How Does a Payment Gateway Work?


Payment gateways enable online transfer of money by communicating with different entities. They have become an essential part of our online world and web hosting services deeply integrated in it. From online shopping to utility bill payments, to charity givings these payment gateways help us in numerous ways.

payment gateway
Lets understand how payment gateways work by considering a typical credit card transaction.

A credit card transaction involves five entities

1. The cardholder

2. Issuing bank i.e. the bank that issued the credit card

3. Credit Card Brands. Visa, Mastercard , Amex

4. Merchant’s Bank

5. Merchant i.e Shop, e-commerce website etc

The cardholder goes to a merchant, buys a product or service and pays using credit card on POS system. From swiping of the card to approval it takes roughly three seconds and a payment gateway does all the work. It sends instructions to deduct dollars from the swipe machine (in case of a physical store) to the merchant’s bank, then to the card company and finally to the issuing bank. The issuing bank then checks the credit limit of the card holder and accordingly accepts or declines and sends the instructions back to the card company, then to the merchant bank and finally the merchant. All this happens in incredible three seconds, thanks to your payment gateway. All transactions are settled into merchant’s bank account at the end of the day and at the end of the month the card holder gets a bill.