Types of Payment Gateways: What They Are & How They Work

1. What are payment gateways?

A payment gateway is the secure technology that makes digital payments possible by acting as a bridge between the customer, the business, and their banks. It captures, encrypts, and transmits sensitive payment details - like card numbers or e-wallets credentials - while ensuring transactions are processed quickly and safely.

Think of a payment gateway as the digital cashier of your online store. Just as a cashier verifies money and completes the handover in a physical shop, the gateway authenticates payment information and ensures funds move smoothly from buyer to seller. Without it, online shopping wouldn’t feel nearly as effortless, secure, or trustworthy.

2. How do payment gateways work?

A payment gateway might look like a simple checkout button to customers, but behind the scenes, it runs a complex sequence of digital events in just a few seconds. Here’s how the process works in simple terms:

Customer enters payment details: When someone makes a purchase online, they type in their card or wallet information on the checkout page.
Encryption for security: The payment gateway immediately encrypts this sensitive data to keep it safe from fraud or theft.
Sending the request: The gateway passes the encrypted details to the payment processor, which then connects with the card network (like Visa or Mastercard).
Bank verification: The card network routes the request to the issuing bank (the customer’s bank). The bank checks if the details are valid and whether the customer has enough funds or credit.
Approval or decline: The bank sends back a “yes” or “no,” which flows through the card network, processor, and gateway until it reaches the business and the customer.
Funds transfer (settlement): If approved, the money is moved from the customer’s bank to the merchant’s account (after deducting small gateway and processing fees). This transfer usually happens within a day or two.

Think of it like sending a secure package: the payment gateway is the courier who collects your parcel (payment details), seals it for protection (encryption), and delivers it through a chain of checkpoints (processor, card network, banks) before finally confirming delivery to the merchant. All of this happens in seconds, making online payments feel instant and effortless.

Also read: Payment Processing Software: Everything You Need to Know

3. Main types of payment gateways

There are four main types of payment gateways, each of which comes with its own characteristics and a set of pros and cons. Let’s look at each type in detail.

3.1. Hosted gateways

A hosted payment gateway is a type of gateway managed entirely by a third-party provider. Instead of entering their card details directly on your website, customers are redirected to the provider’s secure payment page (for example, PayPal or Square). Once the transaction is complete, they’re sent back to your site with confirmation of payment.

Hosted gateways

Pros of hosted gateways

High security: Sensitive payment data is handled directly by the provider, who takes care of encryption, fraud detection, and PCI DSS compliance. This spares businesses from the heavy responsibility of managing complex security systems.
Easy setup: Integration is simple, often requiring just a code snippet, plugin, or redirect link. Even small businesses without technical teams can quickly start accepting payments.
Reliability: These gateways are maintained by established providers with global infrastructure, ensuring strong uptime, fewer errors, and secure payment processing.
No compliance burden: Since the provider is responsible for regulatory standards and audits, businesses avoid the costly and time-consuming task of managing compliance themselves.

Cons of hosted gateways

Customer redirection: Shoppers are redirected to an external page to complete payment, which can interrupt the checkout flow and sometimes cause confusion or hesitation.
Limited branding: The hosted payment page usually cannot be fully customized, making it harder for businesses to maintain a consistent brand experience during checkout.
Higher fees: Because providers handle both security and infrastructure, they often charge slightly higher transaction fees, which can add up for high-volume merchants.
User experience risk: Multiple page loads and the need to switch between sites can feel inconvenient, increasing the risk of cart abandonment compared to seamless on-site gateways.

3.2. Self-hosted gateways

A self-hosted gateway is a payment solution where all transaction data is collected and processed directly on the business’s own website or app. Unlike hosted gateways, there’s no redirection - customers stay on the merchant’s platform from start to finish.

Self-hosted gateways

Pros of self-hosted gateways

Full control over customer experience: Since the checkout happens entirely on your site, you can design every element - from branding to user flow - creating a consistent and professional experience that matches your business identity.
Ownership of payment data: Businesses gain direct access to valuable customer and transaction information, which can be used for personalized marketing, loyalty programs, or advanced analytics to drive repeat sales.
Customizable features: From adding tailored payment options to designing a unique checkout process, self-hosted gateways give merchants the flexibility to align the system perfectly with their operational and customer needs.
Potential cost savings: By cutting out certain third-party digital payment services, large enterprises can reduce long-term transaction fees and gain efficiency, especially if they already have strong technical infrastructure in place.

Cons of self-hosted gateways

High technical demands: Implementing and maintaining a self-hosted gateway requires significant IT expertise and ongoing support, which can be challenging for businesses without a dedicated technical team.
Heavy security responsibility: Since payment data is handled directly on your servers, your business must ensure compliance with PCI DSS standards, fraud detection, and data encryption - a costly and complex burden if mishandled.
Greater setup and maintenance costs: Compared to plug-and-play hosted solutions, self-hosted gateways often involve higher upfront infrastructure investments and ongoing expenses for updates, audits, and monitoring.
Risk of downtime or errors: Because you manage the system in-house, technical issues or outages fall entirely on your team, which could disrupt transactions and hurt customer trust if not managed properly.

3.3. API-hosted gateways

An API-hosted gateway processes payments directly on the merchant’s website or app through an Application Programming Interface (API). This setup keeps customers on the same platform during checkout, allowing for a fully integrated, branded experience. The API acts as the bridge that securely transmits payment data to the processor and returns the transaction status in real time.

API-hosted gateways

Pros of API-hosted gateways

Seamless customer experience: Customers never leave your site or app to pay, resulting in a fast, fluid checkout process that feels fully integrated into your brand’s digital ecosystem.
Full customization and control: Merchants can design the payment flow to fit their exact requirements - from layout and branding to added features like loyalty rewards, upselling, or multi-step checkout logic.
Scalable for growth: With API integration, businesses can easily adapt their payment systems to handle larger transaction volumes, new currencies, or additional payment methods as they expand globally.
Support for diverse payment options: Many API-hosted gateways allow you to accept multiple currencies, local payment methods, and digital wallets, making it easier to serve an international customer base.

Cons of API-hosted gateways

High technical expertise required: Implementing and maintaining an API-hosted gateway demands advanced programming and web development skills, making it less ideal for businesses without an experienced IT team.
Strict compliance responsibilities: Because you handle cardholder data directly, your business is responsible for PCI DSS compliance, encryption, and fraud prevention - which can be complex and resource-intensive.
Ongoing security investments: Data security measures like SSL certification, data encryption, and regular system audits are non-negotiables, adding to the cost and effort of maintaining a secure payment environment.
Risk of costly mistakes: Any misstep in handling sensitive payment data could lead to security breaches, fines, or loss of customer trust, making this option best suited for businesses ready to take on that responsibility.

3.4. Local bank integration gateways

A local bank integration gateway connects an online business directly with a bank’s own payment system. When a customer makes a purchase, the payment data is routed through the gateway to the local bank, which processes the transaction and sends the result back to the merchant’s site or app. In many cases, the customer is briefly redirected to the bank’s secure page to complete payment, then returned once the purchase is finished.

Local bank integration gateways

Pros of local bank integration gateways

High trust with local customers: Because payments are processed through a known and reliable local bank, customers feel more confident completing transactions, which can increase satisfaction and reduce abandoned carts.
Lower transaction fees: Many local bank transfer gateways offer lower processing costs compared to international providers, helping businesses save money while boosting conversion rates in specific regions.
Easy to set up for merchants: Since these gateways are hosted directly by banks, they usually require less technical setup than fully API-driven solutions, making them a simpler entry point for small and mid-sized businesses.
Builds on existing banking relationships: If a business already works with a bank, integrating payments through that same institution can streamline communication, settlement, and overall financial management.

Cons of local bank integration gateways

Limited payment options: These gateways often don’t support returns, recurring billing, or modern methods like digital wallets, restricting flexibility for both customers and merchants.
Technical complexity for integration: Connecting directly with a bank’s API can be challenging, requiring specialized development skills and ongoing maintenance to keep everything running smoothly.
Disruptive checkout flow: Customers are redirected away from the merchant’s site to the bank’s payment page, which can feel clunky and increase the risk of cart abandonment if the experience isn’t smooth.
Lower scalability: Local bank gateways typically have lower processing limits and fewer advanced features, meaning they may struggle to handle larger transaction volumes as a business grows.

4. How different types of payment gateways compare

Choosing the right payment gateway isn’t just about enabling transactions - it’s about balancing ease of integration, cost, speed, security, and the overall customer experience. Let’s dive into the differences between four types of payment gateways to find out which one is the best choice for your business.

4.1. Comparing four types of payment gateways

Ease of integration

Hosted gateways: The easiest to set up, usually requiring nothing more than embedding a link or button that redirects customers to the provider’s secure site.
Self-hosted gateways: Require significant technical expertise, since businesses must handle the payment form, data capture, and integration on their own servers.
API-hosted gateways: Also need strong technical know-how, particularly in managing API calls and responses, but provide more control over the process.
Local bank integration: Varies widely depending on the bank’s infrastructure. Some offer plug-and-play modules, while others may demand more complex custom development.

Pricing and fees

Hosted gateways: Usually charge per transaction with little to no setup cost, making them attractive for startups or businesses with inconsistent sales volumes.
Self-hosted gateways: Come with higher upfront investment compared to other types of payment gateways, including software purchases, plus ongoing costs for compliance, updates, and security management.
API-hosted gateways: Pricing models can be flexible, ranging from per-transaction fees to subscription-style charges, often tiered by transaction volume.
Local bank integration: Costs typically include setup fees, monthly service charges, and transaction fees, though larger businesses may negotiate better rates with banks.

Transaction speed

Hosted gateways: Slightly slower since customers are redirected to an external website before returning to complete their purchase.
Self-hosted gateways: Transaction speed depends on the business’s own server performance - optimized infrastructure can lead to very fast processing.
API-hosted gateways: Among the fastest types of payment gateways, enabling real-time payments directly on the business’s site or app without unnecessary redirects.
Local bank integration: Processing times depend on the bank’s systems, which may not be as optimized for speed as dedicated payment service providers.

Transaction speed

Security

Hosted gateways: Strong security built-in, with compliance handled by the provider - ideal for businesses that don’t want the burden of managing PCI DSS requirements.
Self-hosted gateways: Place full responsibility for protecting sensitive data on the merchant, requiring heavy investment in cybersecurity and ongoing audits.
API-hosted gateways: Security is shared - businesses must safeguard their end of the integration, while the gateway secures API endpoints and data transmission.
Local bank integration: Security is largely handled by the bank, offering robust protection but less flexibility in tailoring features to a business’s needs.

Customer experience

Hosted gateways: Can disrupt the checkout journey with redirects, but many customers find them familiar and trustworthy.
Self-hosted gateways: Provide a fully customizable, seamless experience where customers never leave the merchant’s site, boosting trust and reducing drop-offs.
API-hosted gateways: Offer the smoothest experience, as payments are integrated into the business’s app or site and can be branded for consistency.
Local bank integration: Trusted due to the bank’s reputation, but the checkout flow may feel rigid or less polished compared to other options.

4.2. Who is each type of payment gateways best for?

Not all payment gateways are created equal, and the right choice often depends on your business size, technical expertise, and growth goals. To help you decide, here’s a breakdown of which types of payment gateways typically work best for different kinds of businesses:

Hosted payment gateways: If you are wondering which type of payment gateway is best for small businesses, hosted payment gateways are a good choice. A hosted solution is especially suitable for online stores that are just starting out, have a simple setup, and don't yet process a high volume of sales. It takes care of the heavy lifting - security, compliance, and processing - so you don’t need a tech team to get up and running quickly.
Self-hosted payment gateways: A strong fit for small to mid-sized businesses (SMBs) that want more control over the checkout experience but still need a manageable solution. If you have some in-house technical skills, this option lets you customize the payment flow while relying on the provider’s tools and documentation for support. It strikes a balance between flexibility and ease of use.
API-hosted payment gateways: Tailored for enterprise-level or highly mature ecommerce operations. These businesses usually have dedicated development teams and the resources to handle advanced security and compliance requirements. API-hosted gateways, also known as non-hosted payment gateways, allow for a fully integrated, branded, and scalable payment process - but they demand significant technical expertise to maintain properly.
Local bank integration gateways: Best suited for solopreneurs or small local businesses with limited sales volume and minimal plans for expansion. These gateways are simple and familiar to customers in specific regions, but they typically lack advanced features like recurring payments or multi-currency support. For long-term growth, most businesses will outgrow this option and need to switch to a more versatile gateway.

5. How to choose the best payment gateway for your business

Selecting a payment gateway isn’t just a technical step - it’s a decision that affects how smoothly your business operates and how trustworthy your brand feels to customers. Here are the key factors to consider when making your choice:

Alignment with your business model
Different types of payment gateways are designed for different business types and goals. For example, an online store needs fast, secure online checkout and mobile-friendly payments while a brick-and-mortar shop with an online presence might benefit most from omnichannel support, connecting in-store point of sale (POS) systems with online sales. Even your industry matters - if you operate in high-risk sectors like travel, gaming, or crypto, ensure your provider actually supports your niche.

Transaction fees and pricing structure
Every gateway charges fees, but how they’re structured varies. You might see flat-rate pricing, interchange-plus, tiered plans, or even subscription models. Beyond the headline transaction fee, be mindful of setup costs, monthly charges, refunds, chargebacks, and international fees. What looks affordable today might be expensive as your sales volume grows. The key is transparency and scalability - choose a model that won’t eat into margins as your business expands.

Supported payment methods
Customers expect flexibility at checkout, whether that’s major credit cards, debit cards, digital wallets like Apple Pay and Google Pay, or even BNPL (Buy Now, Pay Later) options. If you sell globally, international methods like Alipay or multiple currency support become essential. Failing to meet customer preferences can mean lost sales, so choose a gateway that reflects how your customers want to pay.

Security and fraud protection
With online payments, trust is everything. Your gateway should meet PCI DSS compliance standards and offer advanced safeguards like encryption, tokenization, and two-factor authentication. Some types of payment gateways go further with fraud detection tools, chargeback protection, and geolocation checks. The more secure your system, the more peace of mind you give to both customers and your business.

Security and fraud protection

Integration and compatibility
A payment gateway doesn’t work in isolation - it needs to fit seamlessly into your existing tech stack. Look for solutions with well-documented APIs, SDKs, and plugins for platforms like Shopify, WooCommerce, or Magento. Beyond your website, check whether it integrates with accounting, invoicing, CRM, or subscription tools. Smooth integration saves time, reduces errors, and creates a frictionless customer journey.

Customer experience
Checkout is the final step before conversion, and even small frictions can derail a sale. A good payment gateway should provide a clean, intuitive process with minimal redirects. For growing businesses, customization options to brand the checkout page or support one-click payments can make a huge difference in reducing cart abandonment.

Global and scalability needs
If you’re planning to expand internationally, make sure your gateway supports multiple currencies, local payment options, and fast cross-border settlement. Also check for transaction limits - some gateways cap monthly volumes, which can be a major roadblock for fast-growing businesses. Choose a solution that can scale with your ambitions, not one you’ll quickly outgrow.

Payout speed and cash flow management
How quickly funds land in your merchant account affects your day-to-day operations. While authorizations are usually instant, settlement times can range from 24 hours to a week depending on the provider and risk profile. Some types of payment gateways also hold a rolling reserve for high-risk merchants. Knowing the payout cycle upfront helps you plan cash flow more effectively.

Customer support and reliability
Payments are the lifeblood of your business, so downtime or unresolved issues can be costly. Look for providers with strong uptime guarantees and 24/7 multi-channel support (chat, phone, email). Access to dedicated account managers or robust documentation is also valuable, especially during integration or troubleshooting. Reliable support isn’t just nice to have - it’s critical insurance for your revenue flow.

6. Conclusion

Choosing the right payment gateway isn’t just about processing transactions - it’s about shaping the customer experience and building trust at every checkout. By understanding the strengths and limitations of types of payment gateways, you can align your choice with your business model, growth goals, and customer needs.

At Sky Solution, we help businesses create seamless, secure, and scalable ecommerce ecosystems powered by advanced technology. If you’re ready to upgrade your checkout experience and drive more conversions, explore our ecommerce solutions today.