If you are an e-business owner and have successfully set up your wares to be displayed online, a critical part of the process is selecting a suitable Payment Gateway. Once the order items have been selected on the shopping cart, the user moves to the checkout process. It is here that the role of Payment Gateway comes into play. It allows the merchant’s site to request payment from the client’s chosen mode of payment. Once the payment gets approved, it is securely transferred from the buyer to the seller. Let us now see in detail how a Payment Gateway works.

How Does A Payment Gateway Work

A Payment Gateway plays a vital role in every online transaction taking place globally. It authorizes transactions between merchants and customers.

Let’s delve a deeper into the sequence of events during the checkout process –

1) Once the customer confirms the order and selects the payment option, the customer’s browser encrypts the payment information and sends it to the merchant’s website. This encryption is done via Secure Socket Layer (SSL). For this process, the merchant needs to be SSL certified. This encrypted information is then passed on to the Payment Gateway by the merchant’s website.

2) The merchant’s chosen payment gateway takes over from here on.

3) This Payment Gateway forwards the encrypted information to the merchant’s bank.

4) If the chosen mode of payment selected by the customer is a debit or credit card or any e-wallet, then the bank would further forward this encrypted information to that association, which in turn forwards it to the issuing bank.

5) If the chosen mode of payment is net banking or UPI transaction, then this encrypted information goes directly to the relevant bank’s servers to the customer.

6) The customer’s bank then checks the customer’s account to ascertain the availability of funds and other criteria like CVV or Pin match, any limits set by the customer, etc.

7) On assessment, if the transaction fulfills all the specified protocols, the client’s bank approves the transaction. If there is any mismatch in data or non-availability of funds, the transaction is declined.

8) This response is coded and sent back to the Payment Gateway.

9) The Payment Gateway then forwards this response to the merchant by duly approving or declining the transaction.

How Crucial Is A Seamless Payment Gateway?

The entire process needs to be super swift and requires a well-coordinated effort between all the parties concerned. The efficacy of the Payment Gateway rises to the fore here. A reliable Payment Gateway working with optimum speed should be able to complete this entire process in a matter of seconds.

The role of a Payment Gateway does not end here. Till this stage, the status of the transaction, whether approved or declined, is determined. But the merchant is yet to be paid. It is here that the second stage of the Payment Gateway’s process kicks in.

1) On receipt of approval, the merchant sends this sanction code to their bank via the Payment Gateway.

2) The merchant’s bank then deposits the sanctioned amount into the merchant account of the vendor or in the aggregated merchant account of the Payment Gateway.

3) The payment is finally transferred to the business’s bank account from this merchant account.

About The Merchant Account

The need for a merchant account here is two-fold. It acts as a safeguard for business clients and credit card companies. It holds the money safely for a transitionary period until the order is completed to the customer’s complete satisfaction. If there are any issues with the e-commerce order, the client is refunded from the merchant account.

There is an option for the vendor to either have their merchant account or choose the aggregated merchant account offered by the Payment Gateway. The choice is made considering the cost factors involved and the cash flow duration in each case.

How Are Payment Gateways Regulated In India?

 The business owner needs to understand how Payment Gateway works in India. RBI guidelines regulate the workings of Payment Gateways. Vide a circular dated March 17, 2020, RBI has issued “Guidelines on the regulation of Payment Aggregators and Payment Gateways”.

What Is The Ideal Process For A Payment Gateway Selection?

 The selection of a Payment Gateway also depends on how it can be integrated into the merchant’s website. Software developers generally carry out this task for the merchants. Knowledge of PHP, Java, or C# coding is essential for this job. How a Payment Gateway works in PHP and how a payment gateway works in Java or C# needs to be tested exhaustively before making it live.

Ready-made software is also available that allows the merchant to blend the Payment Gateway with their website without coding.

 In India, PayU India offers the service of Payment Gateway with the best success rates. It already has a broad base of satisfied clients. Some of the salient features of partnering with PayU India are – 

  • PayU India offers more than 100 payment options for your customers.
  • PayU India allows you to accept international payments as well.
  • PayU India ensures fast and easy-to-use operations.
  • PayU India provides extreme safety and world-class security.


With a strong push towards digitization, merchants now realize the importance of online presence. There are so many businesses that are now available only online. The selection of the right Payment Gateway is critical to the success of an e-commerce venture. Merchants can read the above pointers carefully and make good business decisions.


Can you explain what a Payment Gateway is in layman’s terms?

A Payment Gateway is simply a technology that enables business owners with an internet presence to receive payments online.

How does a Payment Gateway work?

The working of a Payment Gateway starts once the customer enters the banking details on the merchant’s website. The working is not-so-difficult to comprehend – to put it simply, a Payment Gateway acts as an intermediary for transferring information between the merchant’s website and the banks’.

Is it safe to use a Payment Gateway?

PayU India provides a secure and safe environment to process the payment. With PayU India’s Payment Gateway, you don’t have to worry about data leakage or fraud.