How Do Payment APIs Work?

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

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

So, it’s no surprise that the payment API market has grown tremendously, especially over recent years. In fact, it was worth $200 million in 2023, with forecasts to hit $306.5 million by 2032. Plus, a 2024 State of the API Report shows that nearly 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 payment API?

A payment API, or payment application programming interface, is a technology that allows business platforms — like point-of-sale (POS) terminals, e-commerce sites, and similar — 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 carry out 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’s a hypothetical example to walk us through the process.

Let’s say I want to purchase a sandwich from 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 tap my credit card on the terminal. The payment API works 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 if it’s approved, usually depending on whether I have sufficient funds or if the transaction appears to be fraudulent.

When the payment is approved, the payment API goes to work again, sending 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 goes through a payment gateway, where it’s 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 payment API for small businesses, there are several common mistakes to avoid to ensure smooth transactions, security, and a good user experience. Here are some key mistakes to watch out for.

Not having the proper technical expertise

Integrating payment APIs can be complex, especially for businesses without extensive technical expertise. They often require 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 offer 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 with PCI DSS (Payment Card Industry Data Security Standards).

It’s important to make sure all transactions are securely encrypted using SSL/TLS and that you comply with PCI standards to protect sensitive data like 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 abide by these standards can put your business at risk of fines — or worse.

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

Not testing for all scenarios

It’s easy to test for the standard situations that pop up: a card is declined, the Wi-Fi goes down, you have to manually input a card, etc. However, it’s 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 kinds of scenarios, including failed transactions, duplicate submissions, partial payments, and more.

Choosing the wrong payment gateway

Selecting a payment gateway without considering factors like transaction fees, international support, customer support, and payout times is an easy mistake to both make and avoid.

Make sure you research different payment gateways, such as Stripe, PayPal, and Square, to figure out which 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 API report also shows as many as 39% of developers say “inconsistent docs” 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 troubleshoot common issues. This makes it difficult to manage, integrate, or upgrade the integration from an internal perspective.

Create internal documentation on the integration process, troubleshooting steps, and any customizations. That same report shows that more than half (58%) of developers use internal documentation to help navigate this mistake. This 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 there are more APIs available than ever before. In fact, the average business application uses between 26 and 50 APIs. And, a payment API is just one of many a business could have in its tech stack.

Maintaining PCI compliance

I already talked about avoiding the mistake of neglecting compliance, but this is 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 adheres to PCI standards and limits your exposure to sensitive card data. Many payment APIs handle compliance for you by tokenizing card data.

Mitigating API downtime and reliability

Payment APIs can have hiccups — outages, latency, slow checkout, timeouts, you name it. Downtime or performance issues 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 might also want to implement backup payment tools and alternative payment options to mitigate issues during downtime.

Additionally, 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.

Handling multiple payment methods

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

That’s why I recommend finding an API that supports various 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 probably simplify the integration.

Dealing with errors and disputes

Not every payment is going to 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 for managing payment failures, disputes, refunds, and chargebacks. Look for APIs that have built-in features for handling disputes or automating refunds.

How to choose the best payment API for your business

When selecting a payment API for your business, I recommend considering your existing tech stack and what’s missing. Find the platforms that fill those gaps, then compare them against one another based on the abovementioned criteria.

This article was reviewed by retail and payments expert Meaghan Brophy.