How do payment APIs work?

If you’re hearing more about payment APIs now than in the past, it might be because you are.

Apple recently announced plans to incorporate tap-to-pay functionality into the new iPhones. Big banks like Bank of America are seeing a huge increase in the adoption of payment API technology. And payment technologies with open APIs like Stripe continue to advance their capabilities and integrations.

So it’s no surprise that the payments API market has grown tremendously, especially over recent years. In fact, it was worth $200 million in 2023, with predictions to reach $306.5 million by 2032. Plus, a 2024 State of the API Report shows that almost three-quarters of businesses are “API first” compared to just 66% a year ago.

Let’s discuss payment APIs in more detail and what to look out for when using them in your business.

What is a Payments API?

A payment API, or payment application programming interface, is a technology that allows business platforms—such as point-of-sale (POS) terminals, e-commerce sites, and the like—to process payments. The payment API is essentially the connection between all platforms involved in any payment transaction. For businesses, it connects your payment processor and gateway with the customer’s financial institution to complete the transaction.

SEE: Best payment gateways

How are APIs used in payment processing?

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

Let’s say I want to buy a sandwich at a restaurant. The sandwich costs $15, and I want to pay for it with my credit card.

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

I tap my credit card on the terminal. The payment API is working again, taking the information from the restaurant’s POS and sending it to my card issuer. My card issuer looks at the transaction and determines whether it was approved, usually depending on whether I have enough funds or if the transaction turns out to be fraudulent.

When the payment is approved, the payment API goes back to work, sending this information to all parties involved – my card issuer, the restaurant’s POS, and even the restaurant’s financial institution once the funds from my card and the restaurant’s POS system has been transferred. However, this data first passes through a payment gateway, where it is encrypted for security.

Basically, payment APIs are used at every step of payment processing. They communicate between all entities, share relevant information and allow the payment to be processed.

Mistakes to avoid when integrating a payment API

When integrating a payments API for small businesses, there are several common mistakes to avoid to ensure smooth transactions, security, and a great user experience. Here are some key mistakes to watch out for.

Not having the right technical expertise

Integrating payment APIs can be complex, especially for businesses without extensive technical expertise. This often requires a deep understanding of API documentation, coding practices, and security protocols.

Carefully review the API documentation and consider working with a developer familiar with payment gateway integrations. 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 not complying with PCI DSS (Payment Card Industry Data Security Standards).

It is important to make sure that all transactions are securely encrypted with SSL/TLS and that you comply with PCI standards to protect sensitive data such as credit card information. These measures protect both you and your customers.

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

Research the payment regulations in all regions in which you operate and ensure that your payment integration meets those legal requirements.

Does not test for all scenarios

It’s easy to test for the standard situations that come up: a card is rejected, the Wi-Fi goes down, you have to enter a card manually, etc. However, it is equally easy and important to test for unlikely edge cases, such as e.g. declined payments, network timeouts or duplicate transactions.

To avoid this error, test your payment API integration for all types of scenarios, including failed transactions, duplicate submissions, partial payments, and more.

Choose the wrong payment gateway

Choosing a payment gateway without considering factors such as transaction fees, international support, customer support and payout times is an easy mistake to make and avoid.

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

Insufficient documentation

Some payment APIs have unclear or incomplete documentation, making it difficult for developers to correctly implement or troubleshoot the API. The same 2024 State of API report also shows that as many as 39% of developers say that “inconsistent documents” are their biggest challenge, and 43% actually turn to their colleagues to explain APIs.

Choose payment APIs with comprehensive and clear documentation. If you’re stuck with a platform with less than helpful documentation and support, I recommend turning to community-driven resources like forums, Reddit, 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 the integration from an internal perspective.

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

Common challenges with APIs for payments

Payment APIs are essential for businesses to handle transactions efficiently, but integrating and maintaining them can present challenges. Here are some common challenges when working with payment APIs.

Managing the technology

It seems that there are more APIs available than ever before. In fact, the average business application uses between 26 and 50 APIs. And a payments API is just one of many that a business can have in its technology stack.

Maintaining PCI Compliance

I’ve already talked about avoiding the mistake of neglecting compliance, but that’s also a challenge. The PCI standards are very specific and rigid. The best way to maintain compliance is to use a payment processor that already complies with PCI standards and limits your exposure to sensitive card data. Many payment APIs handle fulfillment for you by knowing card data.

Mitigating API downtime and reliability

Payment APIs can have hiccups – outages, lag, slow checkout, timeouts, you name it. Downtime or performance issues disrupt business operations. All of this can lead to lost sales, customer dissatisfaction and trust issues.

It is 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 tools and alternative payment options to mitigate issues during downtime.

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

Handle multiple payment methods

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

Therefore, I recommend finding an API that supports multiple payment options and can easily integrate new methods as they become popular. Also look for APIs that use the same interface for different payment methods, which will likely simplify the integration.

Handling errors and disputes

Not every payment is going to work. Payments can fail for many reasons, including insufficient funds, expired cards, or network issues. Dealing with disputes, refunds and chargebacks can be cumbersome and affect cash flow.

Implement comprehensive error handling processes for managing payment failures, disputes, refunds and chargebacks. Look for APIs that have built-in features to handle disputes or automate refunds.

How to choose the best payment API for your business

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

This article has been reviewed by retail and payment expert Meaghan Brophy.