How Payment Gateways Work: An Example and Explanation

What is a Payment Gateway?

A payment gateway is a digital service that facilitates secure and encrypted transactions between a merchant and their bank and/or processor after a purchase is made. In other words, it’s the bridge that enables the transfer of funds from the customer’s preferred payment method to the merchant. A payment gateway covers not only the physical card-reading devices found in brick-and-mortar retail stores but also the payment processing portals found in online stores.

Simply put, a payment gateway is a technology that allows merchants to receive electronic payments such as credit or debit cards from online customers for their products or services.

Main Features of a Payment Gateway

A payment gateway is responsible for the secure transfer of any payment information. It also offers data encryption for security, compatibility with different payment modes, and instant transaction processing.

In essence, a payment gateway acts as a safe link between the merchant and the customer to ensure smooth financial transactions. It enables the secure movement of funds from the customer’s bank account to the merchant’s account.

The Framework of a Payment Gateway

A payment gateway has different frameworks depending on whether it is used for online or in-store payments.

Online payments need to be hosted on the website either by a third-party service provider or by the merchant using an API that allows the website to communicate with the payment processing network and get a response from the issuing bank.

In-store payments use a payment gateway through a physical card reader or a POS terminal that connects to the processing network with a secure internet connection.

The Players in the Payment Gateway Ecosystem

Merchant or Seller

A merchant is an online seller of products or services.

To receive online payments, the merchant requires a merchant account, which is a special bank account that enables them to collect money from online transactions. Connected to the payment gateway, this account ensures the safe processing of transactions. In other words, the merchant account is the destination of all the money after settlement.

To get a merchant account, you will need to find and select a provider that meets your needs.

Sophia is passionate about Digital Marketing, E-commerce, and travel. I also like photography and writing interesting articles.