Payment gateways explained: How they work for your small business

Published Tuesday 23 December 2025

Table of contents

• What is a payment gateway?
• How payment gateways work
• Payment gateway vs payment processor
• Examples of payment gateways
• How much a payment gateway costs
• How to choose the right payment gateway for your business
• How to set up a payment gateway
• Managing payments with Xero
• FAQs on payment gateways

Key takeaways

• Evaluate payment gateway costs by considering all six fee types including transaction fees (typically 1.2% to 2.9% plus fixed amounts), fraud protection fees, token storage fees, monthly account fees, setup fees, and authentication fees to make an informed financial decision.

• Choose the appropriate gateway type based on your technical capabilities and business needs: hosted gateways for simple setup, self-hosted for seamless customer experience, or API-hosted for complete customisation control.

• Prioritise essential features like multi-currency support for international customers, Level 1 PCI DSS compliance for security, subscription payment handling for recurring revenue models, and mobile payment support to maximise conversion rates.

• Implement gateway stacking by using multiple payment providers simultaneously to offer customers more payment options, increase completion rates, and boost overall sales through familiar payment methods like PayPal alongside traditional card payments.

What is a payment gateway?

Payment gateways are secure technologies that process card payments between customers and businesses. They encrypt payment data and authorise transactions, allowing merchants to accept debit and credit card payments both online and in physical stores.

Choosing the right payment gateway is crucial for your business success. It ensures safe transactions for your customers and streamlines your payment processing. You can find more detail in this guide on five reasons to use online payment gateways.

How payment gateways work

Payment gateways work by securely processing customer card details through a series of automated steps. Here's exactly how the process works:

1. At checkout, the customer puts in their credit or debit card information.
2. Either the payment gateway runs the payment page, or your site encrypts the input fields and sends the data securely to the gateway.
3. The payment gateway encrypts the card details, conducts fraud checks, and then transmits both the cardholder's information and transaction details to the merchant's acquiring bank.
4. The acquiring bank sends this information to the relevant card scheme, for example, Visa or Mastercard, which then sends it to the issuing bank. The issuing bank runs another fraud check and either approves or declines the payment.
5. The authorisation decision is communicated back to the payment gateway which informs both the customer and the merchant whether the payment has been accepted or declined.
6. Depending on the issuing bank's decision, the payment page will either confirm the payment or prompt the customer to attempt another payment method if the transaction has been declined. Under strong customer authentication (SCA) rules, the session may also time out, as the maximum time without activity from a customer after authentication is five minutes.

Payment gateway vs payment processor

It's easy to confuse payment gateways with payment processors, but they do different jobs. Think of it this way:

• A payment gateway securely collects and sends your customer's payment information. It's like the digital version of a credit card terminal.
• A payment processor takes that information and communicates with the banks to approve the transaction and move the money.

Some services, like Stripe or PayPal, handle both roles, which simplifies the process for your business.

Examples of payment gateways

Popular payment gateway options for UK businesses include:

• Square: Simple setup, works online and offline
• Stripe: Highly customisable, developer-friendly
• Braintree: Accepts 130+ currencies, good for international sales
• GoCardless: Specialises in direct debit payments
• PayPal: Widely recognised, builds customer trust
• Worldpay: Established provider with comprehensive features
• Adyen: Global platform for larger businesses
• Amazon Pay: Leverages Amazon customer accounts
• Shopify Payments: Integrated with Shopify stores
• Opayo: UK-focused with local support

To choose the best payment gateways, consider which ones provide the functionality you need at the right cost.

For instance, Stripe is one of the most popular payment gateways in the UK and you can customise it to fit your website. If you want to get set up quickly, Square makes it easy to take payments both online and offline. Braintree accepts over 130 currencies, so it can work well if you want more international customers.

Well-known brands can help customers feel secure when they pay (for example, Amazon Pay or Shopify). You can also stack payment gateways if you want to offer more options.

How much a payment gateway costs

Payment gateway costs typically include six main fee types:

• Transaction fees: Charged per payment processed
• Fraud protection fees: Security screening costs (often per transaction)
• Token storage fees: For saving card details for repeat customers
• Monthly account fees: Regular service charges
• Setup fees: One-time activation costs
• Authentication fees: For secure customer verification using strong customer authentication (SCA) and 3D Secure 2 (3DS2), which include rules that limit customers to no more than five failed authentication attempts

How much do payment gateways charge per transaction?

Transaction fees vary by provider and typically range from 1.2% to 2.9% plus a fixed amount per transaction. For example, Stripe charges 1.2% – 2.9% + 20p per transaction with no monthly fees. Some providers combine percentage rates with fixed monthly charges.

Why do payment gateways charge fees?

Payment gateways charge fees to fund fraud protection that benefits you and other businesses that use them. These fees cover security measures that protect your business from fraudulent transactions, which is critical since customers may have up to 13 months after the transaction to report an unauthorised payment. While the costs may seem high, they provide essential protection against online fraud and chargebacks.

How to choose the right payment gateway for your business

When deciding on a payment gateway you should take into consideration the needs of your business.

Types of payment gateways

You can choose from three main types of payment gateways for your business:

Hosted gateways: Customers complete payments on the provider's secure page

• Benefits: Simple setup, high security, minimal technical requirements
• Drawbacks: Redirects customers away from your site, potentially reducing completion rates

Self-hosted gateways: Payment forms appear directly on your website

• Benefits: Seamless customer experience, higher completion rates
• Drawbacks: Requires more technical setup and offers limited customisation control

Application programming interface (API)-hosted gateways: Complete payment control on your servers

• Benefits: Full customisation, optimal user experience
• Drawbacks: Higher costs, significant technical requirements, mainly suitable for large businesses

Key features to consider

Key factors to evaluate when choosing a payment gateway include costs and these essential features:

• Multi-currency support: If you have international customers you'll want to provide a payment gateway that can handle payments made in different currencies and from different countries. Keep an eye out for any fees involved in foreign currency transactions too.
• Security and fraud checks: Online payments involve a lot of sensitive financial information, so choose a payment gateway that is Level 1 Payment Card Industry Data Security Standard (PCI DSS) compliant to keep your business and customers protected. Some gateways will provide additional means of fraud detection and screening tools which can add further protection.
• Subscription payment gateways: If any of your products are subscription-based, you'll need a payment gateway that can handle recurring payments, like GoCardless. Look for ones that can store customer details for future transactions, automatically charge them according to the subscription schedule, and offer retry options if a recurring payment fails for any reason.
• International payment gateways: To make sure you can get international sales, choose a payment gateway that can use multiple languages so your international customers can follow the payment process smoothly and confidently.
• Mobile payment support: Paying by mobile phone is becoming a common way to shop, though some payments through electronic communication networks are subject to value limits, such as £40 per transaction. Look out for payment gateways that support payments from phones and mobile devices to give your customers maximum flexibility and convenience.

Gateway stacking benefits:

• More payment options: Customers can choose their preferred method
• Higher completion rates: Familiar payment methods reduce abandonment
• Increased sales: More options typically lead to more completed purchases

Popular stacking combinations include card payments plus PayPal, Amazon Pay, or other digital wallets.

How to set up a payment gateway

Getting started with a payment gateway is usually straightforward. While the exact steps vary by provider, the process generally looks like this:

1. Choose your provider: Research and select a payment gateway that fits your business needs and budget.
2. Create an account: Sign up on the provider's website. You'll likely need to provide details about your business and bank account.
3. Integrate with your website: Connect the gateway to your ecommerce platform or website. Many providers offer simple plugins or apps for this.
4. Configure your settings: Customise payment options, currencies, and security settings in your provider's dashboard.
5. Test and go live: Run a few test transactions to make sure everything works smoothly before you start accepting real payments.

Managing payments with accounting software

Xero accounting software for ecommerce businesses helps you track your income from payment gateways. What's more, if you decide to stack your payment gateways or have multiple streams of income, you can sync your payments from Squarespace, Shopify, Wix, Etsy and WooCommerce sales data with Xero, to stay ahead with your accounting.

Find out more about how to accept payments online, and visit the Xero ecommerce hub for practical guidance.

Try Xero for free to get started.

FAQs on payment gateways

Here are answers to some of the most frequently asked questions about payment gateways.

Is Google Pay a payment gateway?

No, Google Pay is not a payment gateway. Google Pay is a digital wallet that stores payment methods on customers' devices. It works with payment gateways to process transactions but doesn't handle the payment processing.

What's the difference between a payment gateway and a processor?

A payment gateway securely collects customer payment information, while a payment processor handles transaction approval and money transfer between banks. Think of the gateway as the front door and the processor as the engine that makes payments happen.

Can I use multiple payment gateways on my website?

Yes, you can use multiple payment gateways simultaneously. This approach, called gateway stacking, gives customers more payment options and can increase your conversion rates by offering familiar payment methods like PayPal alongside traditional card payments.

Is PayPal a payment gateway?

Yes, PayPal is a payment gateway. PayPal functions as both a payment gateway and payment processor, handling the entire payment process from customer checkout to funds transfer. It also offers Payflow, a separate gateway service for businesses needing more customisation.

How can a payment gateway benefit my business?

Payment gateways benefit your business by providing secure payment processing and improving customer experience:

• Security: Protect sensitive customer payment data
• Streamlined process: Automate payment handling and reduce manual work
• Customer confidence: Professional payment experience builds trust
• Higher conversions: Smooth checkout process increases completed sales