Payment Gateways And Their Functioning

Payment Gateways And Their Functioning
Share this:

From buying a pen to a car, everything is available online today and what plays a pivotal role in online purchases is the facility to pay online. Most of the customers today prefer shopping at the comfort of their homes and so, making it a safe and smooth experience for the customers is a merchant’s responsibility. Not only this helps customers to have secure transactions but the merchants to gain a bigger and loyal customer base.

What is a payment gateway?

An online payment gateway is a system that enables people to carry out online money transactions securely. It connects the customer’s bank account to the merchant’s payment portal, thus, facilitating communication between banks.  One can opt for different payment methods like debit cards, credit cards, UPI, net banking or online wallets. 

Payment gateways make the transaction process safe by encrypting sensitive information like card numbers or bank details provided by the user and ensure a safe passage of information.

Working of a Payment Gateway

The basic flow of all payment gateways is the same. Working of a payment gateway can  be summarized in the following steps to make it easier for one’s understanding:

Step 1 – Initiating the payment

After finalizing a particular product or service, a customer would click on a checkout button to begin with the transaction. This happens on the merchant website itself. 

Step 2 – Landing on the payment gateway:

Once the transaction is initiated, the customer is taken to a payment gateway where he has to fill all the payment related information like the card or the bank details.

Step 3 – Reaching to the issuing bank

Following step 2, the user is taken to the issuing bank’s page for the authorization process.

Step 4 – Deduction of payment

Once the transaction has been approved, the bank checks for sufficient balance in the user’s account and the payment gateway sends the required message to the merchant. If the transaction is good to go then the deduction takes place else an error message is sent to the merchant. 

Step 5 – Settling the share

From the bank’s end, money is settled with the payment gateway that in turn settles it with the merchant. 

Successful completion of the above process confirms the order and a confirmation message stating the success of the transaction is sent to the customer.

Types of Payment Gateways

Selecting the most suitable payment gateway for an e-commerce website is a crucial aspect of it and must be done according to the business model and the features one needs to incorporate in the e-commerce site.

Hosted Payment Gateways

In a hosted payment gateway, when customers are ready to pay and proceed to the payment options, they are redirected to the payment service provider’s page (PSP). Hence, these gateways take a customer off from your site’s check out page. The user is then required to fill in all the payment details there and once the payment has been completed, the user is again redirected to your site to further complete the checkout process.

Using inline frames (iFrames) is another option to integrate hosted payment gateways. Here, iFrames collect the payment details while PSP hosts the form and receives the data as the form is filled up.

Advantages :

  • These are safe as the PSPs catch the payment details securely. 
  • PSPs are wholly responsible for all the payment related steps and hence one doesn’t need to take another load for running the business. 

Recurring payments are easily handled by creating a profile for the user that keeps a note of recurrence count, amount and other payment-related details. Recurring payments are deducted with the help of these profiles and the notifications are sent to the merchant website. The payment gateway is responsible for handling refunds and cancellations as well.

Self Hosted Payment Gateways

Using self-hosted payment gateways enables customers to stay at your website for filling all payment details. The collected data is then sent to the Payment Gateway’s URL. Gateways require data to be in a specific format or might need any hash key or a secret key. 


  • Makes customer experience better as the entire transaction gets completed at the same place without being redirected to different pages. 
  • One can customize everything as wanted and enrich the user experience accordingly.

Payment gateways deduct the recurring payments on their own and send the notification to the merchant website.  They also supervise the process of refunds and cancellations. 

API/Non-Hosted Payment Gateways

Using these gateways, you are able to get the payment details from the customer on your own website and hence, saving the user from being redirected to different pages for making payments. APIs and HTTPS queries are used to process the payments in such gateways. 


  • Unlike the hosted gateways, one has complete control over the user interface of the website’s payment page.
  • These are capable of being used with smart-phones, tablets, and other devices. 

Refunds, payment cancellation, and other related processes are provided by some of these payment gateways.

Local Bank Integration

In the Local bank integration type of payment gateways, the customer is redirected to the bank’s website where he has to fill in all the payment details. Once the payment is done, the customer is redirected to the merchant website again. These are very similar to the hosted payment gateways and hence are considered to be one of them.


  • Since these are fast and easy to set up, hence, are considered efficient for small businesses that require a simple payment structure.

Using these payment gateways can prove to be a problem at times as they do not support recurring payments, refunds or any cancellations. The merchants are required for these tasks manually. 

E-commerce has revolutionized the shopping trends and hence making online money transactions secure has become critical than ever. Making transactions hassle-free is of the utmost importance for an E-commerce site. Different payment gateways have their own unique set of advantages and can be chosen by merchants according to their business needs.

Share this: