What is a payment gateway and how does it work? Top 3 solutions for marketplaces

When building marketplace software, it is crucial to provide online payments. To remain competitive and boost consumer engagement, an organization should enable real-time or near real-time transactions.

For this purpose, software engineers can integrate a payment gateway. The main advantages of this solution are automated payment processing and increased data security. Since the team doesn’t have to develop tailor-made software, you will save both time and costs.

In this article, we will consider the most popular payment gateways — Braintree, PayPal, Stripe — to help you choose the best option for your online marketplace platform. You will also get a clear understanding of how a payment gateway works.

What is a payment gateway?

Serving as an analog of a third-party virtual terminal, a payment gateway is used for authorizing transactions. When a user makes an online purchase, the required card data is sent to a payment gateway, which forwards it to the acquiring bank and then—to the organization that issued the card.

The key tasks of this process are to:

• verify customer identity
• authorize a transaction
• protect vendors against multiple issues that include fraud, insufficient funds, exceeded credit limits, and expired cards.

With this functionality, consumers don’t have to provide their information to each individual merchant, which increases the security of sensitive data.

In addition, popular payment gateways employ data encryption to prevent cybersecurity threats. Furthermore, by integrating an online payment solution , an organization faster develops an online marketplace platform, this way reducing project costs and time-to-market.

How does a payment gateway work?

The process of carrying out online transactions using a marketplace payment gateway:

1. When making an order or purchase, a user enters the necessary payment data, which is delivered to an app payment gateway. If this operation is performed via a website, the web browser used by the buyer encrypts data — e.g., using Secure Socket Layer connections — to safeguard it from security risks.

2. This data is sent to the payment processor employed by the acquiring bank of a merchant and then — to the card association (i.e., Mastercard, Visa, American Express).

   If you aim to develop a multi-vendor marketplace, it is reasonable to automate this process by allowing transaction data to bypass merchant systems.

   As a consequence, the information will be routed directly from the browser to the gateway and finally — to the payment association sending the transaction to the card-issuing company.

3. After verifying the availability of funds, the card-issuing organization approves or declines the transaction, sending a response code to the payment processor. This code contains the reason for transaction failure, for example, credit card expiration or banking account termination.
4. If everything is okay, the authorization code is forwarded to the payment processor and next — to the marketplace platform. As a result, the transaction is performed and the funds are withdrawn from the user’s account. Thanks to the app payment gateway, the entire process takes just 2–3 seconds.

Now, let’s consider the most popular payment gateways for online marketplace platforms.

Top payment gateways for marketplaces

1. Braintree

Established in 2007, Braintree is a US company delivering online payment solutions to industries such as e-commerce, travel, and hospitality. The organization was acquired by PayPal in 2013.

Braintree is a popular payment gateway provider that supports digital transactions via:

• PayPal — It is another worldwide leading gateway that you can connect to your marketplace platform through the integration with Braintree.
• Venmo — Payments via this mobile wallet application are available in the USA.
• Credit and debit cards — The Braintree payment gateway allows for shopping online employing Visa, Mastercard, Discover, UnionPay, and American Express.
• Electronic wallets — This online payment solution supports Samsung Pay, Google Pay, Apple Pay, and Secure Remote Commerce.
• Bank directs — Braintree enables customers to shop using local payment methods that involve iDeal, SOFORT, Trustly, GiroPay, and Bancontact. The service also lets consumers make purchases via ACH Direct, a direct connection to their bank account.

In order to protect sensitive data, Braintree implements basic tools such as AVS and CVV, as well as advanced features, for instance, machine learning algorithms for fraud detection. Thanks to 3D Secure 2, this online payment solution ensures compliance with Strong Customer Authentication requirements while increasing information security.

At the moment, the Braintree payment gateway enables vendors of goods and services across 45 countries and regions to process payments in over 130 currencies. Well-known marketplace platforms like Uber, Grubhub, delivery.com, and Airbnb use the Braintree payment gateway.

2. PayPal

Founded in 1998, PayPal is a US provider of online payment solutions to applications accepting digital transactions. Today PayPal is among the globally leading payment gateways for marketplaces supporting the following capture methods:

• Bank account — Funds are withdrawn from the customer’s bank account.
• Credit and debit cards — PayPal enables users to shop online using Visa, Mastercard, American Express, and Discover.
• PayPal balance — Buyers can employ this method after opening a PayPal Cash/PayPal Cash Plus account.
• PayPal Credit — Consumers have six months to pay bills in full for purchases that start from $99. Numerous popular marketplaces offer this option, for example, Walmart, eBay, and Hotels.com.
• User rewards — Users can employ collected points, cash back, and other reward types to buy from vendors of products and services.

Aiming to safeguard sensitive data such as card and payment details, the PayPal payment gateway uses artificial intelligence to monitor the system for fraudulent activities. Thanks to this, the service helps marketplace apps and websites prevent cybersecurity risks.

A number of online marketplace platforms have already integrated PayPal, for instance, Walmart, eBay, JVZoo, and e-Junkie.

3. Stripe

Headquartered in San Francisco and Dublin, Stripe was founded in 2009 to deliver online payment solutions and APIs to web and mobile applications. The company provides a payment gateway that enables consumers to make purchases across 35 countries in more than 135 currencies.

As of today, Stripe allows for carrying out digital financial transactions via:

• Payment cards — Visa, Mastercard, Discover, American Express, JCB, Diners Club, and China UnionPay.
• Digital walters — The Stripe payment gateway supports Apple Pay and Google Pay.
• Bank directs — Users can buy goods and services using multiple local payment methods that involve SOFORT, eps, iDEAL, GiroPay, Bancontact, and Afterpay.

As a trusted payment service provider, Stripe focuses on the protection of sensitive data. For this purpose, the system uses machine learning to identify and assess security risks. What’s more, Stripe supports 3D Secure, device fingerprinting, and proxy detection.

Furthermore, by integrating the Stripe payment gateway into a marketplace application, you can automate various operations, for example, refund handling and fund management.

Many famous online marketplace platforms have already incorporated Stripe in their apps and websites, including, Amazon, Lyft, Instacart, DoorDash, and Booking.com.

How to choose a payment gateway for a marketplace platform

To help you identify the best service for your project, we have prepared the following checklist.

1. Does a marketplace payment gateway support countries and regions, in which your target audience operates?
2. Does a payment processing service provide the necessary payment methods?
3. What currencies does it support?
4. How does the gateway safeguard sensitive data?
5. Does an online payment solution have 3D Secure?
6. Does a payment gateway enable customers to make online purchases using local payment options?
7. Will you be able to easily enter new markets — in terms of capture payment methods, supported countries and currencies — with the service you are considering?
8. How long does an online payment solution exist on the market?

Learn more about choosing a payment gateway that will suit your business-specific needs.