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What is a Payment Gateway and How Does It Work?

by Nathan Zachary
What is a Payment Gateway and How Does It Work

The payment gateway allows online payments to businesses and consumers. It keeps the payments system running smoothly. Online merchants don’t have to be payment gateway experts, but it is worth learning the basics of how online payments flow from your customer to your bank accounts. In this article, we will explain to you the payment gateway method and how it works.

A payment gateway is necessary for online shops for their own advantages. According to research, 73% of Americans bought something online by 2021. The ideal approach for online companies to take payments is through a payment gateway.

It is essential to understand how an online payment gateway works for your online business to thrive. Customers should be able to pay you easily, securely, and in an easy-to-use manner. Online payment gateways allow card payments to be made from anywhere in the world, just like at a physical location.

What’s a Payment Gateway?

A payment gateway allows merchants to process transactions online or in-store using an electronic payment processing system called a payment gateway. It is an infrastructure that collects and transfers payment data from the point of interaction (PI) to a payment processor. The point of interaction can be any website, mobile device, or terminal.

To receive payments, the customer must fill out certain details such as credit/debit card number and expiry date.

After this, the customer proceeds with the payment. The money is transferred from the buyer to the merchant’s (merchant) account.

The payment gateway acts as a middleman between the customer and the merchant, making sure that the transaction is completed promptly and securely. Merchants can integrate software easier with an online payment gateway. The gateway acts as an agent between the acquirer of the card and the merchant to manage sensitive card information.

How Does a Payment Gateway Work?

Transaction flow is identical whether you use a virtual or physical payment gateway. However, mobile and online payments use digital capture files to package the card information instead of the output from a card reader.

  1. The buyer completes a card payment via your card reader or e-commerce site.
  2. The payment gateway transmits transaction information to the correct payment switch
  3. The payment switch routes the request toward the issuing bank (the one that issued the card) and pushes the transaction information onto the correct card network.
  4. The issuing bank uses fraud detection procedures to verify the legitimacy of the transaction. It also confirms that the buyer has enough funds to cover the purchase.
  5. The issuing bank approves or rejects the transaction and transmits the information through the card network back to the merchant bank as well as the payment gateway.

The payment gateway can be compared to a train that passes between stations. At each station, the conductor speaks with the station master.

The issuing bank authorizes credit card payments (through the payment gateway), at the point of sale. An authorized transaction is when the bank places a hold on funds, but the merchant has not received payment. This is referred to by customers as a “pending transaction” on their statements. Some debit card transactions are simultaneously authorized and settled so that the transaction immediately appears on the customer’s statement.

The merchant will then need to reconcile all card transactions, add tips if necessary, and send a batch capture or “clearing file” for each one. The merchant can now access the funds that were previously held by the issuing bank because the pending transactions have been committed. Once funds have been posted in the merchant account, they are credited to and cleared by the merchant’s banks.

Why are We Looking for a Payment Gateway?

It may seem odd to you why a payment gateway is needed if it is merely a middleman. We’ll start by pointing out that online payments are not card transactions. You cannot physically swipe the customer’s card on a POS terminal.  You can only trust the information the customer enters on the payment page. How can you ensure that the customer’s card is valid? Online transactions have a significantly higher fraud risk, which is why a payment gateway is so useful.

What happens if the payment gateway is removed from the online payment flow? Fraudsters could have easy access to your card data, which would expose your business to chargebacks and fraud. Fraudsters could also find other ways to initiate illegal transactions, exposing you to more fraud and causing damage to your brand image.

The payment gateway acts as the gatekeeper for your customers’ payment data. A payment gateway is used to transmit information from online merchants to the acquirer or issuing bank. Data encryption protects sensitive card data from unwelcome threats. Merchants are protected from fraudulent transactions, expired cards, insufficient funds, and exceeding credit limits.


You should do your research before you sign up for a payment gateway. Find out about any hidden fees and costs. Also, understand how the integration with your existing systems works. To simplify bookkeeping, you should have both an online and physical payment gateway to your e-commerce site. You should also ensure that your gateway solutions integrate with other payment systems to avoid fraud. Companies that wish to provide secure and convenient payment options for their customers need a payment gateway. Different payment options can offer different payment methods, which allow consumers to quickly receive payments in different locations.


  1. What is a merchant bank account?

A merchant account is a bank account that allows card payments and online trading.

  1. What is the main difference between a Merchant account and a payment gateway?

Merchant accounts are required to accept card payments and to use a payment gateway for online payment data transmission. Your merchant account can be issued by your PSP, payment gateway and it is required to accept online payments.

  1. Is it possible to make cross-border transactions easier with a multi-currency gateway payment?

Multi-currency payment gateways allow you to accept payments in multiple currencies. They allow you to accept international payments.

  1. What is the earliest time you can accept payments?

It will typically take between 3-4 weeks to set up a merchant account for the payment gateway.

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