What is a Payment Gateway and How Does It Work?

8 February, 2024

As the global trend increasingly favours online shopping over traditional brick-and-mortar stores, Payment Gateways have become an integral part of our lives. Whether you are purchasing your favourite pair of shoes from an online shopping site, booking flight tickets for your next trip, or subscribing to a monthly OTT service, the process of transferring money electronically is facilitated by a vital component known as the Payment Gateway.

But do you know what a payment gateway is and how does it work? In this article, you will take a deep dive into the intricacies of this fascinating technology. You will learn the payment gateway meaning, how the payment gateway works, and the payment gateway benefits for online businesses as well as customers.

What is a Payment Gateway?

A Payment Gateway is a digital technology that enables businesses and individuals to receive payments from their customers through their websites or mobile apps. It acts as a bridge between the merchant’s website or smartphone app and the bank that processes the customer’s payment through Debit Card, Credit Card, or UPI.

In simpler terms, a Payment Gateway is a system employed by businesses to receive electronic payments made by customers buying their goods or services online. Similar to how a point-of-sale terminal at a physical store verifies a Debit or Credit Card for authenticity, a Payment Gateway performs the same function in the case of online transactions.

As you cannot physically furnish your card during an online purchase, you are required to enter your card details, including the card number, expiry date, and the card verification code (CVV), in a Payment Gateway to complete the transaction.

Stakeholders involved in an online payment ecosystem

Before you delve deeper into the workings of a Payment Gateway, you must identify the key players involved in an online payment ecosystem. They include:

• The merchant
  
  The merchant refers to the individual or business entity that offers or sells products or services through online platforms. It accepts payments from customers through a Payment Gateway.
  
  

• The customer
  
  The customer is an individual who purchases or avails of online products or services from a merchant and makes payments through Payment Gateways.
  
  

• The issuer
  
  The issuer refers to the bank or a financial institution that has issued a Debit or Credit Card to the customer. It is where a transaction originates.
  
  

• The acquirer
  
  The acquirer refers to the bank or a financial institution that acquires or accepts the payments on behalf of the merchant. It is the end destination where an online transaction terminates.
  
  

• The Payment Gateway
  
  The Payment Gateway is the most crucial component of an online payment ecosystem. It facilitates seamless funds transfer between the merchant and the customer through a secured process.
  
  

• The payment processor
  
  The payment processor oversees the technical links between the Payment Gateway, the acquiring bank, and the issuing bank. It ensures the secure validation and routing of payment transactions.
  
  

How does Payment Gateway work?

Now that you have understood what a Payment Gateway is and the components involved in an online payment process, let’s explore the step-by-step process in which a Payment Gateway operates:

Step 1: After selecting the products or services they want to purchase, the customer can proceed to the merchant’s payment page. They can then choose from multiple Payment Gateway options to complete their payment.

Step 2: In the next step, the customer needs to select the payment method. Then, they can enter their details in the relevant spaces as applicable.

Step 3: The Payment Gateway will encrypt the card details before sending it to the acquirer for further payment processing.

Step 4: Upon successful verification of the OTP and other authentication parameters, the transaction is completed, and the amount is transferred to the merchant’s bank account.

A Payment Gateway plays a pivotal role in facilitating secure and seamless online transactions. Other Payment Gateway benefits include enhanced customer trust, hassle-free international transactions, and a 24x7 payment facility.

By integrating HDFC Bank Payment Gateway, businesses can expand their customer base and develop a secure platform to receive online payments.

*Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. HDFC Bank SmartHub Vyapar is available to only Individual & Sole Proprietorship entity and for select Current Account variants only. For other entity types, please connect with the nearest branch.