What Is A Payment Gateway, And How Does It Work?

What Is A Payment Gateway

With online businesses being a thing nowadays, there has been a need to create a safe online payment method and, thus, the payment gateway. For many business owners, this is a term they often interact with but do not know what it means. So, what exactly is a payment gateway, and how does it help your online business? Read on.

What Is A Payment Gateway?

A payment gateway is a modern-day technology that reads and safely transfers payment details from the cardholder to the merchant. So, for example, if you are in the gaming business, which is considered high-risk, the gaming payment gateway encrypts sensitive payment details and securely transfers them to your site for processing transactions. In addition, it checks the card details to ensure that they are valid and that there are sufficient funds to complete the transaction. 

Five Key Elements Of A Payment Gateway

To understand how it works, you don’t need to attend courses, we will look at the key elements of the payment gateway in this article.

  1. Merchant: In this case, merchant refers to the owner of the business, i.e. the person selling a product or service.
  2. Cardholder: A cardholder is a customer looking to purchase goods and services from the merchant and is the one that initiates the transaction
  3. Issuing bank: Refers to the bank holding the customer’s account 
  4. Card schemes: Card schemes refers to an institution such as Visa, Mastercard, or American Express responsible for issuing the cards
  5. Acquiring bank: This is the bank that maintains the merchant’s account.

How Does Payment Gateway Work?

Now that you have an idea of some of the key components of a payment gateway, let’s look at how it works. Like any other software, the payment gateway works on a series of commands in the form of five simple steps:

  1. The customer inputs their card details on the payment page and safely transfers them to the payment gateway.
  2. The payment gateway captures the data and performs checks to ensure that the card is valid and that sufficient funds are available to complete the transaction.
  3.  When the card passes all checks, the software encrypts the data and securely sends them to the credit schemes through the acquiring bank.
  4. The credit card company performs a fraud check and then approves the transaction. It then sends a command to the merchant through the acquiring bank to complete the purchase.
  5. A command is sent to the issuing bank to transfer funds to the merchant’s bank.

Why Use A Payment Gateway?

Most people would ask, is a payment gateway necessary? The answer is yes. Every online business owner accepting online payment needs a payment gateway. First, this software creates a secure medium for transferring sensitive card details. It encrypts and securely transfers data, ensuring fraudsters do not get access to it. Secondly, this software protects you from completing transactions with customers with invalid cards, exceeding credit limits, or insufficient bank balances.


With the rising cybercrime, a payment gateway is an essential element of any online transaction. Not only does this software protect customers’ details from fraudsters, but it also ensures that you, the merchant, are protected from bouncing cards.