommend hosted payment gateways to ecommerce newcomers and merchants that are bootstrapping their businesses. Companies without large tech-savvy teams benefit from the ease of use. If you have a low sales volume and a very simple web presence, a hosted payment gateway may be the best fit for your needs.

Type 2: Onsite (Self-Hosted) Payment Gateways

onsite payment gateway flow chart

Onsite payment gateways allow you to collect customer payment information on your site — no redirect necessary. In most cases, your site must encrypt a buyer’s credentials and transmit them to the gateway. Some onsite gateways can be embedded so you don’t have to handle customer payment data directly. Either way, an onsite payment gateway allows you to keep the customer on your site throughout the payment process.  

Some examples of popular onsite payment gateways include Braintree and Stripe.

Pros of Onsite Payment Gateways

Onsite payment gateways create a smoother customer experience than hosted payment gateways because they don’t require multiple redirects. You’ll also have more control over the branding and interface.

Since customers will be inputting their payment data on your site, you’ll be able to keep records of your buyers’ payment and purchase data. These details are helpful for merchants who want to experiment with features like personalized promotions and recommendations.

Cons of Onsite Payment Gateways

Onsite payment gateways require more work on your part. Implementation may take a bit more time and tech skills (though most of these companies offer good documentation and integrate with popular ecommerce platforms).

Security is another concern of companies that opt for onsite payment gateways. Since you’re the one collecting the payment information, you need to take steps like tokenization to keep that data safe. You’ll also need to implement fraud protection to protect your customers and yourself.

Who Are Onsite Payment Gateways Best For?

We recommend onsite payment gateways for the majority of SMBs in the ecommerce space. As long as you have some internal technology expertise, you should be able to work with these providers’ documentation and tech support to set up a secure and smooth checkout experience.

Type 3: Offsite (API-Hosted) Payment Gateways

offsite payment gateway flow chart

You can use an API-hosted payment gateway to build a custom payment flow that integrates fully with your site. When working with an API, you take the lead in gathering the customers’ payment details and processing the payments. All payment information is sent to the payment processor through HTML queries or via the API.

API payment gateways are growing more popular. You may be familiar with names such as NMI, Adyen and Cybersource.

Pros of Offsite Payment Gateways

Offsite payment gateways are the top choice for businesses that want full control over their checkout experience. Unlike an onsite gateway, you won’t be plugging a payment gateway into your site’s backend and configuring it to work with your frontend. That means you have more flexibility when it comes to customizing your checkout flow.

Cons of Offsite Payment Gateways

It’s not easy to implement an offsite payment gateway. You’ll need significantly more tech expertise than you would to use a hosted or onsite gateway — so this is not a good option for companies that don’t have experienced developers on staff.

This is the only payment gateway type that does not have PCI compliance built in. Your team will need to implement best practices and keep your SSL certification up to date. Plus, you’ll need to cover your bases with fraud protection.

Who Are Offsite Payment Gateways Best For?

We only recommend offsite payment gateways for enterprise businesses or mature ecommerce operations with a depth of internal knowledge regarding technology and payment security best practices. Smaller, less-experienced companies are too likely to make errors that could cause payment outages or data breaches.

Type 4: Local Bank Integration Payment Gateways

bank payment gateway flow chart

Local bank integration payment gateways are similar to hosted payment gateways but are hosted directly by banks. Customers are redirected to a bank’s site to complete the transaction, then sent back to your site once the purchase is finished.

These gateways aren’t as common as the other three types, but you may have heard of options from J.P. Morgan and Bank of America.

Pros of Local Bank Integration Payment Gateways

Local bank integration gateways make the payments process easy on you by sending customers to a site that’s secure and trustworthy. They’re easy for merchants to set up and work with. Plus, they build on your existing relationship with your bank.

Cons of Local Bank Integration Payment Gateways

Like hosted payment gateways, local bank integration gateways can be frustrating for customers. Most buyers don’t want to be shuttled between sites when trying to make a purchase. These gateways also typically have lower processing limits, so if business grows, your transaction volume may overwhelm the gateway’s capabilities.

Who Are Local Bank Integration Payment Gateways Best For?

We only recommend local bank integration payment gateways for small businesses or solopreneurs with a small sales volume that isn’t likely to grow. All other merchants will be better off choosing one of the other payment gateway types.

Open New Possibilities With the Right Payment Gateway Type

Once you know the payment gateway type that’s best for your business, it’s time to ask which features are best for your customers. Evaluate each option on the following details:

  • Security offerings, including PCI compliance and anti-fraud measures
  • Support for the payment types your customers use most
  • Ability to handle payments from your customers’ home countries and in their local currencies
  • Integration capabilities and how well they match your current setup
  • Processing limits
  • Costs

These six details can help you sort through available payment gateways to find the best options for your business. We expect most ecommerce merchants will choose at least two gateways to work with so they can offer customers a wider range of payment options. Companies with higher purchase volumes and larger (and more widespread) customer bases are likely to need even more payment gateways.

When it comes to meeting customers’ expectations on payment choice and convenience, it’s all down to the payment gateways you choose. Keep your buyers loyal by giving them a smooth and accommodating purchase experience.

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