What Is A Payment Gateway And How Does It Work?

online payment gateway
online payment gateway

Online transactions have never been more straightforward. The picture of the fintech industry keeps evolving every month because making payments digitally is smooth and swift. Both parties, whether merchants or customers, have earned the benefit of this modification. And one crucial part of this entire digital payment ecosystem is the online payment gateway.

Even though business merchants can easily access the system of receiving transactions from the customer’s end, acquiring knowledge about online payments is always helpful. Whether the payment made by the customer is through a UPI scan code or a debit or credit card, both go through the payment gateway. Remember, paying through a UPI scan code is more straightforward and hassle-free. 

As the world of eCommerce flourishes, so will the practice of making payments digitally. So, this article will clarify your basics regarding an online payment gateway and the processes and parties involved in completing the transaction online. 

What exactly are online payment gateways and how do they work?

A payment gateway refers to a network responsible for completing a line of transactions between an issuing bank (customer) and an acquiring bank (the merchant) after a product or service is availed online or in a brick and mortar store. It swiftly transfers the customer’s entire data to the merchant bank, which results in either the fund transfer acceptance or decline in case the transaction fails. 

It is a safe method to bring the entire online payment into action, which could be done through cards or UPI scan code, whatever the customer opts for. Every business merchant selling products or services to a specific niche online integrates their payment software with the payment gateway. Hence, every time a customer chooses to buy a product and make a payment online, the gateway acts as an intermediary. 

How Does it Work?

As a middleman, the payment gateway is responsible for carrying forward the sensitive data of the customer’s bank by encrypting it and successfully executing the payment that gets transferred to the acquiring bank. And here is how the entire process takes place:

  • The customer selects a product from the business portal and moves to the checkout page, which could be a hosted payment page, a server-to-server integration, or encryption-at-source. 
  • The customer is asked for the card details such as the number, CVV, etc. Then the payment gateway transfers this sensitive information depending on the type of integration the merchant’s web portal opted for. 
  • Next, the payment gateway encrypts all the sensitive customer details to eliminate the risk of fraud and sends them to the acquiring bank. 
  • The issuing bank validates whether or not the transaction is fraud and authorizes the forward payment or declines it via the card schemes (Visa, Mastercard) and then to the acquirer bank.
  • The message is carried forward by the acquiring bank to the payment gateway and then to the merchant. If the transaction is approved, it will ultimately be deposited into the merchant’s bank account. 

Reasons for having a Payment Gateway.

Online businesses want to make the shopping experience smooth for customers, especially with payment. Since an eCommerce store is different from how brick and mortar stores function, the payment gateway more or less acts as a Point of Sales terminal, a traditional form of payment process at any store’s checkout counter. So the availability of a physical card and the customer makes the payment more manageable.

However, online payment gateway have the card information, not the actual card. So to ensure that the owner of the card is the same person using it, payment gateways are essential. While making a digital payment is convenient at its best for both merchant and customer, it is also quite risky due to the probability of cyber crimes. A payment gateway is crucial for keeping customers’ information safe.


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