CATEGORY - FEATURES & UPDATES

What is a Payment Gateway? How It Works, Types & How to Choose One

Features & updates - 30 Apr, 2025

Table of Contents

The rapid growth of online payments shows how important payment gateways have become for businesses today. A payment gateway securely processes your customers’ transactions, acting as the bridge between your business, your customers, and their banks - making sure every payment is safe, fast, and hassle-free. Using one also helps minimise revenue loss from failed or delayed payments.

In this article, we’ll cover what a payment gateway is, how it works, the different types available, how to choose one, and what it typically costs.

Key Takeways

Payment gateways help businesses accept secure online payments through UPI, cards, wallets, net banking, and EMI options.
A smooth payment experience improves customer trust and increases successful transactions.
Features like encryption, PCI DSS compliance, OTP authentication, and fraud detection keep transactions safe.
Faster processing and settlements help businesses improve cash flow and reduce payment delays.
Payment gateways automate payment collection, reducing manual work and operational errors.
Easy API and SDK integration allow businesses to add payment systems to websites and apps quickly.
Multiple payment options improve checkout convenience and help reduce cart abandonment.
Transparent pricing and lower transaction charges can help startups and MSMEs save more on every payment.
Checkout speed and smart retry logic directly affect payment success rates and cart abandonment.
The right feature set - wide payment mode coverage, tokenisation, and fast settlements - turns a payment gateway into a growth lever, not just a cost.
Choosing the right payment gateway supports business growth, customer satisfaction, and long-term scalability.

What is a Payment Gateway?

A payment gateway is a digital platform that helps businesses accept and process payments securely through their websites or mobile apps, using credit cards, debit cards, UPI, mobile wallets, and other digital payment methods.

It captures payment details on the front end and securely sends the customer’s information to the merchant’s acquiring bank for processing - acting as the connecting dots that keeps every transaction smooth, fast, and secure.

Today’s payment gateways typically support credit and debit cards, net banking, Buy Now Pay Later (BNPL), cardless and card EMIs, one-click checkouts, payment links, UPI, and mobile wallets - giving businesses the flexibility to offer a convenient checkout experience across payment preferences.

Why Payment Gateways Are So Important?

In today’s world of online shopping, UPI apps, and tap-to-pay options, a payment gateway ensures that every transaction is:

Fast
Safe
Seamless

It keeps your personal and financial information protected while making the buying experience hassle-free.

How a Payment Gateway Works?

Initiating the payment:

The customer selects a product or service and enters their payment details at checkout. Depending on the merchant’s integration method (hosted payment page, server-to-server, or client-side encryption), this information is passed securely to the payment gateway.
Encryption and fraud check:

The payment gateway encrypts the sensitive payment data and runs fraud checks before forwarding it to the acquirer.
Routing through card networks:

The acquirer sends the payment details to the relevant network (UPI, Visa, Mastercard, etc.), where additional fraud checks are run.
Authorisation by the issuer:

The issuing bank verifies the card or account, checks available funds, and assesses transaction risk, then sends an approval or decline back through the network.
Response to the merchant:

The acquirer relays the outcome to the gateway, which informs the merchant. Approved payments show a confirmation page; declined ones prompt the customer to try another method.
Settlement Process:

Once approved, the acquirer collects the amount from the issuer and holds it in the merchant’s account until final settlement, per the timeline agreed with the payment service provider.

This entire sequence typically completes within seconds.

Who’s Involved in the Process

Payment Service Provider (PSP): A third-party company - also called a payment processor - that helps merchants accept payments, offering gateway services, fraud detection, risk management, and acquiring bank access.
Merchant: The business selling goods or services, online, in-store, or both.
Customer (Cardholder): The person making the purchase.
Issuer (Issuing Bank): Issues cards to customers and authorises or declines transactions on their behalf.
Acquirer (Acquiring Bank): Processes card payments for merchants and routes details to the card networks.
Payment Gateway: The technology that securely captures and transfers payment data between merchant, acquirer, issuer, and card networks.
Card Schemes (Card Networks): Networks like UPI, Visa, Mastercard, and American Express that connect acquirers and issuers to authorise payments.

Example of a payment gateway

Easebuzz is an example of a payment gateway that helps businesses accept payments securely through websites, apps, payment links, and QR codes across UPI, cards, wallets, and net banking. When a customer pays via UPI, for instance, the gateway verifies the payment, checks security layers like OTP authentication, and confirms the transaction within seconds - while running on API integration, tokenisation, and PCI DSS-compliant infrastructure behind the scenes.

That infrastructure has a measurable effect in practice. In one case, a ferry ticketing platform (M2M Ferries) added 150+ payment modes along with customer-specific payment reminder links and share templates over Email, SMS, and WhatsApp after integrating Easebuzz - cutting payment confirmation time by 95%, boosting booking conversions 4x, and reducing reconciliation time by 75%.

Types of Payment Gateways

Choosing the right type depends on your business model, desired customer experience, and security requirements.

Hosted payment gateways: redirect customers to a secure payment page managed by the provider. Easy to set up and highly secure - ideal for startups, SMEs, and growing online businesses.
Self-hosted payment gateways: let businesses collect payment details directly on their own site before processing. This gives more control over branding and UX but requires stronger PCI DSS compliance on your end.
API-based payment gateways: provide a fully embedded checkout inside your website or app. Preferred by e-commerce platforms, SaaS companies, fintech brands, and enterprises that want a faster, seamless, customised experience.
Local Bank Integration Gateways: Enable direct integration with local banks, helping businesses offer customers a familiar, secure, and convenient payment experience while supporting seamless transactions in specific markets.

Most modern gateways like Easebuzz support UPI, QR codes, mobile wallets, tap-to-pay, subscriptions/recurring billing, and cross-border payments across all three types.

Features to Look for in a Payment Gateway

Most payment gateways look similar on paper - cards, UPI, wallets, net banking, some mention of “bank-grade security.” The features that actually move revenue are the less obvious ones:

Payment success rate, broken down by method and bank. This is the single number that determines how much of your traffic actually converts into paid orders - ask for dashboard-level visibility into it, not a marketing claim.
Smart retry and failover. When a transaction fails, a well-built gateway automatically retries through an alternate route or prompts the customer with a working payment method, instead of just showing “payment failed.”
Full tokenization across cards and UPI. Beyond baseline PCI DSS compliance, tokenization is what makes safe one-click repeat checkout and recurring billing possible without storing raw card data.
Fast, predictable settlements. T+1 should be the baseline - ask specifically about cutoff times and how holidays or long weekends affect the payout schedule.
Wide, relevant payment mode coverage. More options only help if they match what your customers actually use for most Indian consumer businesses, UPI and wallet coverage matters more than card-only checkout.
Developer-friendly APIs and SDKs. Faster integration and easier maintenance reduce the ongoing engineering cost of running your payment stack.
Native support for recurring billing and subscriptions. If you run any subscription, EMI, or membership model, this needs to be built in - not bolted on later.

Checkout speed belongs on this list too - it matters enough to get its own section further down.

How the Right Payment Gateway Reduces Cart Abandonment

Roughly 7 in 10 online shopping carts are abandoned before checkout completes at a rate that’s stayed close to 70% globally for years, despite heavy investment in checkout optimization across the industry. A meaningful share of that isn’t about pricing or shipping at all; it’s the payment step itself: limited payment method choice, a transaction that fails with no retry path, or a checkout that simply feels untrustworthy at the last second.

The payment gateway is one of the few checkout components a business can actually fix directly:

More relevant payment methods reduce drop-off on their own. - Offering Buy Now Pay Later at checkout, for example, has been shown to cut abandonment by roughly 20% on higher-value orders, and even more among younger shoppers.
Smart retry turns a failed transaction into a recovered one. - Instead of losing the sale the moment a bank declines a payment, the gateway can prompt an alternate method in the same session rather than sending the customer back to square one.
Saved, tokenized payment details shorten repeat checkout - from a multi-step form to a couple of taps - friction is often the biggest reason a returning customer abandons a cart.
Visible security cues - a familiar UPI app, a recognisable OTP flow, a checkout that doesn’t feel like a redirect to nowhere - reduce last-step hesitation, especially for first-time buyers still deciding whether to trust the merchant.

This isn’t theoretical. It’s the same mechanism behind the ferry ticketing example earlier in this piece, where adding more payment modes and simplifying repeat payments produced a 4x jump in booking conversions.

How Fast Should a Payment Gateway Be for Businesses?

Fast enough that customers can complete a payment without unnecessary waiting or friction. In practice, that means:

A fast-loading checkout: Your payment page should load quickly and remain responsive, especially on mobile. Even small delays can add friction at the point where customers are ready to pay.
A smooth payment flow: Customers shouldn’t have to navigate through unnecessary steps, reload pages or repeatedly enter information. A streamlined checkout helps them move from payment selection to confirmation with minimal friction.
Quick transaction processing: Once a customer initiates a payment, the authorisation and confirmation process should happen within seconds wherever the underlying payment network allows it. Clear status updates are equally important when a transaction takes longer to complete.
Speed across payment methods: UPI, cards, net banking and other payment methods can have different processing flows. A good payment experience should make each journey feel fast, reliable and predictable.

Speed is only one part of a high-converting payment experience. The right payment methods, a frictionless checkout, reliable transaction processing and clear payment confirmation all work together to help businesses turn more payment attempts into successful transactions.

Benefits of Using a Payment Gateway for Your Business

Security - Encryption, tokenisation, PCI DSS compliance, and fraud detection reduce the risk of data breaches and unauthorised transactions. (See how payment gateways keep transactions secure for the technical detail.)
Customer trust - Customers complete purchases more readily when checkout looks and feels secure, which builds long-term credibility for your brand.
Multiple payment options - Supporting UPI, cards, wallets, net banking, EMIs, and BNPL improves checkout convenience and reduces cart abandonment.
Faster transactions and cash flow - Instant processing and faster settlements mean fewer payment delays and easier cash-flow management, without chasing customers for reminders or follow-ups.
International reach - Multi-currency support and global card acceptance let you serve customers beyond your local market.
Convenience and accessibility - Customers can pay anytime, from any device — website, app, tablet, or desktop - without being limited to business hours.
Cost-effectiveness - Automated payment flows cut manual reconciliation work, and local methods like UPI and net banking typically carry lower fees than cards. (More on actual charges below.)

How Payment Gateways Ensure Secure Transactions

Encryption (HTTPS, PCI DSS): Gateways use secure channels (HTTPS/SSL) to scramble card details in transit, and PCI DSS compliance mandates strong encryption of all payment data.
Tokenisation: The gateway replaces your real card number with a random token for each transaction. The merchant never sees the actual number, so a stolen token is useless on its own.
Fraud detection: Gateways verify billing address (AVS) and CVV, track buyer IP/device signals, and use algorithms or device fingerprinting to flag suspicious transactions.
3D Secure & Virtual Payment Address (VPA): For card payments, banks often add 3D Secure (an OTP or biometric prompt) as a second authentication layer. UPI payments use a VPA (e.g., name@bank) so card or account numbers are never shared directly.
Mobile wallets & APIs: Apps like Paytm, Amazon Pay, PhonePe, and Google Pay connect via APIs - customers pay by scanning a QR code or selecting a wallet, and the gateway completes the transaction with the bank or wallet app instantly.
Emerging tech: Some gateways also support NFC (tap-to-pay) and biometric confirmation (fingerprint/face unlock) for added convenience and security. Learn more in our PCI DSS compliance guide.

How to Integrate a Payment Gateway Into Your Website or App

Step 1: Choose the right payment gateway. Compare providers on transaction fees, supported payment methods (cards, UPI, wallets), settlement speed, and support quality — Easebuzz, PayPal, and Stripe are common options, and local-bank integrations can help for region-specific needs.

Step 2: Set up your merchant account. Register with your chosen provider and submit your business details to get your API keys.

Step 3: Integrate the gateway. For websites, embed the provided checkout code; for apps, use the provider’s SDK or API. Test everything in the sandbox environment before going live.

Step 4: Lock down security. Confirm PCI DSS compliance and follow secure coding practices to protect sensitive payment data.

Step 5: Go live. Once testing checks out, switch to live mode and start accepting real transactions.

Why Easebuzz: A single platform combining payment gateway and payment processor, average transaction charges of 1.5%, 150+ supported payment modes, and RBI-authorised Payment Aggregator status - so you’re not stitching together multiple providers to cover UPI, cards, and wallets.

Ready to integrate? Get in touch to get started.

Payment Gateway vs Payment Processor

Aspect	Payment Gateway	Payment Processor
What it does	Connects the merchant’s website to the customer’s bank and securely passes payment details for approval.	Checks whether the customer has sufficient funds and transfers the money to the business’s account.
Key functions	Encrypts payment information; verifies payment method and balance; sends data to the bank/processor.	Moves money from customer’s bank to the business’s bank
Security	Uses encryption and fraud checks (CVV, address verification)	Follows PCI DSS rules to protect cardholder data during processing
Integration	Connects to websites, apps, or e-commerce stores via APIs or plugins	Mostly works in the background, connecting to gateways or banks — not usually integrated directly by the business.
Types	Hosted payment gateways (redirect to another page )	Bank-affiliated processors (like HDFC Bank, ICICI Bank, SBI Bank, Axis Bank)
	Self-hosted (collect data on your own website)	Third-party processors (like Easebuzz, Square, Stripe)
	API-based gateways
Business relationship	Works closely with businesses via direct integration, but doesn't manage funds.	Usually offers a merchant account and manages the flow of money between banks and businesses.

In Simple: The payment gateway securely transmits payment information and facilitates authorisation; the payment processor verifies, authorises, and settles the funds.

Easebuzz is the one of the best players in India offering both services - payment processor and payment gateway - on a single platform, giving businesses one integration for the full payment flow instead of two.

Understanding Payment Gateway Charges

Payment gateways help cut costs by automating payment flows, reducing manual reconciliation work, and offering lower fees on local methods like UPI and net banking compared to cards. Volume-based pricing and reduced fraud/chargebacks add further savings, and faster settlements improve overall cash flow.

What Are Payment Gateway Charges?

Every time a customer pays online, the gateway deducts a transaction fee covering processing, verification, security, and settlement. In India, this typically runs 2% to 5% per transaction depending on the payment mode and business type - fees that add up quickly for SMEs, D2C brands, and educational institutions if they’re not transparent.

Payment Gateway Charges Comparison

Provider Type	Average Transaction Charges	Remarks
Easebuzz	1.50%	Transparent pricing with value-added services.
Other Payment Gateways	2% – 5%	Varies by payment method, industry, or volume.

Begin your online payment journey with Easebuzz:

Lower transaction charges - average of 1.5%
No hidden fees
All-in-one platform combining payment gateway, processor, and smart APIs
Custom pricing for growing businesses and large institutions

Conclusion

In today’s digital-first world, businesses need more than a payment gateway - they need a cost-efficient partner. With Easebuzz, you get lower transaction charges, faster settlements, and full visibility into your collections, all on one platform.

FAQ's

What is a payment gateway and how does it work?

A payment gateway is the technology that enables businesses to accept online payments securely through methods such as UPI, credit and debit cards, net banking, and wallets. It securely captures and transmits payment information, facilitates transaction authorisation through the relevant banks and payment networks, and returns the payment status to the merchant.

In simple terms, a payment gateway connects the customer, business, banks, and payment networks to complete an online payment securely.

How do I choose the right payment gateway for my business?

Look beyond the transaction fee. Compare payment success rates, supported payment methods, checkout experience, smart routing and retry capabilities, settlement timelines, security, reconciliation, integration options, scalability, and customer support. The right payment gateway should fit your business model and help you convert more payment attempts while simplifying payment operations.

What features should a payment gateway have?

A good payment gateway should support the payment methods your customers use, provide a fast and reliable checkout, maintain strong security controls, and offer clear transaction visibility. Businesses should also consider features such as tokenisation, fraud detection, smart routing and retries, automated reconciliation, fast settlements, APIs and SDKs, recurring payments, payment links, and payment analytics based on their specific needs.

How much does a payment gateway charge in India?

Payment gateway charges vary based on the payment method, transaction volume, business category, and pricing plan. Depending on the provider, additional charges may apply for services such as refunds, chargebacks, or faster settlements. Businesses should compare the complete pricing structure and applicable taxes rather than choosing a provider based only on its advertised transaction fee.

How does a payment gateway improve payment success rates?

A payment gateway can improve payment success by offering relevant payment methods, optimising transaction routing, supporting eligible retries, maintaining a reliable checkout experience, and providing clear payment status updates. Merchants should also have visibility into payment performance by payment method, bank, or other relevant transaction factors so they can identify and address recurring failure points.

Is UPI a payment gateway?

No. UPI and a payment gateway serve different purposes. UPI is India’s real-time payment system that enables bank-account-to-bank-account payments, while a payment gateway is the technology businesses use to accept and manage payments through UPI and other methods such as cards, net banking, and wallets.

Is a payment gateway safe for online payments?

A payment gateway can provide a secure way to accept online payments when appropriate security and compliance controls are in place. These can include encryption, tokenisation, authentication, fraud monitoring, and PCI DSS controls to protect sensitive payment information and reduce the risk of unauthorised transactions. Businesses should also check the provider’s security certifications, regulatory status, and data-handling practices.

How long does it take to integrate a payment gateway?

The integration timeline depends on the business’s platform, integration method, onboarding and verification requirements, and the level of customisation needed. Hosted checkout, plugins, APIs, and SDKs can simplify implementation. Before going live, businesses should test successful and failed payments, refunds, webhooks, reconciliation, and settlement flows.

Does a payment gateway support international payments?

Some payment gateways support international payments through eligible international cards and other cross-border payment methods. Availability depends on factors such as the business category, countries served, supported currencies, compliance requirements, and the provider’s capabilities. Businesses should also check settlement currencies, conversion charges, refunds, and supported countries before choosing a provider.

What is the difference between a payment gateway and a payment processor?

A payment gateway is the technology layer that securely captures and transmits payment information between the merchant and the payment ecosystem. Payment processing involves the underlying infrastructure that routes transactions between the relevant banks and payment networks and facilitates authorisation and settlement.

Many modern payment providers offer gateway and processing capabilities together, so merchants can manage the payment flow through a single integrated platform.