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So, how does a payment gateway work? What is a payment gateway anyway?
We created this blog to explain what is a payment gateway and how it works.
What is a Payment Gateway?
A payment gateway is a platform that allows any online business to accept payment. It can offer payment options like cards (debit and credit), digital wallets, UPI and more.
Now, these online businesses are known as merchants. They can range from eCommerce industries to any SaaS businesses.
Traditionally payment gateways in India were provided by banks in the early 90s. But, since the late 90s, private 3rd party corporations have entered the foray.
Today, most organizations integrate with these third-party payment processors to collect payments from their customers. Similarly, they can also help to disburse payments to vendors and employees.
Example of Payment Gateway
How can we explain what is a payment gateway in the easiest way possible?
We use an analogy of course!
So, let’s say that you are a furniture manufacturer that needs to ship products to distant areas.
Here, the train makes the transport possible. Similarly, your payment gateway makes payments possible.
Just like the train, the payment gateway ensures the safe transfer of your payment details to the acquiring bank.
Cashfree Payments offer you the best payment gateway in India at the lowest payment gateway charges.
Now that we have understood what a payment gateway is, let’s check how it works.
But for that, let’s figure out the players working alongside a payment gateway making credit card processing possible.
Explain: Payment Gateway vs. Payment Terminal
Payment Gateway
A payment gateway is a digital technology integrated into a website to process and accept online payments. It is primarily used for online transactions made via mobile, websites, and other digital platforms. Payment gateways are a secure bridge between the merchant, the customer, and their respective banks for transmitting payment information securely for authorisation and settlement.
Payment Terminal
A payment terminal, also called a point-of-sale (POS) terminal, is a physical device used by large- and small-scale businesses to accept immediate payments at the counter. The payments are done by debit or credit card swiping, inserting or tapping it on the POS machine at the physical location. It is widely used in restaurants, hotels, offline vendor shops, and retail stores.
Key Differences
The key difference between the two mainly lies in the fact that a payment gateway plays a key role in processing online transactions, and the payment terminal is a face-to-face physical payment processing device using debit or credit, or smart cards.
Explain: Payment Gateway vs Payment Processor
Payment Gateway
A payment gateway is a secure online platform that supports online transactions and ensures every payment made online is processed through a secure payment gateway portal. This protects the customer’s account and the transaction from fraudulent activity and ensures the payment is successfully credited to the merchant’s account.
Payment Processor
A payment processor is a service that handles the actual movement of money during a payment. In simple words, it is the system that communicates with banks to check whether the customer has enough balance, approves or declines the payment, and ensures the money is transferred correctly.
When a customer makes a payment, the payment processor sends the payment details to the customer’s bank, gets confirmation, and completes the transaction. It works in the background to make sure payments are authorised, processed, and settled safely.
Key Distinctions
The payment gateway secures the payment data of the customer, and on the other hand, the payment processor takes care of the transfer of payment. It acts as a route for both the customer’s bank and the acquiring bank. The payment cannot be processed successfully without the payment processor’s intervention.
Players Involved in Online Payment Processing
A traditional payment gateway works with 5 major players.
So, here’s what they are and what they do.
The Issuer or Issuing Bank
Financial Institution that issues cards (Visa/MasterCard) to customers — account holders or cardholders.2d
Role of the Issuer
- Manages cardholder participation and activation in 2D secure service (Verified by Visa or SecureCode by MasterCard)
- Validates cardholders at the time of each online purchase
- Provides digitally signed responses to the merchant for each authenticated transaction
- Also holds responsibility for the authentication experience of their cardholders
Cardholder or Customer
The account holder of the debit or credit card.
Role of the Cardholder
- Uses the card to pay for purchases over the internet or other PoS
- The cardholder activates the card once for 2-factor authentication like 3-D secure, Verified by Visa or SecureCode by MasterCard
Acquirer
That financial institution (banking accounts, payfacs) contracts with the merchants to accept debit and credit payment cards.
In simple terms, this bank holds the merchant’s account.
Role of the Acquirer
- Registers merchants for card networks (Visa, RuPay and MasterCard, etc.)
- Ensures that merchants are operating under a merchant agreement with the acquirer. This agreement should be according to the rules and technical requirements for the card network program
Merchant or Business
Offers merchandise, software or service at a website or mobile app. The business merchant accepts payments from a cardholder who makes purchases over the Internet.
Role of the Merchant
- Operates software to support a 3-D secure program like Verified by Visa and SecureCode by MasterCard. This software is referred to as Merchant Plug-In (MPI)
- The Merchant may either develop their own solution or integrate with PGs like Cashfree Payments to accept payments from its customers
Card Networks
Card infrastructure providers like Visa and MasterCard.
Role of the Card Networks
- Verifies the authentication results of the issuer
- Also routes authorization requests to issuers and sends responses to acquirers for return to merchants
Therefore, all these players interact with each other to make online payment processing possible.
However, there is one thing you must know when it comes to payment gateways in India
Different players have their own set of rules and regulations. Thus, it ensures that every transaction undergoes securely and conveniently.
Now, let’s come to the next logical question.
So, how does a payment gateway work?
Well, there are two ways of going about it. We can either concisely answer this or in detail.
Or we can also do both!
P.S. Wanna test your knowledge? Give it a try!
How Payment Gateway Works?
We have already covered the players involved in online payment processing.
Then, let’s head straight to the answer.
- First, a customer enters their card details on the business site. It may have a hosted payment gateway or a self-hosted payment gateway
Then, the payment gateway encrypts and tokenizes the payment details. The details include card numbers, VPA in UPI, CVV number, etc. - The payment gateway then forwards the payment information to the Acquiring Bank and does it through a payment processor
- Now the Acquiring Bank forwards the information to the card networks. For instance, Mastercard, Visa, American Express, RuPay, etc. These card networks run a fraud check and forward the information to the Issuing Bank
- The Issuing Bank authorizes the payment and checks fund availability. If the customer has enough funds, the Issuing bank sends a positive response to the card networks
- The card company relays the message to the Acquiring Bank
- Finally, the payment gateway forwards the status of payment to the merchant and the customer
- In case the payment is approved, the Acquiring Bank requests the funds from the Issuing Bank. The Payment Aggregator receives the funds and then settles them with the merchant
The settlement can be instant or standard, as per the pre-decided agreement.
aaooek Framework of Payment Gateways in India Every Business Should Know
The payment gateway usage can be divided into two use cases, which include online payments and in-store payments.
1. Online payments – For every online transaction, the payment gateway is required to be integrated into the merchant’s website. This service is provided by either a third-party service provider or through an application programming interface (API).
- Third-party service provider – Every third-party provider acts as a middleman between the business owner’s website and the banks of the customer and merchant. Third-party providers ensure that payments made through various digital platforms are handled securely and in compliance.
- Application Programming Interface (API): An invisible backbone for a merchant’s website that enables it to communicate with the payment processing network to receive payments from the customer’s bank in real time. With the API, the merchants can directly integrate the payment gateway into their website and even customise the checkout experience as per their brand.
2. In-Store Payments – When trying to make payments in person, customers either swipe, tap, or insert their bank’s debit, credit, or smart card on a POS device. These payments are processed through a payment processing network and are secure and seamless; all you need is a reliable internet connection (Wi-Fi).
What measures do payment gateways take to protect customer information?
As digital payments become the backbone of modern commerce, payment gateways play a critical role in ensuring transactions are fast, convenient, secure, and reliable. For businesses, choosing the right payment gateway goes beyond enabling online payments—it directly impacts customer trust, data security, compliance, and long-term growth.
Every payment gateway plays a critical role in ensuring that transactions are successful and free of technical errors. Payment gateways are the backbone of modern e-commerce; below are some key actions they take to ensure the security of merchants’ and customers’ transactions.
HTTPS Protocol
Any reliable website will have HTTPS enabled, as it is the secure version of HTTP that encrypts data exchanged between the customer or viewer and the website. The HTTPS protocol helps protect a merchant’s website from hackers and prevents the leakage of sensitive bank details or login credentials.
Transaction Validation
As the term suggests, it involves validating every transaction made by the customer. This includes the transaction amount, the payment method, the customer’s identity and authorisation from the respective bank before approving the payment. Validating a transaction in advance ensures it is legitimate, complete, and error-free.
IP Address Verification
An IP address is a unique numerical label assigned to every device on a network. It is like a digital address that helps in verifying the originality of the transaction. This ensures that data is sent to the right place over the internet. It helps in identifying the device and its location, thereby detecting suspicious activity and informing the customer of the same via email.
What are the security features of the payment gateway in India?
Payment gateways handle highly sensitive information. To protect this information, they follow multiple layers of security controls.
1. Data Encryption
Payment gateways convert sensitive payment information of the customer into untraceable and unreadable code while transmitting. With this, the customer information is safe and cannot be misused or intercepted by any malware software or fraudulent parties.
2. Tokenization
It means breaking down texts into smaller units, and therefore, in a payment gateway, the tokenisation method helps to break down sensitive information into non-sensitive unique tokens. This helps to protect the customer’s card or account details, thereby reducing the risk of any data theft.
3. Secure Authentication
Gateways use various authentication methods such as OTPs, PIN verification, and device validation to ensure that the transaction is initiated by the rightful user. There are one-factor, two-factor (2FA) and three-factor authentication methods (3FA), which include sending a secure PIN to a mobile number or email and a biometric step. These measures further help in securely proving the customer information and account details.
4. Fraud Detection and Monitoring
There are multiple risk signals that analyse the behaviour of the transaction in real time. This helps to detect any unusual patterns, like repeated failed payment attempts or logging in from a suspicious location. Once confirmed, the payment is either processed or blocked.
5. RBI Regulations and PCI-DSS Compliance
Whenever you onboard a payment gateway partner, ensure it complies with the Reserve Bank of India’s rules and guidelines, including verification of the merchant account, and provide operational transparency. Every payment gateway must abide by the global Payment Card Industry Data Security Standards to ensure the secure handling of customer card and personal data.
6. Data Localisation
The RBI has mandated that all payment information pertaining to Indian clients be processed only in India, which lowers the risk of cross-border transactions.
7. Secure UPI and NPCI Systems
The UPI payment processing method is governed by NPCI, which enforces strong security, transaction monitoring, and dispute management frameworks.
How Do I Know Which Payment Gateway Is Best for My Business?
There is no single “best” payment gateway for every business. The right choice depends on your business model, target customers, and long-term plans for your business.
1. Supported Payment Methods
When choosing a payment method, check that it supports multiple options, including UPI, credit and debit cards, smart cards, e-wallets, buy now, pay later, and EMI options to suit customer preferences.
2. Ease of Integration
Businesses should choose a gateway that offers simple and quick integration. There are multiple ways to integrate, such as APIs, plugins, or hosted checkout pages, reducing technical complexity at the time of launch. Also, before going live, check if the payment integration is working fine in the sandbox environment provided by the payment gateway partner.
3. Transaction Success Rate
Choose a payment gateway that is known to have higher payment success rates and negligible payment decline or abandonment issues.
4. Pricing and Settlement Cycles
Choose a payment gateway that suits your affordability and has reasonable transaction fees. When onboarding a business, Cashfree Payments has the lowest charges at 1.6%, making sure pricing remains transparent and reasonable for the business. Therefore, choose a gateway that is known for faster settlement cycles and thereby allows businesses to manage cash flow efficiently.
5. Flexibility to handle finances
As businesses grow, the payment gateway should be able to handle higher transaction volumes without performance or server issues. This helps in improving customer experience and trust in the business and the gateway.
6. Customer Support and Analysis
When the customer and the merchant are easily able to access their transaction details, it makes management of finances easier and more transparent. Every merchant should be able to access their own customised dashboard where they can oversee every transaction report in detail.
Why Payment Gateway Security Matters for Businesses
For every business to reach new and reputable heights, a secure payment gateway is crucial. Once your business model is finalised, as the next step, it is essential to choose a trustworthy and reliable payment gateway for smooth and successful transactions at every step. A business model helps in defining the type of payment gateway best for business. A payment gateway not only helps to protect the customer information but also safeguards the business from fraudulent activities, malware and cyber theft. Customers trust a business more if their payments are always successfully processed, thereby leading to more conversion and higher success for the business.
Conclusion
Payment gateways are vital security systems that safeguard private data, guarantee legal compliance, and foster corporate expansion in addition to being instruments for payment collection. Businesses may provide a secure and seamless payment experience for their clients by comprehending the security measures employed by payment gateways, carefully assessing business requirements, and selecting a compliant and trustworthy provider.
Purchasing the appropriate payment gateway is a strategic choice rather than merely a technical one in an era when success is determined by digital trust.
Also, check out Cashfree’s payment gateway. It’s one of India’s premier payment gateway solutions. It accepts over 120+ payment modes such as cards, UPI, digital wallets and more.
FAQs about What is Payment Gateway?
What is the payment gateway in eCommerce responsible for?
Here are all the responsibilities of a payment gateway –
- Manages the merchant’s switch configurations – Defines a sub-merchant ID for each merchant payment configuration. Moreover, it communicates with the payment switch using this ID to validate transactions.
- Merchant’s transaction roles – Defines limitations for merchant’s transactions. For instance, the minimum and maximum amount a merchant can transact from a card in a day, restrict transactions from credit cards issued from a particular region, etc.
- Manages the merchant’s 3D secure configurations – As discussed above, the payment gateway communicates with the card network with the help of a payment switch.
It checks if there is 3DS enrollment of the cardholder. Then the related MPI will lookup in Card’s directory services and the returns response to the payment gateway. - Process Payments – Makes a request to the payment switch to process payments and receives results and returns to the customer.
- Sends payment records – Receipts and confirmations to merchants and customers.
- Encryption and Security – Ensuring that there is no data leakage as financial data is extremely sensitive.
What are the different types of payment gateway?
Payment gateways can be clustered under two main categories –
On the basis of Provider:
- Bank Payment gateways
- Third-party payment gateways like Cashfree Payments
On the basis of Payment flow:
- Hosted Payment Gateway: It redirects the customer to the payment gateway’s page for entering payment details. It also allows easy integration where the payment gateway provider handles the PCI DSS compliance.
- Self-Hosted Payment Gateway: The customer remains on the payment page hosted by the merchant and enters information. Therefore, it offers higher control over the customer payment experience.
- Off-Website Payment Gateway: Payment instruments like QR codes, payment links and Excel sheet payments.
Read more about types of payment gateway here.
What are payment gateway charges?
Payment gateway charges differ from one provider to another.
The pricing of your payment gateway can fluctuate depending on:
- The type of payment mode
- The pricing of your provider
- The type of settlement (instant or standard)
- The payment instruments used (off or on website options)
What is payment gateway integration?
Your need to integrate your website or app with your payment gateway to accept payments.
Now, most leading providers offer detailed integration guides and SDKs. Moreover, they offer integration instructions in all major languages.
Your payment gateway integration will depend on your type of integration (seamless or normal checkout) as well as your OS.
Here are some links you might find useful.
Web Integration
Mobile Integration
- Android SDK
- iOS SDK
- React Native SDK Version 2.0.0
- React Native SDK Version 2.1.0
- Flutter SDK
- Cordova SDK
- Android Support SDK: Xamarin
- Xamarin AndroidX SDK
- iOS SDK: Xamarin
- Xamarin Forms SDK
Plugins
What is Payment Gateway vs Payment Processor vs Merchant Account?
- A payment gateway encrypts/tokenizes the payment details. It also communicates the payment info between acquiring bank and the merchant
- A payment processor communicates the payment details and responses between card networks and Issuing and Acquiring banks
- The merchant account is a business bank account. Therefore, the merchant receives the settlement from the acquiring bank here
Related Read: Payment Gateway vs Merchant Account and Payment Gateway vs Payment Processor
