What are Payment Gateway APIs & How to Integrate them?

A Payment Gateway API is a set of code-based interfaces that acts as a communication layer between a website, app, or platform and the payment gateway to process online transactions. When a customer initiates a payment, say through UPI, a credit card, or a wallet the API securely sends that payment data to the payment gateway, which then interacts with banks or networks to complete the transaction. The API also sends back the success or failure response to your system in real time.

For developers, the Payment Gateway API exposes endpoints that handle:

• Payment creation and authorisation
• Capturing or refunding transactions
• Fetching payment status or history
• Handling web-hooks for payment updates

For businesses, this means you can:

• Offer multiple payment options without building each integration separately
• Automate settlement, refunds, and reconciliation
• Keep control over the checkout experience (especially with custom UI flows)

How Do Payment Gateway APIs Work?

A Payment Gateway API manages the entire communication flow that happens when a customer makes an online payment. Here’s a step-by-step breakdown of how it actually works:

1. Customer initiates a payment

When a customer decides to make a purchase, your application collects the basic payment data for example:

• Transaction amount
• Payment method (card, UPI, net banking, wallet, etc.)
• Customer details (name, email, mobile number)

Once the customer clicks “Pay Now”, your front end triggers a call to your backend server, which will then communicate with the Payment Gateway API.

2. Your system sends a payment request to the API

Your backend sends a payment creation request to the payment gateway’s API endpoint.
This request usually includes:

• Your merchant credentials (API key or token)
• Transaction details (amount, currency, order ID, etc.)
• Redirect or callback URLs (where the customer should be sent after payment)

The API call is authenticated and encrypted (typically via HTTPS with SSL/TLS) to ensure no sensitive information is exposed.

3. Payment gateway validates and processes the request

Once the API request reaches the payment gateway:

• It verifies your credentials and payment parameters.
  It creates a transaction session and returns a response (like a payment_id or checkout_url).
• Your app or website uses this response to redirect the user to a secure payment page or show an embedded checkout screen.

4. Customer completes the payment

Now the customer enters their payment details (e.g., UPI ID, card number, or bank login). Depending on the payment method:

• The gateway encrypts and forwards these details to the issuing bank or payment network (like Visa, Mastercard, or UPI).
• The bank performs authorization checking for funds, verifying credentials (like OTP or biometric), and confirming the payment request.

5. Authorization response

After verification:

• The bank or network sends back a response Approved or Declined to the payment gateway.
• The payment gateway formats that response and sends it to your backend through the API response (synchronous) or a webhook (asynchronous).

This response typically includes:

• Transaction status (success, failed, pending)
• Payment reference ID
• Customer and order metadata

6. Payment confirmation & user update

Your backend processes the response and:

• Updates your database (order marked as “Paid” or “Failed”).
• Displays the final payment status to the user (“Payment Successful”).
• Optionally triggers follow-up actions (e.g., email receipt, invoice generation, fulfillment trigger).

Meanwhile, the payment gateway may send a webhook callback confirming settlement or refund updates in case of later processing steps.

7. Settlement

Once the payment is successful, the gateway aggregates your successful transactions for the day and settles the funds into your merchant account after the agreed timeline (often T+1 or T+2 days). You can fetch settlement reports, refund transactions, or reconcile payment data using other API endpoints provided by the payment gateway.

How to Integrate a Payment Gateway API?

The process is simple once you set up your merchant account and connect your platform to PhonePe PG’s APIs.

1. Register as a Merchant

Start by creating a merchant account with your preferred payment gateway like PhonePe Payment Gateway. You’ll need to complete KYC verification by providing:

• Business details 
• Bank account information for settlements
• GST and PAN details

Once verified, you’ll receive credentials like:

• Merchant ID
• API Key / Salt Key
• Access to the Developer Dashboard

2. Get Sandbox Access

Most payment gateways, including PhonePe PG, provide two environments:

• Sandbox (Test): For trial transactions using dummy data.
• Production (Live): For real customer transactions.

You should always start in the sandbox to test how your payment flow behaves  from payment initiation to callback responses without using real money.

3. Create an Order or Payment Request

When a customer proceeds to pay on your website or app, your backend system creates an order with details like amount, currency, and order ID. This information is sent to the Payment Gateway API to initiate a payment session. In response, you’ll receive a unique transaction reference or payment URL that allows the customer to complete the payment securely.

4. Redirect or Embed the Payment Flow

Once the payment session is created, you can:

• Redirect customers to the payment gateway’s hosted checkout page, or
• Embed the payment flow directly into your app or website interface.

If you’re using PhonePe PG, customers can pay using UPI, debit/credit cards, net banking, or PhonePe Wallet  all from one screen, without any additional integrations.

5. Handle the Payment Response

After the transaction, the payment gateway sends a response back to your system confirming whether the payment was successful, failed, or still pending.

For example, PhonePe Payment Gateway redirects the customer to a callback URL you specify and also notifies your backend via a secure server-to-server update.

Your system should capture this response and update the order status in your database (e.g., “Payment Successful”).

6. Verify the Transaction Status

It’s good practice to verify the final payment status with the gateway before confirming the order. Payment Gateways like PhonePe PG allow you to query the transaction using your Merchant ID and Order ID to confirm the result ensuring reliability even if a network interruption occurs during payment.

7. Go Live

Once all test cases are successful in the sandbox, switch to the production environment by updating your live API credentials. Perform a few real test payments to ensure everything works smoothly before launching it to customers.

With PhonePe PG, you can monitor live transactions, settlements, and refunds directly from your merchant dashboard once your integration is active.

Conclusion

Integrating a Payment Gateway API gives your business the flexibility to design a checkout flow that truly fits your product and customers. Instead of sticking to one-size-fits-all payment pages, you can build custom payment experiences from a quick one-tap checkout to an embedded flow that never takes users away from your app or website.

With PhonePe Payment Gateway, developers get complete control through APIs to create, manage, and track transactions the way they want. You can plug in UPI, cards, wallets, and more into your existing flow, automate refunds or settlements, and still keep everything secure and compliant. Whether you’re building a new payment experience or upgrading an existing one, PhonePe PG gives your tech team the tools and flexibility to make it seamless end to end.