Types of Payment Gateways: Hosted, Self-Hosted, API-Based & More

Ever wondered what keeps online transactions running smoothly behind the scenes? Well, they are payment gateways — the silent workhorses that power the fast-growing e-commerce industry. In Singapore, where e-commerce is booming with a transaction value of US$ 8.79 billion in 2024 and is expected to show an annual growth rate (CAGR 2024-2029) of 7.08%, according to Statista, businesses need reliable payment solutions to thrive. Different types of payment gateways cater to diverse business needs, significantly impacting transaction speed, security, and overall user experience. This blog will explore the various types of payment gateways, dissecting their working mechanisms, advantages, and potential drawbacks. Our goal is to equip Singaporean businesses with the knowledge to make informed decisions and select the payment gateway solution that best fits their unique requirements.

What is Payment Gateway?

In the simplest terms, a payment gateway acts as a secure bridge connecting customers, merchants, and financial institutions to process online transactions. It securely transmits sensitive payment data, ensuring smooth and safe transactions. In Singapore’s thriving e-commerce landscape, payment gateways are essential for businesses to accept various payment methods, including credit/debit cards, digital wallets like GrabPay and PayNow, and bank transfers, facilitating seamless digital payments.

How Do Payment Gateway Work?

If you are willing to set your business in Singapore, then we’ve got you covered. Here’s a step-by-step breakdown of how a payment gateway processes an online transaction:

1. Customer Initiates Payment – The customer selects a product or service and enters their payment details (credit/debit card, digital wallet, or UPI).
2. Encryption & Data Transmission – The payment gateway encrypts the data and securely transmits it to the acquiring bank.
3. Authorization Request – The acquiring bank forwards the request to the relevant card network (Visa, Mastercard, etc.) or digital payment provider.
4. Fraud Checks & Authentication – The transaction undergoes security checks, including OTP verification or biometric authentication.
5. Bank Approval or Decline – The issuing bank validates the details, checks for sufficient funds, and approves or declines the payment.
6. Transaction Completion – If approved, funds are deducted from the customer’s account and settled into the merchant’s account.

What are The Different Types of Payment Gateway?

Payment gateways play a crucial role in securing and streamlining online transactions, ensuring businesses in Singapore can offer seamless payment experiences. Depending on business needs, transaction volumes, and customer preferences, different types of payment gateways are available. Here are the four main types:

• Hosted Payment Gateways – Redirect customers to a third-party platform for secure payment processing.
• Self-Hosted Payment Gateways – Businesses collect payment details on their website and forward them to the gateway for processing.
• API-Based Payment Gateways – Allow full customization by integrating payment processing directly into the website or app.
• Local Bank Integration Gateways – Enable direct bank transfers without card payments.

Type 1 : Hosted Payment Gateway

A hosted payment gateway is an external payment processing solution where transactions occur on a third-party provider’s platform instead of the merchant’s website. Businesses integrate this system into their websites or mobile apps, but once a customer initiates payment, they are redirected to the Payment Service Provider (PSP) page to enter their payment details securely. The PSP processes the transaction, conducts fraud checks, and then redirects the customer back to the merchant’s site with the payment confirmation. 

How Hosted Payment Gateway Works?

A hosted payment gateway streamlines online transactions by redirecting customers to a secure external server for payment processing. Here’s a step-by-step breakdown of the process:

1. Checkout Initiation – The customer selects a product or service, proceeds to checkout, and chooses a payment method. They are then redirected to the payment gateway’s platform.
2. Payment Information Entry – On the secure gateway page, the customer enters their payment details, such as credit card or bank account information.
3. Data Encryption & Security – The payment gateway encrypts sensitive payment data, ensuring secure transmission and protecting it from unauthorized access.
4. Payment Authorization – The gateway forwards transaction details to the payment processor or the customer’s bank for verification. The bank checks fund availability and validates the payment details.
5. Transaction Approval or Decline – The customer’s bank responds to the gateway with either an approval or decline message, typically within seconds.
6. Redirection & Confirmation – The customer is redirected back to the business’s website, where they receive a confirmation message indicating the transaction’s success or failure.
7. Fund Settlement – If the payment is approved, funds are transferred from the customer’s bank to the business’s account. This process may take a few days, depending on the banks and payment processors involved.
8. Transaction Records – The payment gateway provides the business with detailed transaction data for reconciliation, refunds, and customer service purposes.

Key Components of Hosted Payment Gateway

• Merchant’s Website or App – The platform where customers browse and select products or services before being redirected to the payment gateway for checkout.
• Hosted Payment Gateway Service – A third-party service provider that securely processes payments, encrypts transaction data, and ensures compliance with financial regulations.
• Payment Processor – The entity responsible for communicating transaction details between the payment gateway, the acquiring bank, and the customer’s issuing bank to authorize and settle payments.

When to Use Hosted Payment Gateway?

For businesses setting up in Singapore, a hosted payment gateway offers a hassle-free way to accept online payments while ensuring compliance with local regulations and security standards. With strict data protection laws and PCI DSS requirements, outsourcing payment processing to a trusted provider helps businesses focus on growth without handling complex security protocols. This solution is ideal for startups and SMEs looking for quick integration, seamless transactions, and secure payment handling.

Pros

• Security & Compliance: Hosted gateways handle payment data encryption, storage, and transmission, reducing the burden of PCI DSS compliance and offering robust fraud protection.
• Easy Integration: Requires minimal development effort—businesses can integrate it via a simple redirect, eliminating the need for extensive backend payment processing.
• Cost-Effective: By outsourcing payment infrastructure, businesses save on security and maintenance costs, allowing them to invest in growth areas like marketing and product development.
• Advanced Features: Many hosted gateways provide built-in fraud detection, risk management, and multi-currency support, helping businesses expand into global markets.
• Scalability: As businesses grow, hosted gateways can support increased transaction volumes without requiring major infrastructure upgrades.
• Faster Go-to-Market: Ideal for startups and SMEs looking for a quick, hassle-free way to start accepting online payments.

Cons

• User Experience Limitations: Redirecting customers to an external site for payment can feel disruptive and may lead to higher cart abandonment rates.
• Third-Party Dependence: Businesses rely on the gateway’s uptime and performance—any downtime could directly impact sales.
• Limited Customization: Hosted solutions offer less flexibility in terms of branding and checkout experience compared to self-hosted or API-based gateways.

Type 2 : API- Hosted Payment Gateway

An API-hosted payment gateway allows businesses to accept payments directly on their website or app without redirecting customers to an external platform. Instead of sending users to a third-party checkout page, the payment details are collected and processed via an Application Programming Interface (API), offering a fully integrated and customizable payment experience.

How API-Hosted Payment Gateway Works?

When a customer initiates a payment, the API-hosted payment gateway securely transmits the payment data to the processor for authorization. Once processed, the response is sent back to the website or app, confirming the transaction status in real time. Here’s a step-by-step process on how it works:

1. Checkout Initiation: The customer selects a product or service and proceeds to checkout on the business’s website or mobile app.
2. Payment Details Entry: The customer enters their payment details (e.g., credit/debit card, digital wallet, or bank account information) directly on the business’s checkout page.
3. Data Encryption & Secure Transmission: The API encrypts the payment data and securely transmits it to the payment gateway for processing.
4. Transaction Authorization: The payment gateway forwards the details to the acquiring bank or payment processor, which contacts the issuing bank to verify the transaction.
5. Approval or Decline Response: The issuing bank checks the account balance and fraud parameters before approving or declining the transaction. The response is sent back through the gateway to the merchant’s website.
6. Payment Confirmation: If approved, the customer receives an instant confirmation, and the transaction is completed. In case of failure, the user is prompted to try another payment method.
7. Settlement & Funds Transfer: The payment gateway initiates the fund transfer from the customer’s bank to the merchant’s account, typically within a predefined settlement period.

Key Components of API-Hosted Payment Gateway

An API-hosted payment gateway relies on three essential components to facilitate seamless online transactions:

1. Merchant’s Website or App – This is where customers browse products, add items to their cart, and initiate the checkout process. The website or app integrates with the payment gateway via an API, allowing customers to enter their payment details without redirection.
2. Payment Gateway Provider’s API – The API acts as a bridge between the merchant’s platform and the payment processing system. It collects payment information securely, encrypts the data, and transmits it for authorization, ensuring a smooth and secure payment experience.
3. Payment Processor – The processor verifies the transaction details with the customer’s bank or card network. It checks for sufficient funds, authenticates the payment, and sends a response (approval or decline) back through the API to the merchant’s website or app, completing the transaction in real time.

When to Use API-Hosted Payment Gateway?

An API-hosted payment gateway is ideal for businesses in Singapore looking to offer a seamless and secure checkout experience directly on their website or app. It is well-suited for e-commerce platforms, subscription-based services, and mobile-first businesses that prioritize a localized, on-brand payment flow without redirecting customers to third-party pages. Companies that require advanced customization—such as integrating local payment methods like PayNow, credit cards, or digital wallets—can benefit from API-hosted solutions. Additionally, businesses handling high transaction volumes can leverage the API’s efficiency while relying on external payment processors for security and compliance, ensuring a smooth and scalable payment experience.

Pros

• Seamless checkout: Customers complete payments without leaving the merchant’s website.
• Full control: Businesses manage the entire payment process for a consistent brand experience.
• Scalability: Easily adapts to growing transaction volumes without major disruptions.
• Supports multiple payment methods: Accepts a variety of local and international payment options.

Cons

• Technical expertise required: Developers are needed for setup and ongoing maintenance.
• Security compliance: Businesses must ensure PCI DSS compliance and robust data protection.
• Higher costs: Additional investments in security infrastructure and fraud prevention tools.
• Increased liability: Handling sensitive customer data comes with added responsibility.

Type 3 : Self Hosted Payment Gateway

A self-hosted payment gateway gives businesses complete control over their payment process by allowing them to collect payment details directly on their website or app, without redirecting customers to third-party platforms. This setup ensures a fully customized checkout experience, aligning seamlessly with the brand’s user interface.

With a self-hosted solution, merchants are responsible for handling security measures, such as encryption and fraud prevention, as well as ensuring compliance with regulations like PCI DSS. While this approach offers greater flexibility and control, businesses must invest in the necessary infrastructure and expertise to maintain a secure and efficient payment system.

How Self Hosted Payment Gateway Works?

A self-hosted payment gateway processes transactions directly on the merchant’s website or app, giving businesses complete control over the checkout experience. Here’s how it works:

1. Customer Initiates Payment – The customer selects a product or service and proceeds to checkout on the merchant’s website or app.
2. Payment Details Entered – The customer securely enters their payment information, such as card details or digital payment credentials.
3. Merchant’s Server Processes Data – The payment details are transmitted from the website or app to the merchant’s server.
4. Transaction Sent for Authorization – The merchant’s server securely forwards the payment data to the payment processor for validation and authorization.
5. Payment Confirmation – The payment processor communicates the approval or rejection of the transaction, and the website displays the final payment status to the customer.

Key Components of Self Hosted Payment Gateway

A self-hosted payment gateway consists of key components that ensure secure and seamless transactions. The merchant’s website or app collects payment details, while the payment gateway infrastructure processes and transmits data to the payment processor, which verifies and completes the transaction with the customer’s bank. To ensure security, businesses implement encryption technologies like SSL/TLS and comply with PCI DSS standards. This setup gives businesses full control over the payment experience while maintaining data protection and operational efficiency.

When to Use a Self Hosted Payment Gateway?

For Singapore businesses handling high transaction volumes and prioritizing security, a self-hosted payment gateway offers full control over payments, branding, and compliance. Ideal for enterprises with the technical expertise to manage infrastructure, it minimizes data exposure risks while ensuring regulatory compliance, making it a preferred choice for businesses seeking a seamless and secure checkout experience.

Pros

• Full Control Over Payment Experience – Businesses can customize the entire checkout process, ensuring a seamless and branded user journey without third-party interference.

• Better Customer Trust & Retention – For Singapore businesses, keeping transactions within the platform builds trust and reduces customer drop-offs caused by redirections.

• Cost Savings on Transaction Fees – By eliminating third-party intermediaries, businesses can save on processing fees in the long run.

• Flexibility & Scalability – Self-hosted gateways allow businesses to scale their operations without major changes to their payment infrastructure.

• Data Ownership & Insights – Businesses can directly manage customer data (with proper security), gaining valuable insights for optimization.

Cons

• High Security & Compliance Responsibility – Businesses must ensure compliance with PCI DSS and implement stringent security measures to protect sensitive data.

• Technical Complexity – Integration requires expertise in secure payment processing, making it challenging for businesses without a dedicated tech team.

• Ongoing Maintenance & Updates – Businesses must regularly update their systems to stay compliant with evolving security standards.

• Higher Setup & Infrastructure Costs – Initial investment in servers, security, and compliance can be expensive compared to third-party solutions.
• Troubleshooting & Risk Management – Any payment failures or security breaches must be handled in-house, requiring dedicated resources for monitoring and issue resolution.

Type 4 : Local Bank Integration Gateway

A Local Bank Integration Gateway is a payment solution that connects a business’s website or app directly to a local bank for processing payments. Instead of relying on third-party providers, transactions are processed through the bank’s infrastructure, ensuring a seamless and secure experience. This gateway is particularly beneficial for businesses targeting local markets, as it enables direct settlements, reduces dependency on external payment processors, and may offer lower transaction fees. 

How Local Bank Integration Gateway Works?

A Local Bank Integration Gateway processes payments by directly linking a business’s website or app to a local bank. Here’s how it works:

• The customer selects a product/service and proceeds to checkout.
• Payment details are entered and securely transmitted via the gateway.
• The gateway forwards the transaction request to the local bank.
• The bank verifies the details, processes the payment, and checks for sufficient funds.
• A confirmation or denial response is sent back to the merchant in real-time.
• Upon approval, the transaction is completed, and funds are settled directly into the merchant’s bank account.

Key Components of Local Bank Integration Gateway

A Local Bank Integration Gateway consists of three key components:

1. Business’s Website or App – This is where customers enter their payment details, initiating the transaction. The platform securely collects and transmits the data.
2. Bank’s Payment Gateway Infrastructure – The local bank processes payment requests, verifies transaction details, and approves or declines the payment.
3. Security Measures & Protocols – Encryption, tokenization, and compliance with data security standards ensure that customer payment information remains protected throughout the process.

When to Use a Local Bank Integration Gateway?

A Local Bank Integration Gateway is ideal for businesses operating primarily within a specific country, such as Singapore, that want to keep transactions within the local banking system. It benefits businesses looking to reduce costs by avoiding third-party gateway fees while ensuring faster, more direct payment processing. This solution is particularly useful for businesses with strong relationships with local banks, allowing them to leverage existing banking infrastructure for smoother transactions. Companies that prioritize local regulatory compliance and seek a secure, bank-backed payment solution can also benefit from this setup, ensuring reliability and efficiency in their payment processes.

Pros

• Lower transaction fees – Businesses typically pay only bank-related fees, avoiding third-party charges.
• Faster processing times – Payments are handled within the local banking network, reducing delays.
• Enhanced security – Payment data is processed directly by the bank, minimizing third-party risks.
• Better customer support – Direct communication with the bank ensures quicker issue resolution.
• Simplified dispute resolution – Easier handling of chargebacks and payment disputes through the bank.

Cons

• Limited scalability – Primarily suited for domestic transactions, making international expansion difficult.
• Dependency on a single bank – Service disruptions or technical issues at the bank can impact payments.
• Complex integration process – Businesses without an existing banking relationship may face setup challenges.
• Fewer advanced features – Lacks functionalities like analytics, multi-currency support, and subscription management.

Difference Between Types of Payment Gateways

	Hosted payment gateway	API-hosted payment gateway	Self-hosted payment gateway	Local bank integration gateway
Flexibility of accepting payments	Limited payment options and customisation	Most payment options and customisable payment modes	Highly flexible with many payment options	Limited to certain banks
Ease of integration	Easiest to integrate	Slight technical skills	Highly complex	Complexity depends on banks’ APIs
Speed	Swift integration and payment collection	Can offer the fastest processing, depending on the merchant’s website	Depends on the merchant’s servers, which could be on the slower side	The bank’s responsiveness determines speed. Could be the slowest of all
Costs	Low setup, ongoing commissions, affordable start	Generally no set-up or integration costs, and lower commissions	High setup, maintenance, customisation investment	High costs due to multiple APIs
Security and Compliance	Provider ensures protocols and security methods such as PCI DSS, SSL, etc	High security, compliance with gateway service	Merchant security, compliance challenges potential	Secure pages, bank-wise compliance complexities
Success rates	Reliable	Highest	Moderate	Varies from bank to bank
Customer service	Generally good support, but limited branding	Variable support	Variable	Variable
Easy reconciliation	Simplified process, but limited access to detailed transaction data	Access to transaction data, but requires data handling, responsibly and securely	Extensive data access and complex reconciliation	Local data access, but complex reconciliation

How to Choose the Right Payment Gateway for Your Business?

When selecting a payment gateway, consider the following key factors to ensure it aligns with your business needs:

• Payment Method Support – Ensure the gateway accepts multiple payment options, including credit/debit cards, UPI, and digital wallets, to cater to diverse customer preferences.
• Cost and Fees – Evaluate transaction fees, setup costs, and monthly charges to choose a solution that fits your budget without compromising on features.
• Security and Compliance – Look for PCI DSS compliance, encryption, and fraud detection measures to safeguard sensitive customer data.
• Integration and Scalability – Choose a gateway that seamlessly integrates with your website/app and can scale as your business grows.
• Settlement Speed – Faster settlement times improve cash flow, so check how quickly funds are transferred to your account.
• Customer Support – Reliable support can help troubleshoot payment issues quickly, ensuring minimal disruptions to your sales.
• Global vs. Local Capabilities – If you plan to expand internationally, ensure the gateway supports multi-currency payments and global transactions.

How Razorpay Can Help?

Razorpay provides a robust and reliable payment gateway solution tailored for businesses of all sizes. With a wide range of supported payment methods, including credit/debit cards, UPI, and digital wallets, it ensures a seamless checkout experience for customers. Its competitive and transparent pricing structure helps businesses manage transaction costs effectively. Razorpay prioritizes security with PCI-DSS compliance and advanced fraud prevention tools. The platform integrates effortlessly with various websites and apps, simplifying payments. Additionally, its dedicated customer support ensures quick issue resolution, allowing businesses to focus on growth without payment-related disruptions.

Key Benefits of Razorpay:

• Multiple Payment Methods – Accepts cards, UPI, net banking, and digital wallets for a frictionless checkout experience.
• Transparent Pricing – Competitive rates with no hidden fees to help manage costs efficiently.
• Advanced Security – PCI-DSS compliance, encryption, and fraud detection tools ensure secure transactions.
• Seamless Integration – Works effortlessly with e-commerce platforms, apps, and websites.
• Quick Settlements – Faster fund transfers to improve cash flow.
• Dedicated Support – 24/7 assistance to resolve payment-related issues swiftly.

Conclusion

Choosing the right payment gateway is essential for ensuring seamless and secure transactions. Each type of gateway comes with its own advantages and challenges, making it crucial for businesses to assess their specific needs, budget, and technical capabilities. A well-chosen payment solution enhances customer experience, improves conversion rates, and ensures compliance with security standards. Razorpay offers a reliable, scalable, and feature-rich solution that caters to diverse business requirements. With its multiple payment options, strong security features, and seamless integrations, Razorpay helps businesses simplify their payment processes and focus on growth with confidence.

FAQs

Q.1 How many types of payment gateways exist?

There are four main types of payment gateways: Hosted Payment Gateways, where transactions are processed on a third-party platform; Self-Hosted Payment Gateways, which allow businesses to collect payment details on their own site; API-Based Payment Gateways, offering full control over the checkout experience with direct integration; and Local Bank Integration Gateways, which connect directly to a bank for transaction processing. Each type offers different levels of flexibility, security, and ease of integration, depending on a business’s needs.

Q.2 Which payment gateway is most prevalent in Singapore?

In Singapore, some of the most widely used payment gateways include Razorpay, Stripe, PayPal, Adyen, and PayNow, among others. These gateways support multiple payment methods like credit/debit cards, bank transfers, e-wallets, and UPI-like solutions. Businesses often choose a gateway based on factors like transaction fees, ease of integration, and support for local and international payments.

Q.3 What are the advantages and disadvantages of payment gateways?

• Advantages: Payment gateways offer secure, fast, and convenient transaction processing, support for multiple payment methods, and fraud protection. They help businesses streamline payments, improve customer experience, and expand their reach globally.
  
• Disadvantages: Some gateways charge high transaction fees, require technical integration, and may have compatibility issues with certain platforms. Businesses must also comply with security standards like PCI-DSS, adding to operational complexity.

Q.4 How do I choose a payment gateway?

When selecting a payment gateway, consider factors such as supported payment methods, transaction fees, security features (PCI-DSS compliance, fraud detection), integration ease, and customer support. Businesses operating in Singapore should also check for local payment options like PayNow and bank transfers. Scalability is another key factor—if you plan to expand internationally, choose a gateway that supports global transactions.