What is a payments API?

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Andy Tweddle, Payments writer
22 Jul 2022
Payments API text with lines coming on and off screen

Offering a variety of payment methods used to be difficult for merchants. Each payment scheme — be it credit card, bank debit, manual bank transfer, open banking, digital wallet, buy now pay later (BNPL) or crypto — has its own infrastructure. What’s more, each provider may also have its own unique payment rails.

Adopting just one method can take significant work for a merchant, from integrating the payment system with the rest of their tech stack to designing the customer experience and managing contractual obligations. Add more payment methods into the mix, and that burden becomes even greater. 

But increasingly, merchants are realising they can’t afford not to offer a variety of payment methods. After all, customers have specific preferences for how they want to pay. For example, Almost half of UK and Ireland shoppers (48%) said availability of different payment options makes them more likely to buy from a retailer. Making things even harder for merchants is that payment preference is far from uniform, but varies between countries, generations and even the type of purchase being made.

Enter application programming interfaces (APIs) — a way for merchants to easily scale the payment methods they offer, and switch them on and off for different markets. 

What is a payments API?

In technical terms, an API is a set of protocols and tools for building application software. Think of it as a connection between two distinct pieces of software. The API lets the recipient access software capabilities owned by the provider. By plugging into lots of APIs from lots of providers, a business can build sophisticated systems and processes that aggregate a suite of best-in-class services.

When it comes to payments, APIs are typically offered by payment service providers (PSPs), third parties that have done the heavy lifting of connecting to the native payment infrastructure of each method. By leveraging these online payment APIs, merchants can quickly absorb new payment methods at a fraction of the speed and cost of having to work with each payment scheme provider on separate custom integrations.

Payment API use cases

Capturing new markets

Merchants should never underestimate the administration involved in operating in a new country. We’ve already mentioned the importance of catering to the payment preferences of consumers in new locales. But first, a business will need to navigate the target market’s regulations. This can often require opening up a bank account in the jurisdiction, which will mean registering as a legal entity there.

By using a payments API, a merchant essentially hands over this responsibility to a third party. With many of the legal and compliance obligations taken care of as part of the API integration, merchants can move into new markets much faster and scale their global footprint.

Optimise the checkout experience

Offering many different payment methods can be harmful if you overcrowd your checkout experience. Faced with a long list of payment options, customers may become overwhelmed and disengaged. It’s the same if the checkout page is not in the local language, if prices are quoted in a foreign currency, or if data formats and forms have been configured for other places.

Again, this is a lot for merchants to consider, especially if they intend to create segmented checkout experiences for different markets. A payment API can help them create localised checkout experiences for each market, giving them the variety they need to keep their customers happy.

Collect and analyse real-time data

Segmentation and optimisation requires data. The more you have, the better informed you’ll be. Everything from the payment success rate to payment preference, cost-per-transaction to settlement times can affect your checkout experience. But harvesting these insights directly from a payment scheme can be arduous. 

With a payments API, you can collect this data and use it to analyse your checkout processes. This can give you insight into the effectiveness of your payment methods and help you determine which ones to prioritise. 

Create new business models 

A payments API also gives a merchant more control over ‘how’ they take payments. For businesses looking to move to a subscription model, their existing payment methods may not be effective for processing recurring transactions. But adapting existing systems may not be straightforward either. By integrating an API from a payment gateway designed for a specific business model, the merchant can add this capability without rewiring their current systems. 

Payouts, withdrawals and refunds are other examples of where a merchant can use a payments API to gain a competitive advantage. A refund or withdrawal made through a bank debit scheme or to a card can take more than five days to process, leaving the recipient frustrated. 

But with an open banking API, payouts and withdrawals can be immediate, giving the merchant a compelling message to attract and retain customers. In a 2021 survey, 85% of shoppers said they’d be more willing to return to a merchant that offers instant refunds.

Alternatives to APIs

APIs vs a custom integration

The integration of two systems can be performed manually. In theory, this gives the merchant slightly more control over how they access the payment method, how it is secured, and what can be achieved with the end-user experience. 

But any technical exercise done manually will struggle to scale. Custom integrations take time to configure and execute. What’s more, it’s not a one-off job. Updates and security patching are ongoing requirements, so the sustainability of the integration depends on retaining the knowledge in-house. And all that draws technical resources away from innovation in other areas. 

APIs vs SDK

A software development kit (SDK) is a set of tools developers use to create applications. An SDK incorporates an API, rather than being something entirely different. If we think of an API as a shared language of two different software applications, then the SDK provides all the building blocks a developer needs to make the most of the available API, such as documentation, libraries, editing software, test environments, analysis tools and drives. 

Choosing whether to use an SDK is really about how much freedom you want. An SDK is more prescriptive, with the express goal of saving a developer time and effort. This may benefit merchants with limited development resources. However, it may be too restricting for those that want to create a fully bespoke payments solution.

How to choose the right payments API for your business

Not all payments APIs are built the same. Two things matter: the services the API accesses, and how easy the API is to work with. 

On the former, merchants should be looking for an API that provides scale, in terms of the geographical coverage it offers and the variety of payment methods and services it can access. The more that a single API can achieve, the fewer APIs a merchant needs, saving time and money. 

But that becomes a false economy if the API is technically difficult to work with. So merchants should not only evaluate payment APIs for the end-user services they enable, but also for their back-end experience. A simple integration experience should be a basic requirement. So too is extensive and well-structured documentation, which developers can use to easily unlock more of the API’s capabilities. 

A testing environment is also key to encouraging innovation and avoiding errors being pushed out ‘live’. The API should relieve the merchant from much of the technical burden of meeting  compliance obligations, such as know your customer (KYC), anti-money laundering and general data protection regulation GDPR requirements. And it should also be able to return data — in real time and in a readable format — that makes it easy to turn insights into improvements. 

This evaluation must also consider the company providing the API. The payments industry moves fast, and an API that is not constantly improved upon will quickly lose its competitive advantage. A track record of innovation, a development team that is both well-resourced and technically excellent (and available for support), and a leadership team with their finger on the pulse of the next big trends in payments are all evidence that an API will not just do the job today, but in the future too.

Explore how the TrueLayer Payments API can help your business create a high-performing payment experience with a single integration.

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