What Are Payment Gateways and How Do They Work?

Billing clients manually is eating up countless hours of your team’s time each week, and you’re losing potential revenue every time a payment gets delayed or a client abandons checkout due to a clunky process. For service agencies processing hundreds of transactions monthly, the right payment gateway isn’t just convenient—it’s the difference between scaling smoothly or drowning in administrative overhead.

Many agencies struggle with scattered billing processes, manual invoice chasing, and clients who abandon purchases due to complicated payment flows. Read on to find out how the right payment gateway can transform your billing from a time drain into a revenue driver.

What is a payment gateway?

A payment gateway is a service that allows you to accept credit card payments and electronic checks on your website. Payment gateways encrypt sensitive information (like account holder details and credit card information) to ensure that data passes securely between all parties involved in transactions.

Examples of commonly used payment gateways include:

• Stripe: A widely adopted online payment gateway popular among e-commerce platforms and merchants globally

• PayPal: A well-established payment processor offering various services, from credit card payments to person-to-person transactions

• Square: A comprehensive platform for in-store and online transactions, featuring point-of-sale systems and inventory management

Types of payment gateways

There are two main types of payment gateways: hosted and integrated. Let’s look at how each one works and which might be better for your agency.

Hosted payment gateways

A hosted payment gateway hosts the payment page on its own servers. This means when a customer checks out, they’re redirected to the payment gateway’s website to enter their payment information.

Hosted payment gateways are often used by small businesses because they’re easy to set up and don’t require programming knowledge. Additionally, hosted payment gateways typically have lower transaction fees than integrated options.

The benefit of hosted payment gateways is that they typically don’t require your business to acquire PCI compliance since the customer’s card information is stored on the payment gateway’s servers, rather than on your own secure server. However, hosted payment gateways can be less customizable than integrated payment gateways.

Integrated payment gateways

An integrated payment gateway allows you to embed the payment page into your own website. This means customers never have to leave your site to enter their payment information.

Stripe

Collect payments for your services.

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PayPal

Get paid via PayPal Payments Standard.

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Integrated payment gateways are often used by larger agencies because they offer more security, scalability and flexibility than hosted payment gateways. Additionally, integrated payment gateways typically provide better conversion rates since customers stay on your branded site throughout the process.

The downside of integrated payment gateways is that they can be more difficult to set up and require some programming knowledge. But this isn’t always the case—customer billing solutions such as SPP make the integration process as simple as clicking a few buttons.

Which type is right for your agency? Use this flowchart to determine the best payment gateway approach for your specific needs:

How do payment gateways work?

A typical payment gateway transaction involves up to six parties:

1. Merchant: This is you!

2. Client: The individual or business purchasing your services

3. Payment gateway: A service that encrypts and processes the client’s payment information

4. Acquiring bank: The bank that partners with the payment gateway to provide merchants with account details and services

5. Issuing bank: The financial institution that provides the credit or debit card to the customer

6. Card scheme: Payment networks linked to physical cards (like Visa, Mastercard, etc.)

With that said, here’s how the payment process typically works:

1. Once services are added to the cart, the checkout process begins

2. The buyer selects their preferred payment method, typically a debit or credit card

3. The gateway forwards this information to the bank to identify the card issuer

4. The request is directed to the appropriate network

5. Fraud detection measures activate to verify payment legitimacy (checking CVC, address, 2FA, etc.)

6. The bank either approves or denies the payment, providing an error code if applicable

For offline payments, it’s common for payments to remain pending until you reconcile them, whereas online payments typically process immediately unless there’s an issue.

Are payment gateways secure?

Those accepting payments often worry about security and protecting against fraud or chargebacks. According to the European Central Bank survey, Europeans increasingly value privacy, hence the growing preference to pay in cash.

Most payment gateways offer procedures to ensure users own their payment methods. Providers often allow activation of extra security options. For example, the billing address must match the card issuer’s information. In Europe and some other regions, mandatory two-factor authentication greatly reduces fraud risk.

Here are the main security features your payment gateway should have:

• Encryption: Credit/debit card data should be encrypted during checkout to protect sensitive details

• SSL: Any website dealing with sensitive information should secure data transit via Secure Sockets Layer

• PCI DSS: Anyone handling card data must comply with this standard. Stripe, for instance, is a PCI Level 1 Service Provider

• Tokenization: Card data and bank account details can't be kept in plain text - they must be securely stored as tokens

• 3D-Secure: Additional customer authentication for online payments reduces fraud risk significantly

How to choose the best payment gateway

When it comes to choosing a gateway to process all your debit and credit card transactions, there's no one-size-fits-all answer. However, there are several key factors you should consider:

• Client preferences: Do your clients mainly pay via credit cards, use ACH transfers, or prefer mobile payments? Choose a gateway that offers multiple payment options your clients actually want to use

• Easy integration: Many payment gateways look great on paper, but once you examine the technical requirements, you'll realize how difficult implementation can be. Look for solutions that integrate seamlessly with your existing systems

• Fees charged: Features like fraud detection and churn recovery cost extra, but they’re usually worth it. They prevent higher costs like chargebacks, which are $15 if you use Stripe.

The automation imperative is real. With 56% of businesses spending over 10 hours weekly on invoice processing, agencies that don’t automate their payment workflows risk being left behind. The agencies thriving today are those who recognized early that payment processing isn’t just about collecting money—it’s about creating scalable systems that grow with their business.

Real-world payment gateway success

Let me share some real examples of how choosing the right payment gateway transformed our clients’ businesses.

Case in point: Loganix’s $60k lesson: When Adam Steele’s agency was approaching $3M annually, they had spent $60-80k building custom payment dashboards. After switching to SPP’s system, Adam specifically noted “the power of getting PayPal payment notifications with nothing more to do - the deliverables would be taken care of.” The automation eliminated hours of manual work and the need for expensive custom solutions.

Currency matters more than you think: Oliver Meakings, who built a $300k landing page roasting service, discovered that switching from British Pound to US Dollar pricing significantly increased his conversion rates. As he put it: “U.S. customers convert better”—a simple change that directly impacted his revenue.

Automation enables aggressive pricing. Garrett Smith of GMB Gorilla can only offer his low-priced recurring services because of automated payment processing. His results speak volumes: 95% of customers who try his paid trial service convert to recurring subscriptions, largely due to the seamless payment experience.

Payment processing impact:

As the founder of SPP, I’ve had the privilege of helping process millions in subscription payments for agencies worldwide.

Here’s what the data shows:

• Cost reduction: Manual invoice processing costs an average of $15 per invoice, according to an Aberdeen Group survey, and automation can eliminate most of this expense

• Conversion rates: Well-automated payment systems achieve conversion rates as high as 95% from trial payments to recurring subscriptions (as demonstrated by GMB Gorilla)

• Implementation savings: Agencies can save $60-80k by choosing integrated payment solutions over building custom dashboards (as Loganix discovered)

The key insight? Payment gateways aren’t just about processing transactions—they’re about creating frictionless experiences that eliminate administrative overhead while maximizing revenue conversion.

Payment gateways FAQ

Closing thoughts

Payment gateways are essential if you want your clients to purchase your services effortlessly while making it easy for your agency to do business efficiently. The right gateway doesn’t just process payments—it automates your entire billing workflow, saves your team countless hours, and creates the professional experience your clients expect.

With that said, choosing the wrong gateway can cost you significantly in both time and money. The agencies we work with who invested in proper payment automation early have consistently outpaced their competitors in both growth and profitability.

And I hope this post has been of help in understanding how payment gateways can transform your agency’s billing from a manual headache into an automated revenue driver that scales with your business.

Chris Willow

Founder of SPP

Founder of Service Provider Pro, with over a decade of experience in agency operations and billing systems. As a former agency owner, Chris developed SPP to solve the client management and payment challenges he experienced firsthand. His platform now processes millions in subscription payments for agencies worldwide, giving him unique insights into billing best practices across various service businesses.