Payment gateways work in e-commerce transactions by facilitating the transfer of information between customers, the merchant, and the bank. When a customer makes a purchase, the payment gateway encrypts sensitive information (such as credit card details) and securely transmits it to the payment processor. Then, the processor communicates with the customer's bank for authorization. After verifying funds, the gateway confirms the transaction back to the merchant. This technology enhances security and efficiency in online transactions.