You cannot do without some payment gateway software product. It is a necessary link, connecting you to your processor or acquirer. Basically, payment gateway software is a server application facilitating exchange of payment related data (cardholder and transaction information) between a merchant and a payment processor or an acquiring bank. For example, payment gateway software can provide connectivity between merchants’ POS systems and a legacy processing platform used by some bank; often it also handles PCI-compliance-related issues, such as credit card tokenization, reducing merchants’ PCI scope exposure.
Your business can use either licensed or hosted payment gateway solution.
And what is a better option: a hosted or licensed one?
It depends on your particular needs, your processing volume. Each option has its pros and cons.
In case of licensed payment gateway solution a company (a merchant or a payment service provider) licenses, either in a binary form, or in the form of software code, a payment gateway software product from another company and deploys it within its own PCI-compliant infrastructure. It allows the licensee to have greater control of payment gateway infrastructure. Licensed payment gateway cost is more significant upfront, but subsequent use of the payment gateway solution doesn’t impose any per-transaction processing fees.
In case of hosted payment gateway solution a merchant (payment service provider) uses (“white-labels”) an existing solution that resides within a PCI-compliant environment of the hosted payment gateway provider. This payment gateway solution does not require merchants to incur any gateway maintenance costs or to have their own PCI-compliant environments, but merchants do have to pay per-transaction processing fees. In case of hosted solution the merchant might be required to go through payment gateway integration before transaction processing is possible.
Finally, a white label payment gateway is a hosted payment gateway solution, which is sold by a company under its own brand, while the actual service provided by one of its vendors on sub-contractual basis. The white label payment gateway concept allows the company to bolster its image in the eyes of its customers by providing a new critical service under its own brand.
More information on the subject can be found in our articles about payment gateway branding and about hosted and licensed payment gateway solutions.