How Do Payment APIs Work?

If you’re hearing about payment APIs more now than in the past, that’s probably because you are.

Apple recently announced plans to add tap-to-pay functionality to new iPhones. Large banks like Bank of America are increasingly adopting payment API technology. Payment technologies with open APIs, such as Stripe, continue to improve their functionality and integrations.

So it’s no surprise that the payments API market has grown significantly, especially in recent years. In fact, by 2023, it will be worth $200 million and is expected to reach Will reach $306.5 million by 2032. more, there are 2024 State of API Report Nearly three-quarters of enterprises are “API first,” compared to just 66% a year ago.

Let’s discuss payment APIs in more detail and what you need to pay attention to when using them in your business.

What is payment API?

Payment API (i.e. Payment Application Programming Interface) is a technology that allows commercial platforms (such as point-of-sale (POS) terminals, e-commerce websites, etc.) to process payments. A payment API is essentially the link between all platforms involved in any payment transaction. For businesses, it connects your payment processors and gateways with your customers’ financial institutions to conduct transactions.

look: Best payment gateway

How is the API used for payment processing?

APIs connect payment technologies and financial institutions involved in any transaction. Here’s a hypothetical example to walk us through the process.

Let’s say I want to buy a sandwich from a restaurant. The sandwich costs $15 and I want to pay with a credit card.

The restaurant initiates the transaction and shows me its POS terminal. This is the first time the payment API is used to initiate a transaction, identify the amount and determine where it should be transferred.

I clicked on my credit card on the terminal. The payment API runs again, fetching information from the restaurant’s POS and sending it to my card issuer. My card issuer will look at the transaction and determine whether it was approved, usually based on whether I have enough funds or whether the transaction was fraudulent.

When the payment is approved, the Payments API starts working again, sending this information to all parties involved — my card issuer, the restaurant’s POS, and even the restaurant’s financial institution after the funds are transferred from my card and the restaurant’s POS system. . However, this data first passes through payment gatewayit is encrypted for security reasons.

Basically, the Payment API is used for every step of payment processing. They communicate between all entities, share relevant information and allow payments to be processed.

Mistakes to avoid when integrating payment APIs

When integrating payment APIs for small businesses, there are some common mistakes to avoid to ensure smooth, secure transactions and a great user experience. Here are some key mistakes to watch out for.

No appropriate technical expertise

Integrating payment APIs can be complex, especially for businesses without extensive technical expertise. They often require in-depth knowledge of API documentation, coding practices, and security protocols.

Review the API documentation carefully and consider working with a developer familiar with payment gateway integration. Many APIs also provide SDKs and libraries to simplify the integration process.

Lack of security and compliance

Some businesses make the mistake of neglecting proper encryption or failing to comply PCI DSS (Payment Card Industry Data Security Standard).

Please ensure that all transactions are securely encrypted using SSL/TLS and comply with PCI standards to protect sensitive data such as credit card information. These measures protect you and your customers.

Likewise, you don’t want to neglect legal compliance with local or international payment regulations. Failure to adhere to these standards could put your business at risk of fines, or worse.

Research payment regulations in all regions where you operate and ensure your payment integration complies with these legal requirements.

Not tested in all scenarios

It’s easy to test the standard scenarios for a popup: card declined, Wi-Fi out, you have to enter the card manually, etc.

To avoid this mistake, test your payment API integration for various scenarios, including failed transactions, duplicate submissions, partial payments, etc.

Choosing the wrong payment gateway

Not considering factors such as transaction fees, international support, customer support, and payment times when choosing a payment gateway is an easy mistake to make and avoid.

Make sure you research different payment gateways such as Stripe, PayPal, and Square to find out which one is best for you. Compare costs, payment API integration complexity, customer support and monetary support across your customer base.

Insufficient files

Some payment API documents are unclear or incomplete, making it difficult for developers to implement the API correctly or track down issues. The same State of APIs 2024 report also revealed that as many as 39% of developers said “inconsistent documentation” was their biggest challenge, while 43% of developers actually turned to colleagues to explain APIs.

Choose a payment API with comprehensive, clear documentation. If you’re stuck on a platform with less than useful documentation and support, I recommend turning to community-driven resources like forumReddit or GitHub.

Another common mistake is not documenting how the payment system works or how to solve common problems. This makes it difficult to manage, integrate, or upgrade integrations from an internal perspective.

Create internal documentation regarding the integration process, troubleshooting steps, and any customizations. The same report shows that more than half (58%) of developers use internal documentation to help resolve this error. This will also be helpful when onboarding new team members or troubleshooting.

Common challenges with payment APIs

Payment APIs are critical for businesses to process transactions efficiently, but integrating and maintaining them can pose challenges. Here are some common challenges when using the payment API.

management technology

It seems there are more APIs available than ever before. In fact, the average business application uses 26 to 50 APIs. Moreover, the payments API is just one of many APIs an enterprise may have in its technology stack.

Maintain PCI compliance

I’ve talked about avoiding the mistake of neglecting compliance, but that’s also a challenge. PCI standards are very specific and strict. The best way to stay compliant is to use a payment processor that adheres to PCI standards and limits your access to sensitive card data. Many payment APIs handle compliance by tagging card data.

Reduce API downtime and improve reliability

There can be issues with the payment API – outages, delays, slow checkouts, timeouts, etc. Downtime or performance issues can disrupt business operations. This can all lead to lost sales, customer dissatisfaction and trust issues.

It’s important to choose a payment provider with a high uptime service level agreement (SLA) and real-time monitoring. You may also want to implement backup payment instruments and alternative payment options to mitigate issues during downtime.

Additionally, make sure the processor you choose has infrastructure optimized for low-latency payments. You might consider things like asynchronous payments and timeout retry logic to help remove these bumps in the road.

Handle multiple payment methods

Customers expect businesses to offer multiple payment methods—credit cards, debit cards, digital wallets, and even cryptocurrencies—but integrating multiple payment methods can be complex.

That’s why I recommend looking for an API that supports a variety of payment options and can easily integrate new methods as they become popular. Additionally, look for APIs that use the same interface for different payment methods, which may simplify integration.

Handling errors and disputes

Not every payment will be valid. Payments can fail for a variety of reasons, including insufficient funds, expired cards, or network issues. Dealing with disputes, refunds, and chargebacks can be cumbersome and hurt cash flow.

Implement comprehensive error handling processes to manage payment failures, disputes, chargebacks, and chargebacks. Look for APIs with built-in functionality for handling disputes or automating refunds.

How to choose the best payments API for your business

When choosing a payments API for your business, I recommend considering your existing technology stack and what’s missing. Find platforms that fill these gaps and then compare them against each other based on the criteria above.

This article was reviewed by retail and payments experts Megan Brophy.