If you hear more about payment APIs now than in the past, it may be because that's the case.
Apple recently announced plans to add tap-to-pay functionality to new iPhones. Large banks like Bank of America are seeing a huge surge in payments API technology adoption. And open API payment technologies like Stripe continue to advance their capabilities and integrations.
Therefore, it is no surprise that the payment API market has grown tremendously, especially in recent years. In fact, it was worth $200 million in 2023, and is projected to reach $306.5 million in 2032. Additionally, a 2024 State of API report shows that nearly three-quarters of companies are “API first” compared to just 66% a year ago. .
Let's look at payment APIs in more detail and what to keep in mind when using them in your business.
What is a payment API?
A payment API, or payment application programming interface, is a technology that allows merchant 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 the platforms involved in any payment transaction. For businesses, it connects your payment processor and gateway to the customer's financial institution to complete the transaction.
SEE: Best Payment Gateways
How are APIs used in payment processing?
APIs connect payment technology and financial institutions involved in any transaction. Here is a hypothetical example to guide 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 presents me with 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 touch my credit card at the terminal. The payment API works again by taking the information from the restaurant's POS and sending it to my card issuer. My card issuer reviews the transaction and determines whether it is approved, usually depending on whether I have sufficient funds or whether the transaction appears fraudulent.
When the payment is approved, the payment API goes back to work and sends this information to all parties involved: my card issuer, the restaurant's POS, and even the restaurant's financial institution once the funds are transferred from my card. and the restaurant's POS system. However, this data first passes through a payment gateway, where it is encrypted for security.
Basically, payment APIs are used in every step of payment processing. They communicate between all entities, share relevant information and allow payment to be processed.
Mistakes to avoid when integrating a payment API
When integrating a payment API for small businesses, several common mistakes should be avoided to ensure smooth transactions, security, and a good user experience. Here are some key mistakes to watch out for.
Not having adequate technical experience.
Payment API integration can be complex, especially for companies without extensive technical experience. They often require in-depth knowledge 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 offer SDKs and libraries to simplify the integration process.
Lack of security and compliance.
Some companies make the mistake of neglecting proper encryption or not complying with PCI DSS (Payment Card Industry Data Security Standards).
It is important to 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 both you and your customers.
Likewise, you don't want to ignore legal compliance with local or international payment regulations. Failure to comply with these standards can put your company at risk of fines, or worse.
Research payment regulations in all regions you operate in and ensure your payment integration meets those legal requirements.
Do not test for all scenarios
It's easy to try the standard situations that arise: a card is declined, Wi-Fi goes down, a card has to be entered manually, etc. However, it is equally easy and important to test for unlikely edge cases, such as declined payments, network timeouts, or duplicate transactions.
To avoid this mistake, test your payment API integration for all types of scenarios, including failed transactions, duplicate shipments, partial payments, and more.
Choosing the wrong payment gateway
Selecting a payment gateway without considering factors such as transaction fees, international support, customer service, and payment 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 one is best for you. Compare costs, payment API integration complexity, customer support, and currency support for your customer base.
Inadequate documentation
Some payment APIs have unclear or incomplete documentation, making it difficult for developers to implement the API correctly or troubleshoot issues. That same 2024 State of APIs report also shows that up to 39% of developers say “inconsistent documents” are their biggest challenge, and 43% actually turn to colleagues to explain APIs.
Choose payment API with complete and clear documentation. If you're stuck on a platform with unhelpful 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 fix common problems. This makes it difficult to manage, integrate, or update the integration from an internal perspective.
Create internal documentation about the integration process, troubleshooting steps, and any customizations. That same report shows that more than half (58%) of developers use internal documentation to help overcome this error. This will also help when onboarding new team members or troubleshooting issues.
Common challenges with payment APIs
Payment APIs are essential for businesses to handle transactions efficiently, but integrating and maintaining them can present challenges. Below are some common challenges when working with payment APIs.
Managing technology
There seem to be more APIs available than ever. In fact, the average enterprise application uses between 26 and 50 APIs. And a payment API is just one of many a company could have in its technology stack.
Maintain PCI compliance
I already talked about avoiding the mistake of neglecting compliance, but this is also a challenge. PCI standards are very specific and rigid. The best way to maintain compliance is to use a payment processor that is already PCI compliant and limits your exposure to sensitive card data. Many payment APIs handle compliance by tokenizing card data.
Mitigate API downtime and reliability
Payment APIs can have drawbacks: interruptions, latency, slow payment, wait times, 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 an infrastructure optimized for low-latency payments. You could consider things like asynchronous payments and retry logic for timeouts to help smooth out these bumps in the road.
Handling 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.
That's why 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 integration.
How to deal with errors and disputes
Not all payments will work. Payments can fail for many reasons, including insufficient funds, expired cards, or network issues. Handling disputes, refunds, and chargebacks can be cumbersome and hurt cash flow.
Implement comprehensive error handling processes to manage 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 selecting 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 to each other based on the criteria mentioned above.
This article was reviewed by payments and retail expert Meaghan Brophy.
