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How does a Payment Gateway Work: Types and How to Select One

how does a payment gateway work

If you are a business owner who has successfully set up your products to be shown online, choosing an appropriate payment gateway is an important aspect of the process. The user proceeds to the checkout procedure after selecting the ordered items from the shopping basket. The involvement of the payment gateway is crucial at this point. It enables the merchant’s website to request payment via the client’s preferred payment method. The payment is securely sent from the buyer to the vendor once it has been approved.

What is an E-Payment?

An e-payment or Electronic Payment system allows clients to pay for services using electronic methods.

They are also known as online payment systems. Normally e-payment is done by debit, credit cards, direct bank deposits, and e-checks alternative e-payment options including e-wallets, bitcoin, cryptocurrencies, and bank transfers are also gaining popularity.

What is a Payment Gateway/ Payment Processor?

A payment gateway is a technology that accepts and communicates payment data from the customer to the acquirer, and then returns the payment acceptance or decline to the client. 

A payment gateway verifies the customer’s card information, and the availability of funds, and ultimately enables merchants to receive payment. It functions as an interface between the website of the merchant and the acquirer. It makes sure that sensitive card information is sent securely from the customer to the acquiring bank through the merchant by encrypting it.

In other words, the payment gateway acts as a go-between for the customer and the merchant, ensuring that the transaction is conducted securely and promptly. A payment gateway can facilitate the software integration process for merchants. As the middleman between the acquirer and the merchant during payment processing, the gateway takes care of the sensitive card information of the customer.

Parties involved in Online Payments

Before delving further into how the payment gateway works, we must identify the major parties involved in online payments. 

When a customer hits “Pay” on your website, the following parties are crucial to the payment process:

  1. The merchant: An online business operating in any industry (travel, retail, E-Commerce, gaming, Forex, etc.) that offers a product or service to clients.
  2. The client: The customer, or the cardholder, who wishes to purchase the merchant’s goods or services and initiates the transaction.
  3. The issuing bank: The issuing bank is the customer’s bank that, on behalf of the card schemes, issues the cardholder’s credit or debit card (Visa, MasterCard).
  4. The acquirer: An acquirer is a financial institution that manages the merchant’s bank account. The issuing bank takes care of the payment after the acquiring bank sends the merchant’s transactions to it.

What is a Merchant Account?

A merchant account is a bank account for businesses. A merchant account enables a firm to accept a range of payment methods, including credit and debit card purchases. Since it is a commercial bank account, a business licence is required to open one.

After a payment processor has established a merchant account for your business, you can begin accepting credit and debit card payments from clients. Typically, you will need hardware to accomplish this, which can be purchased from your credit card processing partner. In some cases, the payment processor might even give you a credit card reader for free to help you get started.

There are two reasons why a merchant account is required. It protects corporate customers and credit card companies. It safeguards the funds during the interim time until the order is finished to the customer’s entire satisfaction. The client is repaid from the merchant account if there are any problems with the E-Commerce order.

The vendor has the choice of using either their merchant account or the aggregated merchant account provided by the Payment Gateway. The decision is based on the costs involved and the length of cash flow in each scenario.


how does a payment gateway work


How does a Payment Gateway work?

Every single online transaction that takes place all around the world goes through something called a “payment gateway.” It gives the go-ahead for businesses to conduct transactions with customers.

To get a better understanding of how the checkout process works. We have briefly explained the steps involved in an online transaction, let’s go into more detail about the order of the steps.

Step 1: The client’s browser encrypts the payment information before sending it to the website of merchant once the consumer has confirmed the order and chosen the method of payment. The Secure Socket Layer (SSL) is the technology that enables this encryption to take place. To complete this procedure, the merchant must have an SSL certificate. The website of merchant is the one that sends this information to the payment gateway after it has been encrypted.

Step 2: From this point on, the payment gateway that the retailer has selected will handle everything.

Step 3: The information that has been encrypted is sent to the merchant’s bank by using this Payment Gateway.

Step 4: If the consumer chooses to pay using a debit or credit card, or any kind of electronic wallet, then the bank will send this encrypted information to the relevant association. That association will then send it on to the issuing bank.

Step 5: If the customer chooses internet banking or a UPI transaction as their method of payment, their encrypted information is sent directly to the servers of the right bank.

Step 6: The customer’s bank will then check the customer’s account to see if the funds are available. The bank will also look for other information, like a matching CVV or PIN, any limits set by the customer, etc.

Step 7: If, after evaluation, it is determined that the transaction adheres to all of the predetermined standards, the client’s bank will give its approval for the transaction. If there is a mistake in the information or if there aren’t enough funds, the transaction will be turned down.

Step 8: The payment gateway receives a coded version of this response, which it then processes.

Step 9: The payment gateway will then provide this information to the merchant, informing them whether the transaction was successful or declined.

Types of Payment Gateways

There are three primary categories of payment gateways, which are as follows:

  1. Redirect: The payment gateway directs a customer to a payment processor so that the transaction can be processed.
  2. Hosted (off-site payment): When a client makes a purchase on your website or at one of your physical retail locations, the customer’s payment information is sent to the servers of the payment provider so that it can be processed. 
  3. Self-hosted (on-site payment): Self-hosted refers to a system in which the complete transaction takes place on your servers.

How to select a Payment Gateway?

Choosing the appropriate payment gateway for your business is one of the most crucial decisions you must make when establishing an E-Commerce website. And after you’re up and running, the significance of ensuring you have the best payment gateway for your business will only increase.

Ask yourself the following questions before selecting a payment gateway provider:

  • Is it available in the countries where your clients are located as well as in your own?
  • Does it protect the confidentiality of financial information by using encryption and other safeguards? 
  • Is it compliant with the Payment Card Industry standard (PCI) for online payments?
  • Do you want a payment gateway that is hosted by a third party or one that you host yourself?
  • What kinds of payment methods are accepted? Does it meet the requirements of your customers?
  • Can it simply interface with your Point of Sale (POS) system, as well as your website and financial software?
  • Does it come equipped with the functions that your company requires?

You are required to select a payment gateway that will manage the entire procedure on your behalf. This will save you the trouble of having to open an extra bank account or make special software.

When you use a third-party service, you give up some control over the experience that you provide for your customers. Nevertheless, this frees you from the responsibility of addressing security on your own.

SabPaisa Payment Gateway is the world’s first API-driven unified payment gateway, that supports maximum payment methods, such as credit cards, debit cards, wallets, UPI, and more than 10 lac e-cash counters. SabPaisa is highly secure with industry-leading tools & standards and is PCI-DSS & SSL certified.

Features that give SabPaisa an edge:

  • SabPaisa offers multiple online and offline payment modes.
  • One of the highest success rates.
  • Top-notch security.
  • Best-in-class support.


This wealth of knowledge on payment channels may be intimidating. Knowing how the payment gateway works and what are the types of payment gateway is crucial. We understand that selecting the proper online payment partner is a crucial decision for your business.  If you’re considering accepting online payments, or if you want to improve the method you’re already utilizing, then you need a payment gateway.

Payment gateways streamline the online payment process for your business and allow you to take payments more quickly, easily, and securely. By using a payment solution made for today’s savvy shoppers, you can give your customers better online experiences and smoother customer journeys that they will love.


1. What is a Payment Gateway?

Ans: A payment gateway sends financial information to the right banks so that a credit or debit card transaction can be approved and a merchant gets paid.

2. What is Payment Processing?

Ans: Payment processing services speed up card transactions, and payment gateways send data safely so that money from a customer’s issuing bank can be transferred to a merchant’s account.

3. Can I construct my Payment Gateway?

Ans: Yes, it is possible to host a custom payment gateway on your servers. This provides you with complete control over the consumer experience throughout a transaction and places the responsibility for security on you, as opposed to a third-party payment processor.

4. What are the Payment Gateway Charges?

Ans: The cost of a payment gateway depends on the supplier chosen. Monthly service costs, setup fees, transaction fees, and additional fees for chargebacks and cancellations may be assessed. Generally, payment service providers have fewer fees but may charge a greater percentage for each transaction. Learn more about the most affordable method for accepting credit card payments.

5. Are the Payment Gateways protected?

Ans: Even though all online technologies have some level of risk and vulnerability, most payment gateways use data encryption, fraud detection, and other security measures to keep your information and the information of your customers safe.

6. What is an International Payment Gateway?

Ans: A multi-currency payment gateway allows you to accept and be paid in multiple currencies. A multi-currency gateway is required to receive payments from international customers.

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