What Is a Payment Gateway?

If you’re just starting an online business, you might be wondering how to take payments on your website. That’s where a payment gateway comes in—it’s the system that securely handles every card transaction, making sure the money from your customer’s card gets to your bank account. Without it, you can’t accept online payments.

And with £38 billion lost to cart abandonment in the UK in 2024 alone, it’s vital to make checkout smooth, secure, and easy for your customers. In this guide, we’ll explain exactly what an online payment gateway is, how it works, and how to pick the right one to get your online business off the ground.

So, What Are Payment Gateways?

A payment gateway is the system that makes it possible for your business to take payments online.

While gateways were originally built just for card payments, today’s systems are much more flexible. They can handle mobile wallets, crypto, BNPL, and even newer methods that we’ll explore later in this guide.

But first, let’s look at the big picture.

The UK's e-commerce scene is booming. Online retail sales hit £177.11 billion in 2024, making online shopping nearly a third (30.4%) of all retail sales, with smartphones generating 63% of the online shopping orders.

However, businesses are losing potential sales at the final hurdle since 77% of people shopping on their phones abandon their baskets, and even on computers, 69% of shoppers stop before buying. Overall, roughly three out of four shopping journeys end in abandonment, mostly due to unexpected costs like shipping and taxes that pop up at checkout.

Then there's the fraud problem, which is getting expensive fast. Card-not-present fraud, mostly from online shopping, accounted for the majority of payment card fraud overall, reaching £570 million in just the first half of 2024.

It’s easy to see how retailers find themselves caught between a rock and a hard place. Make checkout too simple, and fraudsters have a field day. Add too many security steps, and customers get frustrated and leave. Either way, you're losing money, whether it's to abandoned carts or fraudulent transactions.

This is where online payment gateways become absolutely crucial. They're the behind-the-scenes technology that handles the online payments for your business. When a customer types in their card details and clicks "pay," the gateway takes over and does three crucial jobs: it secures the payment information, checks if the transaction is legitimate, and gets the money from the customer's bank to yours.

Read: E-Commerce Payment Security: Ensuring Safe Transactions

How Does a Payment Gateway Transaction Work?

Let’s say a customer’s ready to buy something from your website. They enter their card details and click “Pay.” From there, the payment gateway steps in and kicks off a process that’s surprisingly quick (usually just a few seconds) but involves several important steps behind the scenes.

Here’s how it all plays out:

1. The customer initiates the payment by providing their card details online. The gateway securely collects the customer's card number, expiry date, and security code from your checkout page.
2. The gateway encrypts the data – It immediately locks down the sensitive payment info using advanced encryption to keep it safe. Gateways must meet PCI DSS standards (a strict set of rules for handling card data securely).
3. The data goes to the payment processor – The gateway passes the info to a payment processor, which checks that everything looks legitimate. At this stage, basic anti-fraud checks are already happening.
4. The processor contacts the card network – Think Visa, Mastercard, etc. They forward the request to the customer’s bank.
5. The bank checks the transaction – It confirms whether the customer has enough money, that the card is valid, and that the transaction doesn’t look suspicious. Many banks now use AI-powered tools to flag anything unusual in real time.
6. The response comes back – If the bank approves the payment, the message travels back along the same path: card network → processor → gateway → merchant’s website or POS.
7. The transaction is confirmed – The customer sees a “Payment successful” message, and the money is on its way to your account.

In most cases, you’ll get a confirmation instantly, but the actual settlement of funds can vary.

Later in the article, we’ll look at different payout speeds, cost structures, and what you should look for depending on your business size.

Payment Gateway vs Payment Processor: What’s the Difference?

These two terms often get thrown around together—and sometimes even used interchangeably—but they’re not the same thing. A payment gateway and a payment processor work together to complete a transaction, but they handle different parts of the job.

Here’s a simple way to think about it:

• The payment gateway collects your customer’s payment details and sends them off safely for processing. If you’re selling online, the gateway is the bit that connects your checkout page to the wider payment system.
• The payment processor is the engine in the background. It handles the actual movement of money, connecting your customer’s bank to your business account and making sure the funds go where they should.

Noda offers both payment gateway and payment processing services, integrating them into a unified platform designed for online businesses, simplifying payment operations and reducing the need for multiple service providers.

Firstly, Noda functions as a payment gateway by securely collecting and transmitting customer payment details. It supports various payment methods, including:

• Card payments (Including Apple Pay, Google Pay)
• Account-to-account bank transfers via Open Banking

Noda also acts as the payment processor, handling the transfer of funds from your customer’s bank to your business account, taking care of refunds, and ensuring everything runs smoothly in the background.

• Connects with over 2,000 banks across 28 countries
• Facilitates direct bank payments through Open Banking API
• Handles instant payouts and refunds
• Ensures compliance with regulatory standards, including KYC and AML requirements

This ultimately allows businesses to handle transactions seamlessly from initiation to settlement.

Types of Payment Gateways

Not all payment gateways work the same way. Depending on your business size, how your website is built, and what kind of checkout experience you want to offer, you’ve got a few options.

Let’s take a look:

Hosted Payment Page (Redirect Gateway)

With this option, your customer is sent to the payment provider’s secure page to enter their payment details. Once the payment is complete, they’re redirected back to your website.
It’s a simple and secure option because the payment provider handles the sensitive card data, and you don’t have to worry about PCI compliance. This setup is great if you want a quick and easy way to start accepting payments.

Direct API (Server-to-Server)

This setup keeps your customer on your site the whole time. The payment details go straight from your checkout form to the gateway’s system via a secure API connection. It creates a smooth experience for your customer, but it also means you’re handling more sensitive data, so you’ll need to make sure your system meets strict security standards.

Client-Side Encryption

With this method, the customer’s payment information is encrypted right in their browser before it’s sent anywhere. That way, even if someone intercepts the data in transit, it’s protected. It’s a smart balance: you still get control over the checkout process, but the encryption adds an extra layer of security, helping you stay compliant without needing to build everything from scratch.

Platform-Integrated Payment Gateway

Many e-commerce platforms come with a payment gateway built in. You don’t have to worry about connecting to a separate payment provider; everything’s already there, ready to go. It’s an easy, all-in-one solution that saves time on setup and often comes with competitive processing rates. Ideal if you want to focus on your products and leave the payment side to the platform.

How do Payment Gateways Ensure Payments Are Secure?

A good payment gateway uses multiple layers of security to make sure everything stays locked down and protected from fraud or data breaches, including:

PCI DSS Compliance

This is the gold standard for payment security. All gateways must comply with the Payment Card Industry Data Security Standard (PCI DSS). It’s a set of rules that control how card data is stored, processed, and transmitted. If your gateway is PCI compliant, that’s a solid first sign you’re in safe hands.

Encryption

As soon as your customer enters their card details, the gateway encrypts the data, scrambling it into unreadable code so no one else can see it. This encryption happens both in transit (while the data moves through the internet) and at rest (if it’s stored).

Tokenisation

Instead of storing actual card numbers, many gateways use tokenisation. This means they replace sensitive card details with a random string of characters (a "token"). Even if a hacker got hold of the token, it’s useless without the rest of the system.

3D Secure (SCA)

In the UK and across Europe, Strong Customer Authentication (SCA) is now required for most online payments. This usually involves 3D Secure, where the customer gets a text, push notification, or fingerprint prompt from their bank to confirm the transaction.

Fraud Detection Tools

Modern gateways also come with built-in fraud prevention systems. These use machine learning to flag suspicious activity, like unusual locations, large orders out of the blue, or mismatched billing and shipping details.

What Makes Noda Different?

Most payment gateways rely on cards, which sounds fine at first, but it quickly adds up. Fees eat into your profits, settlements take days, and there are always extra middlemen like Visa, Mastercard and issuing/acquiring banks taking their cut.

Instead of routing payments through card networks, Noda uses direct bank payments powered by Open Banking. That means payments go straight from your customer’s bank account to yours, so you don’t have to deal with cards, long wait times, or extra fees.

You get:

• Lower costs – With no card networks involved, you avoid extra fees. Noda charges from just 0.1%, so you keep more of what you earn.
• Faster settlement – Money often lands in your account within seconds, not days
• More control – Real-time insights into your payments and customer behaviour
• Simple setup – Works with your website, app, or payment links without the usual complexity. It also offers ready-made plugins for platforms like Magento, OpenCart, PrestaShop, and WooCommerce, plus a powerful API for custom integrations.

And with dedicated support from a real account manager, you’re never left figuring it out on your own.

Want to see how Noda works?
Book a quick demo, and we’ll show you how it can save you time and money while keeping your payments secure and seamless.