If you’re looking to process customer credit card payments, whether as an e-commerce merchant, SaaS brand, or service provider, you’re going to need a payment API.
Without one, processing customer payments is going to be a complex, tricky, and resource-intensive affair.
These helpful tools essentially allow different software applications to connect and communicate to process financial transactions securely. They allow you to take credit card payments on your website or in your app without having to build out the complicated tech involved.
In this article, we’re going to shine a light on the world of payment APIs. You’ll learn what they are, what they do, why they are beneficial, and how they are typically used in business to facilitate easier payments.
What is a payment API?
A payment API (application programming interface) is a software intermediary that allows different software tools to integrate and communicate with one another, specifically with the intention of processing financial transactions.
It helps payment processing services — think Stripe and PayPal — to connect directly to websites, apps, and other digital platforms without having to create manual integrations or build complex infrastructure from scratch.
You can think of it kind of like an adaptor that lets you plug your USB cable into a power outlet. Without that adaptor, the two units (the outlet and the cable) would be incompatible.
What makes payment APIs so essential is not only that they facilitate the connection of sites and apps to payment providers, but they also allow seamless and secure transaction handling. They help you comply with industry regulations like PCI-DSS (Payment Card Industry Data Security Standard).
As such, they are a foundational tool for e-commerce, SaaS, and digital services platforms. If you’re in business in one of these sectors and want to collect payments from customers, you’ll need to use a payment API.
Key benefits of using payment APIs
Using payment APIs provides businesses across various sectors with a number of important benefits, such as:
- Improved efficiency. Payment APIs automate many aspects of the payment process that would otherwise be manual, such as payment authorization and refund management. This helps build more efficient workflows and reduces the amount of resources required to process payments.
- Error reduction. Through the automation of various steps in the transaction process, payment APIs help to reduce human error.
- Enhanced security. Modern payment APIs typically include powerful security features like encryption, tokenization, and fraud detection, helping you to maintain customer trust, secure sensitive data, and reduce the likelihood of a data breach.
- Scalability and flexibility. Payment APIs help you expand payment options, such as adding Apple Pay, without incurring a major development expense.
- Better reporting. Good payment APIs offer real-time access to transaction data and reports, allowing for better financial tracking and decision-making.
What does a payment API do?
A payment API facilitates the secure, efficient processing of online financial transactions. They act as an intermediary between your platform (such as your website or app) and the payment processor, which could be a payment gateway or a bank or other financial institution.
Without getting too into the weeds, here are the basic mechanics of payment APIs:
1. Transaction initiated by the customer
The buyer visits the company’s platform and selects an item or service to purchase, heading to the checkout to enter payment information.
2. Data transmission via payment API
The customer’s payment information is securely transmitted to the payment API. The API validates and processes the data to confirm it is formatted correctly and meets required security standards such as encryption.
3. Connection to payment gateway
The payment API communicates with the payment gateway, the service that routes the transaction to the right financial institutions. The gateway performs fraud checks, validates payment credentials, and then forwards the transaction to the customer’s bank or card issuer.
4. Interaction with financial institutions
The payment gateway sends a transaction request to the customer’s card network or bank. The bank or network checks for sufficient funds and approves or declines the transaction.
5. Authorization response
Once the transaction is approved, the gateway sends a response back to the API, which notifies the business that the payment was successful. If the payment was declined, the API returns a failure message.
6. Payment settlement
The payment API initiates the settlement process, asking the customer’s financial institution to transfer funds to the business’s acquiring bank.
7. Confirmation and receipts.
Finally, the payment API delivers confirmation of successful payment to both parties, which may include sending a receipt to the customer and updating business financial records.
Some additional functions that certain payment APIs take care of include:
- Recurring payments. Some payment APIs can handle recurring billing for subscription businesses.
- Tokenization. The API can often replace sensitive payment information (like a credit card number) with a secure token that can be reused for future transactions without actually storing the sensitive data.
- Fraud detection. Many APIs also include built-in fraud detection tools, like card detail verification.
Payment gateway vs payment API
Payment APIs and payment gateways are two tools that play crucial roles in the processing of online transactions. They serve distinct functions but work together to enable smooth and secure payments.
Here’s the difference:
The payment gateway is a service that authorizes and processes transactions between a customer and a business (a buyer and a seller). It acts as a middleman between the two parties’ banks to transmit payment details, request transactions, and facilitate the transfer of funds.
The payment API is a software interface that allows developers to connect payment processing capabilities to apps and websites. It connects those online platforms to the payment gateway, acting as a sort of translator or converter.
How are payment APIs used in business?
Payment APIs are used by a number of different kinds of businesses. Here are a few common examples:
Ecommerce
Online stores integrate payment APIs from suppliers like PayPal or Stripe to handle customer credit card, debit card, and digital wallet payments.
Subscription
SaaS companies and other subscription services integrate payment APIs to handle recurring billing and automate payment and renewals.
Service business
Some service-based businesses, like consulting agencies, use payment APIs to automate invoicing and payments, streamlining the billing processes and speeding up cash flow.
Marketplaces
Online marketplaces and freelancing platforms like Upwork and Fiverr use payment APIs to split customer payments between the freelancer and the platform, simplifying payout management.
Retailers
Even brick-and-mortar stores can use payment APIs, such as a restaurant that integrates one into their mobile app for contactless payments and easier ordering.
Considerations with payment APIs
Thinking about getting started with a payment API?
Here are a few important considerations to keep in mind:
- Security: Look for an API that implements security measures like SSL, PCI DSS compliance, and tokenization to protect sensitive payment information.
- Costs. Evaluate APIs based on transaction fees, supported currencies, and other cost structures.
- Integration. Thoroughly review API documentation to understand ease of integration. Choose a tool that promotes itself as integrating well with the rest of your established payment tech stack.
- Additional features. Look for support for refunds, subscription billing, and digital wallets.
- Access control. Choose an API with multi-factor authentication for users and granular access control, adding an extra layer of security beyond passwords.
- Keep an eye on the future. Technology is moving fast, and payment APIs are no exception. Future trends include Buy Now, Pay Later, crypto and blockchain integrations, and personalized payment experiences. Look for a payment API that is moving with the times.
BILL’s payment API
A payment API is an important tool for integrating online payments into your website, app, or platform without having to develop your own complex infrastructure.
BILL, our financial operations platform, offers a number of helpful APIs for connecting with your existing finance tech stack, such as our own payment tracking API to help monitor your payment disbursements and ensure funds are transferred to your vendors.
